Convertible market very quiet as four deals line up this week

By Ronda Fears

Nashville, Tenn., Nov. 12 - Convertibles were very quiet Monday and the secondary market was described as basically flat. Some market players took the day off or at least half the day, even though the market was open for business along with stocks, while bonds took the day off to observe Veteran's Day. Still, primary market activity marched on and by day's end the week's calendar has swelled to four deals from one. Rite Aid Corp. launched a deal to price Wednesday that is expected to get a lot of attention.

"It was pretty slow today with the bond market closed and lot's of people took a half-day because of Veteran's day," said a convertible trader at one of the major investment banks in New York. "Futures went way down, then bounced back. Mondays are typically slow and the plane crash hasn't helped liquidity. But I didn't see any type of panic selling or anything like that."

The uncertainty of the cause of the American Airlines plane first caused stocks to plunge, but the tide was stemmed and stocks closed mixed. The Dow Jones Industrial Average ended down 53.63, or 0.56%, to 9554.37 and the Nasdaq added 11.65, or 0.64%, to 1840.13. The crash was reported to be a mechanical or other type of accident with no connection to any sort of terrorist activity.

Still, Jefferies & Co. convertible analyst Jonathan Cunningham noted: "Everyone in New York this month was watching the news and holding their breath. Outside of New York, too, I suppose."

But for the most part, the tape kept running in normal fashion, and a couple of convertible issuers proceeded with new deals. In addition to Rite Aid, PartnerRe and Northrop Grumman deals were firmed up for this week's business. There's now $975 million of new paper in this week's pipeline. Next week's Thanksgiving holiday, however, is expected to pretty much keep a lid on mew deals. But the full week after the holiday is anticipated to add several more deals to the month's issuance tally.

"This market has undergone a great shift. Convertibles are becoming a very flexible means of raising capital," said Salomon Smith Barney convertible analyst Venu Krishna. "This market has matured a lot in terms of buyers and sellers. Each year, it's been beating the previous year by about 50%, and in very difficult market conditions."

Traders said the secondary market was so slow there was not even any activity in the gray market, but market sources still anticipate a good turnout for the new deals this week.

"There was absolutely nothing going on with these deals in the gray market," said a convertible trader at a hedge fund in New Jersey. The trader added, however, that the lack of when-issued activity was more of a byproduct of the market's overall lack of activity rather than a lack of interest.

Interest was certainly high with regard to Rite Aid's new deal among the market participants at work Monday. Rite Aid is pitching a small deal, $125 million, of five-year convertible senior notes that are talked to price to yield 4.0% to 4.5% with a 20% to 25% initial conversion premium.

"This will be very interesting to watch," said one market watcher, adding a bit sarcastically. "Just think, a year ago, people were jumping out windows because they held Rite Aid bonds."

Indeed, Rite Aid has made somewhat of a comeback. The 5.25% convertibles due 2002 were in the mid-20s a year ago but were quoted Monday unchanged at 94 bid, 96 offered as the common stock dropped 21c to $5.58. But traders said there was no activity in the Rite Aid converts, which are deep into busted territory with a conversion premium of nearly 500%. The drugstore chain also has a 7.125% bond due 2007 outstanding.

Deutsche Banc Alex. Brown convertible analysts said the middle of the Rite Aid price talk would put the deal pricing about 3% to 6.5% cheap with an implied volatility of 33% to 25%, assuming a credit spread of 800 basis points over LIBOR and 40% volatility in the stock.

However, Sierra Pacific Resources is at bat first, with pricing scheduled for after the market close Monday. Rite Aid's deal is not scheduled to price until after the close Wednesday. Then, after Thursday's close defense giant Northrrop Grumman Corp. and PartnerRe Ltd. tap investors for new capital. Rite Aid's deal is the only convertible bond coming this week, however, which market watchers said also will put it in the spotlight. The others are mandatory convertible preferreds.

Sierra Pacific Resources, a Nevada utility holding company, is selling $300 million of four-year convertible premium income equity securities (PIES) with pricing guidance of an 8.75% to 9.25% yield and an 18% to 22% initial conversion premium. Sierra Pacific shares closed off 34c to $13.85.

Price talk emerged on Northrop Grumman's deal early Monday as the road show kicked off. The $1.2 billion capital-raising effort is split between the proposed convertible at $400 million and a stock offering for $800 million. The deal is anticipated to price to yield 7.25% to 7.75% with an 18% to 22% initial conversion premium. Northrop shares ended off 74c to $96.86.

PartnerRe also moved its deal up into a firm slot for pricing on Thursday. The $150 million of convertible premium exchangeable participating securities (PIES) are pricing alongside $200 million of trust preferred shares. The convert is expected to price to yield 8.0% to 8.5% with an 18% to 22% initial conversion premium. PartnerRe shares closed up 22c to $48.94.

Market watchers have been expecting an uptick in insurance names coming to the market for new capital. Prudential Financial Inc. has set its initial public offering for the week of Dec. 10 and the firm is anticipated to sell $500 million of mandatory convertibles at the same time. But syndicate sources said it will be a couple of weeks before pricing guidance emerges.

Outside of the primary market activity, traders said the session was very slow. Even though the put on Tyco International's zero-coupon due 2020 is not anticipated to be exercised, market sources said there could be some activity in the name this week. The deadline to notify Tyco to exercise the put was Monday and the last day to put the bonds is Friday. The put is not anticipated to be exercised, however, since the convert is trading higher than the put price of 75.282. The Tyco zero-coupon converts due 2020 slipped about 0.5 point to 76.5 bid, 76.875 offered, with the stock up 10c to $54.60. The Tyco zero-coupon convertible due 2021 were off 0.25 point at 74.5 bid, 74.75 offered.

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