Convertible market holds flat against stock retreat with new deal activity

By Ronda Fears

Nashville, Tenn., Nov. 20 - Convertibles managed to hold their ground against a retreat in stocks, traders said, largely due to having so much new paper in circulation. In addition to Agilent Technologies Inc.'s $1 billion deal and Xerox Corp.'s upsized $900 million, Cendant Corp. surprised the market with a $1 billion overnight deal. Issuance continues to rage at a record pace, topping the $100 billion threshold with the new deals Tuesday.

"Having a boatload of new paper helped our market tremendously today," said a convertible trader at a major investment bank in New York. "The Cendant deal was a bit rich for some, but we heard all of it got placed. It didn't do as well in the aftermarket as Agilent and Xerox, we heard it lost 2 points out of the gate. Overall, though, converts held up very well with the pullback in the Nasdaq."

Several market watchers were surprised with the decline in stocks, given that Goldman Sachs' equity guru Abby Joseph Cohen predicted double-digit growth for stocks in 2002. But, the Nasdaq lost 53.91, or 2.79%, to 1880.51 and the Dow Jones Industrial Average gave up 75.08, or 0.75%, to 9901.38.

Most of the activity in the convertible market had to do with new deal activity, and the market was described as flat, but there were some sharp drops in the tech and telecom areas.

Nvidia lost more ground Tuesday after the company confirmed that 10 of its employees have been accused by the Securities and Exchange Commission of civil violations of insider trading laws and in a separate action, the U.S. Attorney's Office charged four of those people with criminal insider trading violations related to alleged insider trading in Nvidia stock in March 2000. The Nvidia 4.75% convertible due 2007 (B-), which sold in October 2000, dropped another 2.625 points on the day to 132.375 bid, 133.375 offered as Nvidia stock closed down $1.44 to $49.90.

Corning Inc. also had a sharp fall off in its new convert. Traders said there was no news and it appeared to be a selloff to buy into the new deals. Corning's 3.5% convertible due 2008, which sold a couple of weeks ago at par, dropped 5.5 points on the day to 117.5 bid, 118 offered while the common stock declined 67c to $9.55.

Technology certainly is the flavor du jour when it came to new issues.

Xerox's new deal was upsized yet again to $900 million from the revised $750 million, which had been boosted from original plans to sell $500 million of 20-year convertible trust preferreds. The 7.5% issue, which sold at par of 50 with a 25% initial conversion premium, gained out of the gate and closed up 2 points to 52 bid, 52.25 offered as Xerox shares lost 30c to $7.

Agilent's deal remained at $1 billion. The new 3% convertible notes, which priced at par with a 32% initial conversion premium, also was seen 2 points higher out of the gate, closing at 102 bid, 102.375 offered as Agilent shares declined 63c to $23.78.

"It was really busy today and Cendant was the big surprise - it was a very aggressive pricing - but it began tapering off quickly this afternoon," said a convertible trader at a hedge fund in New Jersey. "There are a lot of people taking tomorrow off, or half a day. Some people even left early today."

Cendant trotted out an overnight deal for $1 billion of 3.875% 10-year convertible senior notes with a 48% initial conversion premium. Market sources watching the deal said it opened out of the gate down 2 points from par, but was said to be entirely placed by the end of the day. The new Cendant was quoted closing at par with the underlying stock down 53c to $15.72. Cendant said it was using part of the proceeds to take out its 3% convertible note due 2002, which was flat at 99 bid, 100 offered. Cendant's zero-coupon convertible due February 2021 lost 1 point on the day to 66 bid, 66.25 offered and the Cendant zero-coupon convertible due May 2021 added 0.125 point to 98.5 bid, 98.875 offered.

"The problem with issuers who repeatedly tap the market is that most people already hold it," said a syndicate source, who was not working on the Cendant deal, but observing. "So, it has to be priced cheaper."

Deutsche Banc Alex. Brown convertible analysts put the new Cendant deal pricing about 4% cheap with an implied volatility of 36%, assuming a credit spread of 450 basis points over LIBOR and 45% volatility in the stock. But, one hedge fund convertible trader pointed out that several new deals lately have been pricing as much as 10% cheap.

"They tend to swing one way for a while and get way out in one direction, and then pull back," the trader said. "We'll see a few rich deals and depending on the market's reaction, it will either be absorbed or rejected and terms will swing back the other way. It's the natural course of supply and demand. I don't think it's a sign that everything is going to become rich all of a sudden."

Other recently priced new paper was mixed. Traders said it much the same situation as with the new Corning, with some selling to buy into new deals Tuesday. The Quest Diagnostics 1.75% convertible senior notes price gained 0.75 point to 101.5 bid, 102.5 offered as the common added $1.72 to $63.15. Riverstone Networks' new 3.75% converts dropped 3.25 points on the day to 102 bid, 103 offered as the common stock lost 76c to $13.95. In addition to Agilent and Xerox, Profit Recovery Group International Inc. sold a small deal ahead of schedule that was also upsized, to $95 million from $75 million. Anadigics Inc. is the only deal remaining on the pricing calendar, with $75 million of five-year convertible senior notes talked to price for a 5.0% to 5.5% yield and a 21% to 25% initial conversion premium. Anadigics shares closed down $1.759c to $16.80.

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