New deals activity provides some boost to trading volume

By Ronda Fears

Nashville, Tenn., July 29 - Convertibles market volume was boosted by the heartening move upward in stocks and a somewhat unexpected slight surge in new deal activity. Volatility, however, dropped sharply, but most hedge fund had begun unwinding late last week.

Corning Inc. launched a $500 million mandatory preferred deal for midweek, with the dividends guaranteed, and Scios Inc.'s small bond was seen higher in the gray market. Both were providing some trading volume, enhanced by the uptick in stocks.

"We'd been hearing some rumblings about another new deal this week, but hadn't really taken it to heart," said a convertible dealer.

"If the market tone had turned negative again, I don't think we'd be looking at this Corning. As it is, though, even with the stock under $5, it will be placed well. The collateralized coupon pretty much takes the guesswork out of that."

Even though Corning was downgraded to junk by S&P and Moody's on Monday, the deal was expected to do well, again, chiefly because the company is buying Treasury notes to secure the interest payments. The existing converts were already priced at junk levels, traders said, so the blow was minimal in the secondary market.

"The Corning converts, the zeroes are so far out of the money that they don't trade, and the 31/2s are trading really almost at distressed levels, certainly at junk levels," said a trader at a convertible fund in New York.

"It's awful. The devastation has been lingering for quite some time. But we bought these [existing] converts when they were upper-end investment-grade. Now, it's just sickening."

The new Corning mandatory is rated BB- by S&P and B1 by Moody's. It is slated to price after Wednesday's close.

What will hurt the Corning deal the most, one buyside source said, is that Corning stock has such a high volatility, which works against mandatories.

Deutsche Bank Securities Inc. puts the Corning deal, at the midpoint of price talk, at about 5.4% cheap. That's using a credit spread of 100 basis points over Libor, to account for a "slight risk" to the coupons, and 85% volatility to the stock.

St. Paul Cos. Inc.'s success last week with a mandatory surprised many players in the market.

"The new St. Paul deal was a nice surprise," said a convertible trader at a hedge fund in New Jersey.

St. Paul's new mandatory, which priced at par of 50 with a 9% dividend and 20% initial conversion premium, gained 4.71 points on the day to 58.61. The stock rose $3.19 to $30.19.

Scios' deal, which is set to price after the close Tuesday, was seen 1 point over par in the grey market. The stock closed up $1.54 to $31.

At the midpoint of price talk, Deutsche puts the Scios deal is 2.44% cheap, using a credit spread of 1,100 bps over Libor and 50% volatility.

Bear Stearns & Co. convertible analyst Matt Hempel puts it about 5.75%, using a credit spread of 1,000 basis points over Treasuries and 50% volatility.

It is 9.92% cheap, using a credit spread of 900 bps over Treasuries and 55% volatility, according to a report by convertible analyst Kimberlee Brody at Wachovia Securities, Inc.

In the secondary market, nearly everything was marked up as stocks soared in a strong rally.

Cable and media names were up sharply for the most part, except for AOL Time Warner, which was still reeling somewhat from liquidity concerns among creditholders although the stock closed a bit higher.

"I think we've hit a bottom, for a while," said a convertible trader at a hedge fund in New Jersey.

Some onlookers expect the market to move sideways for some time, but the length is a source of debate.

Regardless, one dealer noted that after-hours trading in stocks indicated that the rally will cool off considerably on Tuesday.

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