UBS AG sets record with $2 billion of 18-month exchangeables; Amazon.com converts hold steady

By Kenneth Lim and Ronda Fears

Boston, Feb. 3 - Friday was the quietest of days with the loudest of deals. A record-setting $2 billion notes offer by UBS AG, exchangeable for Time Warner Inc. shares, emerged even as a languid market hardly moved to results disappointments at Amazon.com Inc.

Good news, though, for DOV Pharmaceutical Inc. as its convertibles rode the stock's rally following positive news of a drug trial.

"Not a whole lot moving in convert land," said a hedge fund trader after the bell.

Meanwhile, convertible analysts have started to digest the first month of the year, and while Lehman Brothers thinks average cheapness fell in January, Citigroup reckons that convertible arbitrage gave its best return since 2003. In Europe, Barclays Capital takes a shine to steel converts, which its analysts believe should be played amid the industry's consolidation news.

Further east, India continues to dish up new convertibles, with Mumbai-listed Monnet Ispat Ltd. pricing a $60 million offering of foreign currency convertible bonds.

UBS sets record with Time Warner exchangeables

In primary market news, UBS AG is offering $2 billion of 18-month, 22% mandatory notes exchangeable for Time Warner (NYSE: TWX), the largest issue of its kind to be offered in the United States. The conversion rate will be set on Monday.

Proceeds from the deal will be $200 million more than the principal, because the notes are priced at 110% above par of $100,000 apiece. The notes mature on Aug. 15, 2007.

Also new in this deal is the "wide strike" feature in the exchange ratio, which syndicate sources said was the first time such a feature is being offered in a United States sale. The exchange ratio of the notes will be calculated from a wider-than-usual range between the lower threshold of 90% and the upper threshold of 140% that could give investors payouts between 64.29% to all of the initial conversion.

UBS also used the wide-strike feature in a €700 million issue of exchangeables into DaimlerChrysler last year, the syndicate source said.

The syndicate source said price talk guided for a coupon between 21.25% and 22.25%, and the deal was mostly distributed to hedge funds.

Shares of Time Warner, the New York-based media giant, closed at $18.40 on Friday, up 0.16 cents or 0.88%.

An analyst at a hedge fund noted the large size of the deal, but voiced concerns that the deal may not be actively traded. "I haven't heard anything about it [trading]," the analyst said.

But the syndicate source was optimistic that the notes would be active.

"It's absolutely not a genuine private placement that doesn't trade, it's a proper [Rule] 144A," the source said.

Buy- and sell-side sources speculated that the deal may be part of a hedging arrangement for a private transaction, and that Time Warner, which is in the midst of a share buyback, is not offering its own stock.

It was announced on Tuesday that UBS had struck a deal with Istithmar PJSC to create derivative instruments that would give the Dubai government-backed investment firm an "economic exposure" in Time Warner. Istithmar, which will be consulted by UBS for any shareholder votes that may arise, also engaged Time Warner dissident shareholder Carl Icahn as an adviser. Icahn leads a group of investors trying to overhaul Time Warner and replace its chief executive, Richard Parsons, with former Viacom executive Frank Biondi.

Amazon converts withstand stock plunge

Amazon.com's 4.75% convertible subordinated notes due 2009 saw some trading on Friday but did not depart from the 96 range even though the stock plunged 10.32% or 4.41 cents to close at $38.33. A sell-side trader said the convertible changed hands at about 96¼ against a stock price of $42.75, while another trader said it was bid at 96.39 and asked at 96.89 against a $38.33 stock. The company's 6.875% euro-denominated convertible due 2010 saw a bid of 100 and ask of 101 against the same stock.

Amazon.com's stock (Nasdaq: AMZN) closed the session down $4.41 at $38.33.

The Seattle-based online retailer said fourth-quarter earnings dropped 43% to $199 million as revenue fell short of expectations. An analyst, who said the company's result was "a horrible number", added that the convertible nevertheless withstood the investor drubbing because the convertibles were "a reasonably busted security without any call protection left...People were wondering if they were ever going to call these damn things."

The reason the convertibles have not moved is that there is no incentive to sell, the analyst said. The yield to maturity is decent, and if the company ever uses its call option it will be a "home run" for investors. "If you own them, you hold them," the analyst said.

Amazon did in fact call some of the issue on Thursday, saying it will redeem €250 million of the total outstanding on March 7 at par. That will leave €240 million outstanding.

DOV flies high on drug trial news

DOV Pharmaceutical's 2.5% convertibles due 2025 was pushed up together with its stock after the Hackensack, N.J.-based biotech announced late Thursday that it has completed enrollment in a phase 3 trial for its lower back pain drug bicifadine.

An analyst, who said his trading desk saw "a lot of DOV Pharmaceutical" on Friday, noted that the convertible was going at 90½ against a $15.50 stock midday. By the end of the week, a trading source at another firm said the convertible had been seen at 93 5/8 against a $16.50 stock. DOV shares (Nasdaq: DOVP) shot up $1.47, or 9.44%, on the news to $17.05.

Analysts see pricier deals, better arbs in January

Looking back at the past month, analysts at Lehman Brothers noted that the "cheapness" of the $2.8 billion of new deals in January was just 0.59%, compared to 2.06% in December and the 2.38% average for all of 2005.

The research note by analysts Venu Krishna, Brendan Lynch and Manoj Shivdasani also figured that the seven new issues in January were valued in the middle of talk, while 43% of the deals were upsized by an average of 28%.

At Citigroup, the analysts also looked at what the convertibles market meant for investors in January. Their conclusion: outright convertible returns of 3.8% in January 2006, on a capitalization-weighted basis, were the best start of a year since 2001.

"The robust performance was attributable to strong equity returns, especially within the smaller-capitalization tier, an increase in realized volatility and a strong showing from the high yield market which saw spreads come in 18 bp," wrote analysts Adrian K. Miller, Stuart P. Novick and Lynn S. Hambright.

They added that January gave the convertible arbitrage strategy one of its best monthly returns since January 2003.

"Convert arb returns could be in the +2.0% [to] +2.5% area and in some cases even as high as +3.0%," they said.

Barclays: Steel looking sharp

Investors looking to take advantage of recent events should also look at steel convertibles, said Barclays Capital analysts Luke Olsen, Haidjie Rustau and Heather Beattie in a research report.

Citing merger and acquisition interest in the sector prompted by the recent $22.5 million takeover bid by Netherlands' Mittal Steel Co. (Euronext: MT) for Luxembourg-based Arcelor SA (Euronext: LOR), the research team advocates buying "delta neutral positions" in steel convertibles.

Investors who believe that the steel industry is ripe for consolidation should buy Arcelor's 3% 2017 convertibles, Corus Group plc's (Euronext: CORS) 3% 2007 bonds and Voestalpine AG's (Wiener Borse: VOE) 1.5% 2010 debentures, the analysts said.

Monnet Ispat keeps Indian pipeline active

Mumbai-listed Monnet Ispat Ltd. priced a $60 million offering of zero-coupon foreign currency convertible bonds maturing in five years to yield 7.6% with an initial conversion premium of 24.09%.

The bonds convert to stock at Rs. 317.20 per share. Monnet Ispat (Bombay: 513446) stock traded at a volume-weighted average of Rs. 255.62 on Feb. 1 and 2. There is a greenshoe of $15 million. Shareholders are expected to vote on the deal this week.

JP Morgan is lead-managing the deal.

Monnet Ispat is a Raipur, India, company involved in the metal mining and power generation industries. Its board plans to change the company's name to Monnet Ispat and Energy Ltd. to reflect its increased reliance on power generation and coal. Shareholders will vote on the name change this week.

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