New deals improve trading flow as market awaits Fed

By Ronda Fears

Nashville, Tenn., Nov. 5 - New deals from Aon Corp. and Skyworks Solutions Inc. helped the trading flow as the markets in general await the outcome of the Federal Open Market Committee meeting Wednesday.

To a lesser degree, participants said the market was slow due to the elections Tuesday.

"It was a pretty busy day," said a dealer, "but I can't anything really stood out other than the Aon deal."

Aon's new 3.5% convertible, with a 25% initial conversion premium, was upsized to $250 million from $200 million and soared out of the gate.

"A lot of it traded today," said another dealer.

Traders said the Aon convert opened 4 points over par and closed at 106.75 bid, 107.25 asked.

Aon shares ended up $1 to $18.18.

Sellside analysts put the Aon deal pricing anywhere from 1.81% cheap to as much as 4% cheap.

The Aon terms were out before the open - and then after the close an overnighter was launched by Skyworks.

Skyworks, a wireless semiconductor that is the product of Conexant Systems Inc.'s spin-off of its wireless unit in June, which merged with Alpha Industries Inc., was pitching $160 million of five-year bonds.

The convertible subordinated notes were talked to price to yield 4.5% to 5.0% with a 15% to 20% initial conversion premium.

Although the chip sector as well as the telecom group were weaker Tuesday, traders expect the Skyworks deal to price without a hitch. Little resistance is expected, traders said, mainly because the terms are appetizing to buyers - although the small size is somewhat of a hindrance.

Deutsche Bank Securities Inc. analysts put the Skyworks deal 6.85% cheap, using a credit spread of 1,200 basis points over Libor and 50% volatility.

Skyworks shares closed down 2.29c to $7.90 but the stock was seen at $6.70 in after hours trading.

Players also are eager for the Hilb, Rogal & Hamilton Co. mandatory, which is set to price after Thursday's close. The $125 million of three-year mandatory exchangeable convertible, to be issued by The Phoenix Cos., is talked to yield 7% to 7.5% yield with an 18% to 22% initial conversion premium.

"It [Phoenix/HRH deal] models out very cheap, because there's no dividend on the common," said a buyside trader.

Deutsche Bank analysts put the Phoenix/HRH deal 6.85% cheap, using a credit spread of 750 basis points over Libor and 74% volatility.

Hilb, Rogal & Hamilton shares closed down $1.87 to $37.58.

"The new deal volume is picking up," said Rao Aisola, head of convertible research at Bear Stearns & Co., who said he expects more of a pick up in the issuance pace in first quarter.

Outside of some shuffling due to the new deals of late, traders said there was really no trends seen in terms of buying or selling convertibles. There was good two-way flow, but the overall market was widely mixed.

"The market's sort of waiting on the Fed," one trader said.

The Federal Reserve is widely expected to cut interest rates Wednesday, which would be the first reduction in borrowing costs since December.

Allergan's new 0% convertible, issued last week at 77.941, lost 0.5 point to 82.375 bid, 82.875 asked while the stock closed off 26c to $54.24 on weakness in the drug sector.

Several telecom issues were notably lower, including Nextel Communications Inc.

There was no news from Nextel, but Bear Stearns downgraded the stock to peer perform from outperform.

The stock closed off 43c to $12.54.

Nextel's 4.75% converts were quoted down 2.25 points to 84.875 bid, 85.375 asked. The 5.25s were quoted off 0.5 point to 71.625 bid, 72.625 asked and the 6s down 2.125 points to 85.75 bid, 86.5. The Nextel 9.375 junk bonds were seen losing 1 point to 86.5 bid.

HealthSouth Corp. saw mixed reactions to its earnings, which missed analysts' expectations with a 32% drop in net income.

"I'm not sure which direction people are going with it [HealthSouth]," said Stuart Novick, convertible analyst at Salomon Smith Barney.

While some investors have no qualms about HealthSouth being able to pay off the convertible next April, he said others seemed to be concerned about the earnings report.

The 3.25% convert was quoted at 96 bid, 97 asked at one shop but up 2.5 points to 95 bid, 96.5 asked at another. HealthSouth's 7.625% junk bonds were quoted down 3 points to 76 bid.

HealthSouth shares closed off 81c to $4.07.

Cable names were mixed with Cablevision Systems Corp. benefiting from a capital injection as well as an asset sale while Charter Communications Inc. lost ground as it delayed a full income report

Charter, facing a criminal investigation of its accounting practices, on Tuesday delayed reporting its full income statement but said third quarter revenues gained about 13% to $1.18 billion from a year before and operating cash flow rose about 9% to $497 million.

The company said it expects fourth quarter revenue to rise 8% to 9% from fourth quarter 2001 and operating cash flow to gain about 4% to 5%. For 2002, Charter expects revenue growth of 11% to 12% and operating cash flow growth of 9% and 10%.

Also, Charter said it expects final bids for some of its cable assets to be submitted by the end of November.

Charter's 4.75% converts were quoted down 0.375 point to 23 bid, 24 asked and the 5.75% converts down 0.5 point to 26.25 bid, 27.25 asked. The 8.625% junk bonds were quoted down 1.5 points to 43.5 bid. The 11.125% junk bonds lost 0.5 point to 46 bid.

Charter shares closed off 27c to $1.18.

Cablevision announced Monday it will sell its Bravo cable television network to NBC in a deal valued at $1 billion, but about half of that is in the form of General Electric shares with the rest in Cablevision shares currently held by NBC.

Standard & Poor's said Cablevision's ratings and outlook (BB/negative) would not be affected by the sale, noting the loss of cash flow made the overall deleveraging impact minimal.

"Given the magnitude of capital and operating needs anticipated for 2003, the company may not have sufficient funding beyond 2003 under its current financial plans, especially if it is not able to materially increase operating cash flows," S&P said.

Moody's noted a similar assessment of the impact of the sale, and said it is keeping Cablevision on review for possible downgrade.

But on Tuesday, Cablevision also announced that Steven Rattner's private equity fund Quadrangle Capital Partners had agreed to invest $75 million in the company in the form of preferred stock convertible into Cablevision Class A shares. Rattner will join the company's board of directors.

That may give the credit a boost, traders said, noting that after the announcement, Cablevision shares jumped to $13.45 in after hours trading.

Cablevision shares had closed up $1.19 to $12.99.

The AT&T/Cablevision mandatory added 1.27 to 16.59 and the AT&T/Rainbow Media Group mandatory gained 1.39 to 16.54.

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