Convertibles slide; Lucent upped to $1.75 billion, pricing advanced

By Ronda Fears

Nashville, Tenn., March 13 - Convertibles were lower as stocks continued to slide, traders said, but activity was livened up with several new deals. Lucent Technologies Inc. upped its deal to $1.75 billion and advanced the pricing to coincide with overnighters from Computer Associates Corp. and Dominion Resources Inc., both with upsized deals. Ohio Casualty Corp. also upsized its deal.

Looking further down the pipeline, price talk emerged on the Travelers Property & Casualty Corp. deal for next week's business. And, Toys R Us filed to sell a $350 million mandatory.

"It was sort of snappy today. New deals always liven things up around here," said a convertible trader at a major investment bank in New York.

Dealers, however, said there still seemed to be a great deal of concern about credit quality issues, and a cautious tone continued to steer many investors. Weaker than expected February retail sales report took the wind out of many retailer issues and Intel's warning added insult to injury in the chip sector. Federal Reserve Chairman Alan Greenspan's speech compounded the negative tone, traders said, because many pundits saw his comments as less optimistic than his recent Congressional testimony.

"The market was lower overall, probably, but it was really a very mixed bag," said a convertible trader at another major investment bank in New York.

"We saw a lot of buying and a lot of selling due to the new deals and that skews the market a bit in terms of comparing it to what happened with the major stock indexes. It's not that simple sometimes."

None of the negativism fazed new deals, however, market watchers said, what with Lucent and Computer Associates both facing perceived liquidity problems and yet finding plenty of buyers for their new deals. Lucent upsized its deal from $1.5 billion and Computer Associates upped its to $600 million from $500 million, plus tightened the pricing terms. Lucent also got more aggressive on the premium end of its terms, but left the yield talk intact.

"You have to stand back and take a hard look at some of these deals coming to market right now," said the portfolio manager of a convertible fund based in Boston.

"While it's exciting that the convertible market is active, the quality of some of these credits and the circumstances under which many of the issuers are coming to market is a bit concerning. Of course, you can find a buyer for anything if the price is right."

Those putting in orders for the Lucent deal, however, said they were looking at the 2-year breakeven horizon and pretty comfortable with that. The Computer Associates deal will be investment grade and for many that was enough enticement along with relatively favorable terms, even after guidance was tightened.

Both deals are cheap by the standards of new deals coming to market of late.

The Lucent deal at the midpoint of guidance is about 8.96% cheap, assuming a credit spread of 1200 basis points over Treasuries and 50% volatility in the stock, said Wachovia Securities convertible analyst Kimberlee Brody.

Lucent's deal priced at 7.75% yield, the midpoint of talk, but the premium came at 24%, a bit more aggressive than the 18% to 22% guidance.

In the gray market, the new issue had slipped during the session from 1.5 to 2 points over par early on to only 0.125 to 0.5 point over by late afternoon.

Lucent's existing convert was also lower with the stock but was finding buyers. The 8% convertible trust preferred due 2031, a $1.9 billion issue that sold in August with a 22% initial conversion premium, was quoted down 5.875 points to 93.625 bid, 94.625 offered.

While there was considerable selling in the old Lucent convert, traders said there also were lots of buyers.

"They were sold off a little heading in but that eased up when buyers emerged," said a trader at one of the major investment banks in New York.

There was some switching into the new issue from the old one for capital inflow, traders said. But with the weakness in the existing 8s, there were also some buyers taking both.

"We bought some early on. We should've bought more this morning when they got pounded," said the trader in New Jersey.

Many market sources anticipated the Lucent deal to be priced early because the stock was getting pounded. Lucent shares closed down 73c to $4.92.

The Computer Associates deal at the middle of the new pricing terms is about 5% cheap, assuming a credit spread of 700 basis points over Treasuries and 45% volatility in the stock, said Bear Stearns convertible analyst John Wright.

Several buyside sources also feared the terms on the new Lucent convert would be changed after guidance was tightened on the Computer Associates Corp. deal.

Computer Associates launched a $500 million overnighter early Wednesday and before pricing the Rule 144A deal was upsized to $600 million and guidance for the senior notes was tightened to 5.0% to 5.25% yield with a 30% to 33% initial conversion premium from original talk of 5.0% to 5.5% yield and a 25% to 30% premium, on strong demand.

Computer Associate shares ended down $1.23 to $18.30.

With Ohio Casualty also upsizing its deal to $175 million from $125 million, the week's slate was shaping up nicely. Price talk emerged on the Travelers deal for next week, and Toys R Us announced a deal after the close but timing was uncertain.

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