New liquid paper seen as a nice addition for traders although some sit back waiting on Fed meeting

By Sara Rosenberg

New York, June 29 - The new, relatively liquid paper that hit the convertible market Tuesday - including offerings from Novell Inc. and Goodyear Tire & Rubber Co. - took much of the spotlight as investors were happy for this latest change in pace. However, there were those who chose to sit on the sidelines and watch to see what Wednesday's Federal Open Market Committee meeting has in store.

"I wouldn't say we're in the Sahara Desert here but excluding [Novell and Goodyear] this month we're about $2.7 billion in new issuance and that's 19 deals so they're pretty small sized," a market source said.

"A lot of people don't want to touch things that small because they're worried about illiquidity. I'm looking at four or five of those in private placement and those don't trade at all. A lot of those are small enough that they won't trade much. They'll trade a little the first couple of days and then you won't hear about them for a couple of weeks.

"If nothing else, we had a day with what people would consider 'real deals' even if they don't like them. It's a change of pace for people. There hasn't been a day like this, with a couple of new sizable deals to work on, in a few weeks," the source concluded.

But not everyone was enticed to participate in trading these new deals or much else. Rather some chose to take a more cautious stance waiting on the upcoming Fed meeting.

"With the Fed tomorrow and going forward as far as the interest rate picture, we're just staying on the sideline until the smoke clears," a trader said.

Novell up about ½ point

Novell's new convertible was seen quoted at par 1/8 bid, par 3/8 offered versus an $8.29 stock price on a 70% hedge late Tuesday afternoon, according to a trader.

"We've been busy with the Novell deal trading today," an analyst added, quoting the paper around par 1/2.

After close Monday, Novell sold what the analyst called a "well oversubscribed" and upsized $500 million offering of 20-year convertible senior notes at par to yield 0.5% with a 40% initial conversion premium via bookrunner Citigroup Global Markets Inc.

The Rule 144A deal, increased from $450 million, priced at the aggressive end of talk for a 0.5% to 1.0% coupon and 36% to 40% initial conversion premium.

Ahead of the pricing, Deutsche Bank Securities analysts put the Novell convert 1.55% rich to 1.92% cheap at the middle of price talk, using a credit spread of 325 basis points over Libor and a 45% volatility. The Deutsche analysts noted that pro forma for this transaction Novell will be 4.6 times levered, but added that as of April 30 the company had cash and securities of $636 million with no net debt on its balance sheet.

A convertible analyst at another sellside shop put the deal 0.03% cheap at the midpoint of guidance, using a credit spread of 520 bps over Treasuries and a 50% volatility.

The deal was sold on swap with up to $125 million of proceeds earmarked to buy back stock from short sellers participating in the offering. The structure includes dividend and cash takeover protection features.

On Monday, the deal started off in the gray market early with a bid of 1.25 points over issue price, buyside traders said, although that level was seen as a trial balloon by the deal managers involved. Around noon on Monday the deal was bid 0.5 point over issue price with an offer at 0.875 point over. By the close, the deal was still bid 0.5 point over issue price but the offer had slipped to 0.75 point over.

Proceeds remaining after the stock buybacks will be used for general corporate purposes, including potential future acquisitions, the Waltham, Mass.-based computer networking firm said.

The use of proceeds piqued considerable interest, with some convertible players speculating Novell might make a play for another convertible name like RealNetworks Inc. or Red Hat Inc. Novell and RealNetworks already have a distribution partnership. RealNetworks and Red Hat also have a licensing agreement.

Goodyear better offered

Goodyear's new convertible was seen quoted at 102 bid, 102½ offered on Tuesday morning and then was seen "better for sale later in the day" at 102 5/8, versus a stock price of $9.27, a trader said. The stock closed at $9.14, down $0.12 or 1.3% on the day.

"We're also trying to get involved in Goodyear," the analyst said, also quoting the paper at around 102 5/8.

After close Monday, Goodyear sold a hugely upsized $300 million 30-year notes offering at par to yield 4.0% with a 30% initial conversion premium via joint bookrunners Deutsche Bank Securities, Goldman Sachs & Co. and JPMorgan Securities.

The Rule 144A deal, bolstered by full dividend and cash takeover features, was doubled to $300 million and got printed at the aggressive end of price talk for a 4.0% to 4.5% coupon and 25% to 30% initial conversion premium.

In the gray market on Monday, buyside traders said the proposed Goodyear convert started out above issue price and just kept slowly bouncing higher during the session. It was last seen in the when-issued market at 1.875 bid.

The Akron, Ohio-based tire maker said proceeds would be used for general corporate purposes, including the possibility of temporarily repaying its bank revolver.

A convertible offering was part of the company's agreement with union workers late in 2003, but the deal announced as a result of those negotiations was delayed by a Securities and Exchange Commission investigation into the company's accounting practices.

Nationwide Health prices

Nationwide Health Properties Inc. sold $100 million of perpetual convertible preferreds at par to yield 7.75% with a 20% initial conversion premium via bookrunner JPMorgan Securities Inc. and co-managers Banc of America Securities, Citigroup Global Markets Inc. and Wachovia Capital Markets.

The deal, which priced after close Monday, came at the cheap end of talk for a 7.25% to 7.75% coupon and 20% to 25% initial conversion premium.

The Newport Beach, Calif.-based real estate investment trust, which owns healthcare facilities such as nursing homes and assisted living centers, said it plans to use proceeds to repay outstanding debt under its unsecured revolving bank line of credit and for general corporate purposes.

Nationwide Health common shares have a dividend yield of 7.59%.

The stock closed at $18.92, down $0.03 or 0.16% on the day.

LionOre to come

Coming up after close Tuesday is pricing of LionOre Mining International Ltd.'s $125 million seven-year senior unsecured convertible notes talked to yield 3.3% to 3.8% with a 37% to 42% initial conversion premium.

Barclays Capital is bookrunner of the deal, which is expected to price Tuesday.

A $25 million greenshoe is available.

Proceeds from the offering will be used for general corporate purposes, the Toronto-based mining company said.

Watson Pharmaceuticals active

Watson Pharmaceuticals Inc.'s 1.75% convertible due 2023 was active on Tuesday, according to a trader, a day after the company revised second quarter numbers.

The notes were quoted at 94.09 bid, 94.59 offered, down 0.77 on the day, according to a different trader, while the stock closed at $26.93, down $0.56 or 2.04% on the day.

On Monday, the company revised its forecast second quarter total net revenue to $400 million and earnings estimates to $0.39 to $0.41 per diluted share. The revised earnings estimates do not take into account a $3.0 million charge ($0.02 per diluted share) related to the repurchase of a portion of the company's 7 1/8% senior notes due 2008 and a $10.0 million milestone payment ($0.06 per diluted share) related to a transaction with Kissei Pharmaceutical Co., Ltd.

Previously, the Corona, Calif. pharmaceutical company estimated that second quarter 2004 total net revenue would be $410 million and earnings per diluted share would be $0.50 to $0.52.

The revision is due to lower than anticipated Women's Health and General Products revenues, partially offset by stronger than estimated Generic division revenue, according to a company news release.

The company also revised its predicted total net revenue to $1.6 billion and earnings estimates to $1.85 to $1.90 per diluted share for the full year 2004.

Previously, the company had estimated that total net revenue would be $1.7 billion and earnings per diluted share would be $2.10 to $2.20 for the full year of 2004.

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