Finisar prices to sell, gains 4.5; Quanta quick-sale up 2 in gray; CA plunges 8.5-12 on executive exits

By Ronda Fears

Nashville, Oct. 9 - The convertibles market was better bid overall Thursday, particularly new paper, as stocks took off but Computer Associates International Ltd. plummeted sharply as three top finance executives resigned amidst the ongoing accounting probe at the software firm.

A downgrade by Moody's Investors Service and a negative CreditWatch by Standard & Poor's fueled the drop in Computer Associates, with the 1.625s plunging 12 points and the 5s losing 8.5 points.

Yahoo! Inc., however, led the tech pack higher as its earnings wowed onlookers.

The Yahoo 0% convertible due 2008 added 7.625 points on the day to 124.625 bid, 125.125 offered as the stock gained $3.96, or 10.21%, to $42.75 on the pleasing earnings and higher guidance from the online giant.

New issues were also hot, particularly new deals.

"Several of these new deals are priced to sell, you can clearly see that," said a buyside trader. "But they needed to be."

Quanta Services Inc. spent the day marketing a $175 million deal that is part of a refinancing of its bank revolver and existing 4% converts due 2007. It was pricing after the close but final terms were not available at press time.

The new Quanta convert was talked to yield 4.0% to 4.5% with a 35% to 40% initial conversion premium.

At the middle of price talk, Merrill Lynch analysts put the new Quanta convert 5% cheap, using a credit spread of 770 basis points over Treasuries and a 40% stock volatility, with the stock at $8.

Merrill convertible analyst Tatyana Hube noted in a new issue report that just prior to the new deal announcement, the old convertible 4% convert was seen trading at an implied spread of 655 bps, while about 10 days ago it was trading at a 770 bps spread.

"Given that this deal appears relatively cheap based on the recently priced new convertible deals and accounting for a somewhat tight borrow, we anticipate that the issue will price at the rich end of the talk, or possibly even outside of it," said Merrill convertible analyst Tatyana Hube in a new issue report.

It would not be a surprise to market participants, either.

Finisar was described by buyside sources as a "hot" deal priced to sell, even after pricing at the tight end of yield talk and aggressively outside premium guidance. It was upsized, too, to $130 million from $100 million.

Finisar sold the seven-year convertible notes at par to yield 2.5% with a 30.5% initial conversion premium. It had been talked at 2.5% to 3.0%, up 22.5% to 27.5%. A big draw to the new Finisar convert was the collateralization of coupon payments for the first four years.

Bookrunner Merrill Lynch closed the new Finisar convert at 104.5 bid, 105.5 offered. The stock ended the day up 10c, or 3.52%, to $2.94.

iDine Rewards Networks Inc. also sold its tiny deal at the aggressive end of guidance. The Miami-based company sold $60 million of 20-year convertible notes at par to yield 3.25% with a 25% initial conversion premium. The deal had been talked at 3.25% to 3.75%, up 20% to 25%.

This week's other new deals did fairly well in the aftermarket Thursday, too.

Eastman Kodak Co.'s 3.375%, up 47% convert - which price at the tight end of yield talk and aggressively outside premium guidance - added 0.5 point to 103 bid, 103.5 offered. The stock closed up 32c, or 1.5%, to $21.65.

Placer Dome Inc.'s $2.75%, up 55% convert - which sold at the aggressive end of price talk - was unchanged at 102.625 bid, 103.125 offered. The stock slipped 7c, or 0.51%, to 13.69.

The biggest newsmakers of the day, though, were Yahoo! and Computer Associates.

Yahoo's 97% increase in EBITDA for third quarter, boosted by a net revenue gain of 43%, translated into a whopping shot in the arm for the converts. Dealers also said the converts were propelled by the nice pop in the stock.

The news from Yahoo that online advertising was its biggest driver for the revenue gain also helped other converts in the ad sector like Lamar Advertising Co.

Lamar's new 2.875% convert due 2010 gained 1.125 points on the day to 94 bid, 94.5 offered while the stock closed off 2c to $30.09.

Computer Associates, however, took a hard blow on "severe headline risk" from the latest fallout of its accounting woes.

Late Wednesday, Computer Associates announced the resignation of three executives as the result of an internal audit into questionable accounting matters raised by federal regulators and New York state attorneys. Those were Ira Zar, chief financial officer; Lloyd Silverstein, senior vice president, finance; and David Rivard, vice president of finance.

Sanjay Kumar, CEO of Computer Associates, said that as previously reported, the company has been responding to a joint investigation by the U.S. Attorney's Office in New York and the Securities and Exchange Commission.

The investigation concerns accounting practices prior to the company's adoption of a new business model in October 2000, he stressed. It primarily relates to the timing of revenue recognition in the fiscal year ending March 31, 2000.

Computer Associates said its internal investigation is ongoing, but had already determined that some revenue was recognized prematurely in fiscal 2000, with a number of software contracts in that fiscal year signed after the end of the quarter in which revenues associated with the contracts was recognized.

On those findings, the resignations of those who oversaw sales accounting during the relevant time were requested.

Kumar also said the company expected to achieve results for the quarter ended Sept. 30 in line with previous guidance. The company will announce second quarter results after the market close Oct. 22.

The development prompted Moody's to cut Computer Associates' senior debt to Baa3 from Baa2, putting the credit one notch away from junk territory, and the agency is keeping the rating on review for a possible further downgrade.

S&P did not cut Computer Associates ratings, but put the BBB+ credit on negative watch.

The Computer Associates new 1.625% convert due 2009 fell 12 points on the day to 148 bid, 148.5 offered and the 5% convert due 2007 lost 8.5 points to 128.5 bid, 129 offered.

Computer Associates shares plunged $3.01, or 10.39%, to $25.95.

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