Lehman ends commissions for clients; Isis jumps on debut; National Financial makes quiet start

By Kenneth Lim

Boston, Jan. 18 - Lehman Brothers shook the convertible market on Thursday by offering commission-free stock trading to convertible accounts.

Meanwhile, Isis Pharmaceuticals Inc.'s new offering gained several points outright after the deal arrived within price talk.

National Financial Partners Corp. was quiet, hampered by a lack of interest even after the deal priced at the cheap end of talk.

In the primary market, Anworth Mortgage Asset Corp. and Invacare Corp. announced plans for about $250 million worth of new convertibles.

Lehman ends commissions

Trading volume at Lehman's convertible desk spiked on Thursday after the shop stopped collecting commissions on stock trades by its convertible clients, and market sources said the move could spur other brokers to drop their fees.

"It's great!" said a hedge fund portfolio manager. "It's going to be very hard for me to do business with someone who's asking me to pay fees versus someone who lets me do it for free."

Lehman on Thursday told its convertible clients that it will not collect commissions on stock trades for outright and hedge accounts. Lehman is currently the only major convertibles shop to adopt such a "net-market" system. A number of rival convertible shops declined to comment on the matter.

Lehman offered no statement on the move.

Doing away with commissions is widely expected to improve transparency in the marketplace. "I just think some people are inverting markets because there's a commission," one market source said. "Some people are charging one cent to trade, some people are charging five cents...but now whatever is quoted is just your execution cost, outright and on swap."

Lehman is believed to have been planning the move for the past few months, a buyside convertible trader said. The trader noted that investors could save 2% to 4% if every convertible shop follows suit.

For the moment, Lehman stands to win over business in more generic names, the trader said.

"Ultimately you still have to cross on names," the trader said. "But if there's a fairly generic name that I can match with five different guys...naturally I'd go with Lehman."

The trader, who also said Lehman was believed to have started looking into making the move a few months ago, thought that the time was ripe for such a change.

"You'll have to find some other way to add value," the trader said. "It makes sense to me. In fact, buyers and sellers, they could have just traded with each other if they wanted to cut out these guys. We ultimately would have cut them out completely. There's just so much competition on both sides of the ball for them."

Isis gains on debut

Isis Pharmaceuticals' new 2.625% convertible due 2027 rose about 3.5 points outright on Thursday after the deal priced within talk.

The convertible traded at 102.5 against a stock price of $11.25. Isis stock (Nasdaq: ISIS) slipped 2.31% or 26 cents to close at $10.99. The notes were offered at par.

Isis priced the $125 million offering of convertible subordinated notes with an initial conversion premium of 30%. Price talk was for a coupon of 2.5% to 3% and an initial conversion premium of 27.5% to 32.5%.

There is an over-allotment option for a further $37.5 million.

Lehman Brothers was the bookrunner of the Rule 144A offering.

Isis, a Carlsbad, Calif.-based drug maker whose products cardiovascular, metabolic, inflammatory and ocular diseases and cancer, said it will use the proceeds of the deal to buy back its 5.5% convertible subordinated notes due 2009, of which $125 million is currently outstanding, and for general purposes.

"They were priced well," a sellside convertible trader said. "Guys were already modeling it about 1%-2% cheap at the mids, and they didn't come in too aggressively. It's got decent vol and potential upside in the credit, so it will set up well."

The trader said there were some initial concerns about the stock borrow and ranking of the notes.

"I know there was a bit of issue with the borrow early on, and some people didn't like that it's subordinated debt," the trader said. "But the borrow's not that big of a problem now, and the ranking of the debt's already worked into the price, and it's still attractive."

National Financial starts quiet

National Financial Partners' new 0.75% convertible senior notes due 2012 were quiet on Thursday, as critics panned the offering's aggressive pricing.

The new notes were bid at par against the previous closing stock price of $47.10 near the open. National Financial Partners stock (NYSE: NFP) closed at $47.70, up by 1.27% or 60 cents.

The notes offered at par, and priced with an initial conversion premium of 20%.

The $200 million offering was talked at a coupon of 0.25% to 0.75% and an initial conversion premium of 20% to 25%.

There is an over-allotment option for a further $30 million.

Goldman Sachs and UBS Investment Bank were the bookrunners of the registered off-the-shelf offering.

Some National Financial Partners common stockholders concurrently sold 1.6 million common shares at $46.35 per share. The company will not receive any of the proceeds from that stock sale.

National Financial Partners, a New York-based financial services provider, said it will use the proceeds of the deal to buy back about 2 million shares of its common stock from Apollo Investment Fund IV LP and Apollo Overseas Partners IV LP The proceeds will also fund convertible note hedge and warrant transactions and pay down existing debt.

A buyside convertible trader said the deal was not attractive enough to get involved with.

"I stayed away from NFP," the trader said. "It was basically a no-coupon. It had a high common dividend, your carry was negative, the stock has basically zero vol...there's nothing there."

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