Rite Aid drops 3 points as Merrill pans stock; Openwave bid up in gray; OSI Pharmaceuticals dips

By Ronda Fears

Nashville, Sept. 3 - Lackluster was a common adjective used Wednesday to describe convertible trading. There were some key losers - Rite Aid Corp. and Sierra Pacific Resources Inc. - but several mandatories were moving higher.

"I think a lot of convert people are waiting for the new issues, that will be the focus," said a senior convert trader at one of the big shops.

"There's too much volatility in the bond market and not enough in stocks, so they will just let the status quo be and look to the new issue market for something to do."

In the primary market, OSI Pharmaceuticals Inc. priced a small $135 million deal at the cheap end of guidance and the new issue loitered around par before closing just under that, while its existing 4% convertible dropped about 3 points on the day.

Openwave Systems Inc. was getting a warmer reception, although a couple of buyside sources looking at the new deal acknowledged it was a gamble.

"The equity has made quite a run. It's a great sector, wi-fi software," said one source.

"They [Openwave] have agreements with Sprint and Nokia but revenues haven't ramped up yet. They are expecting to be EBITDA positive in the current quarter, but just slightly."

Still, the new Openwave deal - talked to yield 2.75% to 3.25% with a 20% to 25% initial conversion premium - was bid 1.5 points over issue price in the gray market. Sources also said it might be advanced from the original pricing time line of after the close Thursday.

Market sources said the Openwave issue would be at about fair value at the midpoint of guidance, using a credit spread of 1,200 basis points over Libor and a 50% stock volatility.

Openwave shares closed off 11c, or 2.11%, to $5.11.

NII Holdings Inc.'s $100 million of 30-year convertible notes, which was launched late Tuesday, isn't scheduled to price until after the close on Sept. 10. Price talk is expected this week, however.

Morgan Stanley is bookrunner.

The only details known so far on the NII deal are that the 30-year paper will be non-callable for five years, with puts in years seven, 10, 15, 20 and 25. Also, there will be a 110% contingent conversion feature.

NII said it plans to use proceeds primarily to pay down outstanding debt under its equipment financing facilities. There is a $20 million greenshoe available.

NII shares on Wednesday fell $1.38, or 2.08%, to $65.08.

OSI Pharmaceuticals returned to the convertible market, tapping investors for $100 million of 20-year convertible notes. The issue sold at par to yield 3.25% with a 32.5% initial conversion premium.

The issue sold at the cheap end of price talk and was sold on swap, as the biotech firm said up to $20 million of proceeds would be used to repurchase shares concurrently with the offering. Also the first six interest payments are collateralized with U.S. Treasuries.

Still the deal flagged and the existing OSI 4s dropped about 3 points to 98 bid, 100 offered. Bookrunner Merrill Lynch closed the new issue at 99.375 bid, 99.875 offered, as the stock fell another $1.86, or 4.91%, to $36.03.

Market sources put the new OSI Pharmaceuticals convert about 2% at the cheap end of guidance where it priced, using a credit spread of 900 basis points over Libor and a 50% stock volatility.

On the market chatter, or hopes perhaps, of an upcoming Charter Communications Inc. deal, following the cable company scrapping a $2 billion junk bond last week, high yield market sources don't particularly think it will be revived with a convertible tranche. But, the junk bond deal could resurface any day.

Convertible investors are hoping the convert market will follow the lead of the high yield market, though.

"Bear Stearns [high yield strategist Mike Taylor] is saying that acquisition-related financing will drive junk bond issuance, for another $20 to $25 billion through the end of the year, and it seems that with refis plus acquisition activity that converts should see close to that," said a convertible manager at a huge hedge based in New York.

Taylor said in a recent report that high yield issuance so far this year is at about $80 billion and he sees it likely to end the year in the $100-$105 billion range.

The hedge fund manager also said that a strong new issue calendar will be "paramount" to the convertible market's ability to stem what some think is a tide of redemptions and liquidations.

"The secondary market just doesn't have enough to keep the money flow coming in and without a lot of new issues people will be looking to put capital to work somewhere else," she said.

There have been changes at New York-based Clinton Group, a $10 billion hedge fund heavyweight, according to recent media reports, she noted, and that "tends to fuel the rumors that there's a massive exodus," but she doesn't believe that is the case.

"The convertible market has matured to a point where it's not going away," she said.

"I think in time there's going to be a little more transparency even with regard to inflows and outflows in convertibles. For right now, we tend to base our decision on our ongoing commitment, not what we hear is going on or the rumors about what's going on."

In the trading trenches, convertible traders said a sell recommendation on Rite Aid shares by Merrill Lynch sent the converts lunging downward while the stock dropped 26c, or 4.95%, to $4.99. The 4.75% convert due 2006 fell 3 points to 107.25 bid, 108.25 offered.

Merrill Lynch equity analyst Mark Husson said in a report Tuesday that the recent rally in Rite Aid shares "severely limits share price upside even if sales/earnings do better than expected. At current forecasts we see only downside as this recovery story is nearly played out."

Sierra Pacific Resources also saw some backlash to an adverse decision stemming from the Enron Corp. bankruptcy case, which also sparked some negative ratings actions. S&P put the ratings on negative watch and Moody's cut the outlook to negative, as a result of the court decision, which could end up costing nearly $300 million.

Utility units Sierra Pacific Power Co. and Nevada Power Co. said they may issue bonds to fund the judgment, which is being appealed, but they also warned that if appeals are unsuccessful they may have to file bankruptcy.

Last week, there was a ruling in the Enron bankruptcy case that would require the two utility units of Sierra Pacific to pay the Enron unit nearly $300 million toward their power supply agreements, which were terminated when Sierra Pacific was cut to a below-investment-grade rating.

Sierra Pacific's 7.25% convertible due 2010 fell 4 points on Wednesday to 135.625 bid, 137.625 offered, a dealer said, while the stock gained 7c, or 1.48%, to $4.80.

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