Allied Waste trades up from par; Nash Finch launches deal; Elan slides, Biogen steadier on news

By Ronda Fears

Nashville, March 4 - Convertible players reacted indifferently to stocks rising Friday, with the Dow Jones Industrial Average and S&P 500 flirting with a new record high amid a surprising boost in job growth for February. Traders said the convertible market felt firmer but trading volume was thin, so enthusiasm was watered down considerably.

"So what?" commented one manager of a huge hedge fund based in New York in reference to the gain in stocks. "The jobs data was good news, they say, but our returns for February looked pretty crappy so we're not that happy. We're starting to take down some [hedge] ratios, though, because the economy does appear to be poised for a takeoff on some fronts."

An outright fund manager agreed that the reaction in the convertible market to the broader markets was rather apathetic.

"I'm not entirely convinced that the market has legs," he said. "It's the middle of March, we're coming up on the end of first quarter already, so if anything I'd expect we'll see some more selling."

Meanwhile, Allied Waste Industries Inc. priced an upsized mandatory and edged up in the immediate aftermarket. Traders said it was a good market for mandatories, and several noted utility issues in the structure saw heavy buying Friday.

Nash Finch Co. also launched a new deal for next week, and some market watchers were anticipating more details on the new deal planned by Chiquita Brands International Inc. would emerge next week.

Allied Waste goes to 251.75

Allied Waste's new issue performed out of the gate much as it did in the gray market, edging up ever so slightly. The Scottsdale, Ariz.-based trash hauler sold the upsized $600 million mandatory, concurrently with $100 million of common stock and $600 million of straight notes, in part of a big refinancing package.

Sources who participated in the convertible, however, said the lack of a big spike in the new issue was not an indication that the deal was not popular, pointing to the fact that it was upsized.

"To the contrary, this was a hot deal," one buyside source said. "We heard that there was good participation from across the spectrum of markets - a lot of convert guys as well as equity and high yield people. It was probably played heavier by outright [convertible] folks versus the hedgies, which probably accounts for it not moving much off par today. We're more buy-and-hold type buyers."

The convertible priced at par of 250 with a 6.25% dividend and 25% initial conversion premium - smack at the middle of guidance for a 6.0% to 6.5% dividend and initial conversion premium between 23% and 27%.

Stabilization agent and joint bookrunner Citigroup Global Markets Inc. closed out the new Allied Waste convertible at 251.75 bid, 252.75 offered.

Allied Waste shares gained 8 cents on Friday, or 1.01%, to close at $7.98. The company's 6.25% mandatory gained 0.21 point to 46.86 on the New York Stock Exchange.

Nash Finch deal for next week

Kicking off a three-day marketing show for a Rule 144A deal, which has become a rare event in convertibles, Minneapolis-based food distributor Nash Finch launched on Friday afternoon a small deal aiming to fetch $150 million in proceeds.

The 30-year discount cash-to-zero contingent convertible senior subordinated notes are talked to yield at 2.75% to 3.25% and initial conversion premium between 32.5% and 37.5%. The issue will pay a cash coupon for eight years.

Pricing is slated after the market close Wednesday.

"It is odd to see this these days," said a market source, referring to the longer marketing period of three full days, compared to the more typical one-day book-building effort. "Maybe there's more to the story than we can see."

Nash Finch said proceeds would be used for its $225 million acquisition of distribution centers and two retail outfits from Roundy's Inc. that was announced last week or, alternatively, to repay part of a term loan under its senior credit facility. Nash Finch estimated the acquisition, which represents about $1 billion in annual food distribution sales, would contribute $31 million to $33 million to operating earnings in the first year.

For fiscal 2005, the company estimated earnings per share of $3.40 to $3.55, before the effect of the Roundy's acquisition.

Synthetic issues get comments

Remarks continued to come in Friday on the topic of an increased level of synthetic convertible issues both as investment opportunities and business for the investment banks as convertible issuance remains in a drought.

"I've looked at a lot of synthetics," said Ted Southworth, a manager at Northern Trust Co.

"I think they're getting more popular as the new issue market pricing approaches the secondary market, i.e., no real discount to 'theoretical' value. Since they're usually carrying at least an investment grade credit, from the underwriter, and constructed with open market options, I'm told they're liquid. Unfortunately, the majority of those I've seen work by selling volatility, limit the upside. That lessens their attractiveness to me, as I'm primarily an equity investor. Plus, my notion of 'theoretical' value is based on a different calculus than the hedge funds."

Still, many also see these as great ways to expand their portfolios to play stocks not available in the standard convertible market. These include names like Fed Ex Corp., Caterpillar Inc., Kroger Co., International Business Machines Corp., Whirlpool Corp. or Colgate-Palmolive Co. to name a few.

Lack of liquidity in these small deals, which typically are far less than even $50 million, is one of the main obstacles.

"Really, I suppose the 'problem' with these is simply the old rule of 'tanstaafl' - there ain't no such thing as a free lunch," Southworth said. "To gain on one parameter, you must give up something on another. Plus, there's a transaction cost which rises with complexity. That's one reason I try and keep things as simple as possible."

Elan, Biogen bad news mounts

Elan Corp. plc and Biogen Idec Inc. administered a second dose of bad news, confirming that a second patient in a clinical trial testing their muscular sclerosis drug Tysabri in combination with Biogen's Avonex had been diagnosed with a potentially fatal brain infection, following the death of another patient.

Biogen's convertibles were continuing to hold steady, traders said, although Elan saw more selling.

Elan continued to take a sharp dive with its 6.5% convertible notes dropping to 111 bid, 111.75 offered, down another 9.5 to 10 points Friday and off by about 25 points on the week, a sellside convert trader said. Elan shares dropped another 94 cents, or 14.14%, to $5.71, having lost more than half its market capitalization throughout the week.

Still supported by a strong cash pile, though, Biogen's zero-coupon converts were said to be little affected on swap although the 2032 issue was off 1.75 points outright at 62 bid, 63 offered and the 2019 issue lost 8 points outright at 151 bid, 152 offered. Biogen shares ended lower by $1.80, or 4.58%, to $37.53.

On Monday, Elan and Biogen voluntarily pulled the MS treatment, which had received accelerated approval from the U.S. Food and Drug Administration in November. The companies said they have suspended sales and testing of the drug until further notice.

"I think probably the stocks will see a bounce early next week," the trader said. "Then there will be days of uncertainty until the companies or the FDA make some sort of decision. In the end, at least Biogen, I think, will not have a lot of long-term damage."

Utility issues see heavy buying

Traders said it has been a good week for mandatory convertibles, and on Friday several issues from the utility sector were seeing heavy buying. Dominion Resources Inc. led the pack, and Aquila Inc. also was mentioned at a couple of desks.

Dominion's 8.75% due 2006 was quoted up 1 point at 56.375 bid, 56.5 offered by one dealer, and the issue closed on the New York Stock Exchange up 0.36 point at 55.86. Dominion shares ended up $2 on the day, or 2.77%, at $74.25.

Aquila's 6.75% due 2007 shot up 2.125 points to 36.5 with the underlying stock gaining 29 cents, or 7.57%, to $4.12.

There was little to no news moving the specific convertibles, the trader said. Moreover, it was a sector rotation as well as investors "taking a liking to mandatories" recently.

On Friday, Dominion announced an agreement to sell UBS Investment Bank 76.4 billion cubic feet of natural gas over the next four years for $424.4 million. This is the third volumetric production payment transaction for UBS since 2003, after the bank expanded into the energy business with the purchase of Enron Corp.'s energy trading business in 2002 following Enron's bankruptcy.

For Aquila, he said it also was a turnaround play.

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