St. Paul prices, Scios launches amid lingering cautious tone

By Ronda Fears

Nashville, Tenn., July 26 - The market moved up, but the tone was still very notably cautious. That aside, Scios Inc. launched a small new deal, a vanilla bond, for next week as St. Paul Cos. Inc. priced an upsized quick-sale mandatory.

"The tone is still very cautious as credit concerns are still very prevalent in the convert market," said a convertible trader at a hedge fund in New Jersey.

"There are lots of issuers with very low stock prices, which often can mean distress. There's still a rough road ahead for many non-investment-grade issues."

Williams, AES, Mirant, Calpine, AOL Time Warner, Avaya, Lucent, Nortel and Agere Systems top the list.

Nonetheless, there was some activity in the market, aided by the new deals, although investors are treading with a fair amount of trepidation.

"The new St. Paul deal did surprisingly well. The common helped the mandatory," the trader said.

"Most people were very lukewarm to negative on the pricing."

St. Paul shares closed up $2.80 to $27. The new mandatory, which priced at par of 50 with a 9% dividend and 20% initial conversion premium, was quoted up 2 points to 52 bid, 52.5 asked.

Valuations were anywhere from 0.75% rich to 3.8% cheap, due to discrepancies on the credit spread as well as volatility level on the stock.

But, the St. Paul deal was upsized in a quick-sale marketing effort, after market conditions stalled the Orbital Sciences' new deal earlier in the week.

Then, early Friday as final terms were circulated on the St. Paul deal, Scios launched one for next Tuesday.

Scios is bringing a vanilla convertible bond, however, which market sources said is likely to get a nice response except for the small size. It is a $125 million.

"Demand, in terms of having capital to put to work, is certainly out there," said a buyside analyst.

"This [Scios deal] looks like it's priced to sell. It's really cheap, which sometimes can be a red flag, but in this market, that's probably what it will take."

Analysts put it around 10% cheap.

Scios shares closed down $1.29 to $29.46, which the analysts said suggests a good level of hedge fund participation.

There was some rebound in the cable group, traders said, as Cablevision reaffirmed is guidance and said it was ready to certify its books without any changes to prior filings.

Cablevision and Charter Communications were both higher.

AOL also rebounded somewhat, and Tyco gained rather nicely on the new CEO news.

But Sprint and Sprint PCS were hammered on liquidity concerns.

"Sprint paper, both the straight debt and the converts, as well as the stock, was getting hammered midmorning on a rumor that it had a $2.5 billion bank note coming due but only had $1 billion available," said a convertible dealer.

"That brought up some fears about getting cut to junk, but finally it eased up after the company finally issued a statement saying everything was okay. Of course, that only goes so far. In this market, people are quicker to believe the worst."

Sprint PCS closed down 70c to $3 and the convert was quoted off 0.25 point to 46 bid, 46.5 asked.

"Contrary to rumors, Sprint has not drawn against any of its bank credit lines and has no plans to draw against bank credit lines," the company said in a statement.

"As outlined on the company's earnings conference call held on July 18, Sprint has strong liquidity and a fully-funded business plan for the rest of the year and beyond."

At the end of second quarter, Sprint said it had a cash balance of about $650 million. In early June, it closed a new $500 million PCS accounts receivable asset securitization facility and another source of cash includes a $700 million untapped term loan facility backed by its directory publishing business.

Excluding a $2 billion bank line that does not expire until August 2003, liquidity comes to $1.85 billion, which the company said far exceeds its expected cash requirements of about $550 million in the second half of 2002 that consists of $100 million for operations and $450 million of debt redemptions.

Sprint has an existing $3 billion, 364-day facility expiring in August 2002 and a $2 billion, 5-year facility that does not expire until August 2003.

The company said it expects to finalize in the next few weeks a significant unsecured 364-day bank credit facility with a one-year term out to replace the $2 billion facility due August 2003. In light of the fact that Sprint has no commercial paper outstanding and expects continued improvements in operating cash flows, the company said it is expected to be smaller, however.

Regarding the possible sale of the directory publishing business, the company said it has made management presentations to a broad field of parties. Interest remains high from potential bidders. Final offers are expected over the next couple weeks with a decision around the end of August.

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