Convertibles bounce, activity picks up late due to new deals

By Ronda Fears

Nashville, Tenn., Dec. 17 - Convertible traders said the market was rather quiet early Monday but moving north. Around midday activity picked up as Affiliated Managers Group launched an overnight deal and word spread of a couple of other deals launching after the closing bell, which turned out to be Veeco Instruments Inc. and Electro Scientific Industries Inc. Aside from the new deal activity, market watchers said business was quiet as many market players are keeping a low profile, doing a bit of damage control or otherwise getting ready for year-end.

"The market, pretty much across the board, was higher today with the talk of a Christmas rally but we weren't doing a great deal of business," said a convertible trader at a major investment bank in New York. "Late in the day, things got to rolling pretty steady as word of a couple of new deals spread."

Calpine and Enron to-dos were replaced with a preoccupation of the surge in merger activity, traders said, and investors were trying to determine whether to buy, sell or hold on to names like Carnival Cruise Lines and Royal Caribbean as they suddenly became embroiled in a bidding war for P&O Princess. Restructuring activity also had many investors doing homework on a flock of names, of particular note at NTL, traders said. Meanwhile, stocks gained, with the Nasdaq adding 34.28, or 1.76%, to 1987.45 and the Dow industrials advancing 80.82, or 0.82%, to 9891.97.

When Carnival unveiled a hostile takeover of P&O Princess lines, rivaling Royal Carribean for the P&O, traders and analysts said the news turned out to be negative for both the convertible names but it clouded the overall picture for both as well.

"The Carnival news threw a wrench in evaluating the probability of any of the deals closing," said one analyst. It seemed to be credit negative for Carnival, as all three rating agencies put the credit on review for possible downgrade. It was also a negative for Royal Caribbean, the analyst said, since it put a kink in its aspirations for P&O, which was considered a positive for Royal Caribbean.

Carnival's zero-coupon convertible notes due 2021 (A2/A), which sold at 47.57 in October, lost 1 point on the day to 52.25 bid, 52.625 offered and the 2% convertibles due 2021 were down 0.5 point to 97.875 bid, 98.375 offered with the stock off 47c to $26.83. Royal Caribbean's zero-coupon convertible due February 2021 (Ba2/BB+), which sold at 38.16 in January, dropped 1.25 points on the day to 28.875 bid, 30.875 offered and the zero-coupon convertible due May 2021, which sold at 39.11 in May, fell 1.875 points to 33 bid, 33.5 offered with the common losing $1.91 to $14.42.

As debt pressures mount, investors are trying to unload some positions before year-end, traders said. The more troubled situations are very difficult, and many will be left taking huge losses, however. Three was not a great deal of selling, traders said, as buyers are scarce for distressed paper. In the NTL situation, a market source said there were reports that the NTL board was discussing a major restructuring that would require NTL debtholders to write-off nearly one-third of the total. Traders said the paper suggests far less value, with the NTL 7% and 5.75% converts at about 9 and the 6.75s at about 28.

"It's tough for anyone holding distressed paper right now," said a trader. "This is a time of year when a lot of fund managers would like to get it out of their books, but right now there just aren't a lot of buyers for special situations. The Enron situation certainly hasn't helped in that area, from a standpoint that there could be flood of distressed paper very soon, maybe that's just the tip of the iceberg type thinking."

As the week's new deals were put on the tables, at least as far as most market watchers speculate, recent new paper was again widely mixed. Prudential's new 6.75% mandatory convertible preferred slipped 0.07 to 53.29 as the stock closed off 23c to $29.45. GTech's 1.75% 20-year convert gained 1.25 points to 103.25 bid, 103.75 offered with the stock up 78c to $45.94. No new deals were put on the forward calendar for next week, but market sources fully expect something.

"So many of the new deals were so small, the liquidity has already dried up," said one convertible trader.

Thus, attention turned to the new deals at hand. Affilated Managers Group was in the market pitching a mandatory convertible preferred, although the deal size was not known. The company filed a $750 million shelf registration earlier this month. The deal terms, however, were pretty well defined by the close. One hedge fund manager said the terms originally were talked to produce a 6% yield with a 15% initial conversion premium, but were last seen at 6%, up 22%. Merrill Lynch was lead manager of the deal.

Affiliated Managers Group's zero-coupon convertible due 2021 added 1 point on the day to 98.875 bid, 99.375 as the stock rose $1.94 to $73.10.

A couple of other deals were launched, both small, from Veeco and Electro Scientific.

Electro Scientific wat pitching $125 million of five-year convertible subordinated notes are expected to price to yield 3.75% to 4.25% with a 27.5% to 32.5% initial conversion premium, and the shares closed down 7c to $33.69. Veeco was selling $150 million of seven-year convertible subordinated notes are being talked to price to yield 3.875% to 4.375% with a 22.5% to 27.5% initial conversion premium, and the stock closed down 22c to $32.98.

"It's the sprinkles on a whipped cream year," said J.P. Morgan convertible analyst Alexander Robinson, referring to the spattering of small deals in the market lately.

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