Providian gains sharply amidst big volume on talk about Wells Fargo takeover; buyers aplenty

By Ronda Fears

Nashville, Oct. 2 - In general, there were plenty of buyers in the market Thursday as a fresh load of cash was dumped into the convertible asset class at the beginning of fourth quarter, traders said. There were no official figures as in other markets like equities or junk bonds; traders were just in agreement that there was new money getting put to work.

Everything was getting fresh bids, but the big mover of the day was Providian Financial Corp. on the latest buzz that it is a takeover target by Wells Fargo & Co.

"The big rumor today is that Wells Fargo is going to buy Providian," said a convertible trader at a huge hedge fund in New York.

Traders said the newest Providian convert, the 4% due 2008 sold in May, has been getting bid up over the past week. The other two Providian converts - the 0% due 2021 and 3.25% due 2005 - are busted.

On Thursday, the trader said the 0s were up "on big volume and the coupons are getting squeezed on dividend concerns should this happen."

There were high yield buyers for the Providian 3.25s, one dealer commented, adding that while there may be concern about a dividend cutting into yield, the spread differential between Providian as a single-B credit and Wells Fargo as a single-A credit gives many buyers reason to expect the bonds will richen sharply if this event occurs.

The Providian 0s gained 1 point to close at 46.375 bid, 46.875 offered. The 4s gained 2.25 points to 121.5 bid, 122 offered. The 3.25s rose 0.5 point to 94 bid, 94.5 offered. Providian shares ended up 40c, or 3.33%, to $12.41.

For the 3.25s in particular, one convertible player noted the 94-95 levels, with the stock at $12.12, would translate to a yield-to-maturity of 6.4% and a premium of 438%.

"That's a good yield for less than two years to go until the Aug. 15, 2005 maturity. And the yield would look even better if Providian were taken out by an investment grade acquirer," said F. Barry Nelson, portfolio manager with Advent Capital Management.

"The beauty of a Providian takeout is that a more creditworthy company could fund the Providian receivables less expensively and instantly enhance the profitability of the Providian assets."

Another buyside convert trader in New Jersey said it will be a matter of time as to whether the speculation is confirmed or dispelled, but it appears to have originated at a risk arbitrage desk, which might lend it a bit more credence.

"On the latest rumor du jour regarding a takeover by Wells Fargo, as a corporate policy we do not comment on market rumors and this certainly falls under that category," said Providian media spokesman Allen Elias from the corporate headquarters in San Francisco.

Trading desks were busy otherwise, as well.

"It has seemed like a general buying panic, because the issuance front has been quiet," one buyside trader said. "The market is getting rich."

In addition to buyers with new capital to put to work, however, there were also some sellers taking profits that they hope to use on new issues when the calendar comes back to life toward the latter half of October.

"There is a lot of new money being put into the market on the new quarter," said John Siebel, head of trading at Silverado Capital Management.

He said it may be a good thing for new issues to hold off for a few weeks, since "anything that's issued now, with rates so low and where the dollar is, will get backed up pretty quickly."

Veteran convertible manager Michael Revy agreed that the convert market is looking richer.

"I have been selling a few positions," Revy said, without elaborating.

It is just pockets of the market that is getting rich, however, some participants point out.

"Whether or not the convertible market is getting rich - and a lot of convertible preferreds have a ways to go in richening - remember that, over time, investors in convertibles tend to earn equity-like returns and tend not to panic out in weak spots," Nelson said.

"I noticed that the month-end Merrill Lynch calculations of convertible cheapness seemed to favor preferreds as the cheapest convertibles. The only bonds that seemed cheap were small-caps."

Moreover, Nelson said it seems rather unusual to see such a strong market with few new deals, or none. But he added that most markets seem unusual at this time.

"I'm not sure why companies are not issuing new convertibles. Perhaps the companies simply remain committed to keeping capital expenditures low," Nelson said.

"The high-yield market seems strong and that certainly influences convertibles."

With rates so low, many convertible market participants were anticipating strong issuance - and that was in part due to what the bankers were saying about their forward calendars.

Capital markets sources say there still will be decent issuance in convertibles, but onlookers also note that rates are heading northward. While issuers might be disappointed with that inevitable development, investors are happy to see the opportunity for a bit more income coming their way.

Also, another convertible manager pointed out that rising interest rates will help ease the call risk that has been weighing on the convertible market this year. At what point that will be priced into the market, however, is yet to be seen.

"What level of increased interest rates would make cash calls less likely? Or, how much more do rates have to increase to take away the likelihood that bonds will be called for cash? It's just a thought," said the manager, putting together a multi-strategy convertible fund in New York.

"It's a lot more complicated than that [cost of capital as it relates to refinancing] because dilution also comes into play if there is a possibility of conversion as opposed to cash call or refi.

"But with rates so low, cash calls become a lot more attractive so it's yet another call option convertible investors are short, so there's more risk. When rates are high, it's one less risk."

There was a blitz of sellside research on call threats earlier this year in March and April, and several of the risky names mentioned by analysts have indeed been called - Health Management Associates Inc.'s 0.25% due 2020, Lennar Corp.'s 0% due 2018, Nabors Industries Ltd.'s 0% due 2020 and Teva Pharmaceuticals Inc.'s 1.5% due 2005. The Teva and possibly Lennar were converted into stock rather than a cash payment made, however.

Others, on a Lehman Brothers list, were Gilead Sciences Inc.'s 5% due 2007, Johnson & Johnson (old Alza Corp.) 0% due 2020, L-3 Communications Inc.'s 5.25% due 2009 and United Parcel Services Corp.'s 1.75% due 2007.

"Nothing has changed except that the trend now is for rates to rise, and at some point cash call risks will diminish," the manager said.

"The question is what level of rates will diminish that risk?"

Several biotech issues were active Thursday, although Gilead was not mentioned specifically.

"Some of the smaller biotechs are active today, possibly due to positive comments on the sector on CNBC this morning and maybe also due to an upgrade of Alexion Pharma by Cowen," said Stuart Novick, Citigroup convertible analyst.

Sepracor, Affymetrix, Alpharma, Imclone, Invitrogen, Millennium and Vertex were all mentioned moving higher with the underlying stocks.

Guilford Pharmaceuticals Inc. also got some play to the downside, however, on an order from the U.S. Food and Drug Administration to stop disseminating what the regulator called misleading promotional materials for its brain cancer treatment to physicians.

The Guilford 5% due 2008 was pegged at about 120.5 bid, 121.25 offered, down about 1 to 1.5 points. The stock closed off 10c, or 1.6%, to $6.20.

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