Convertibles edge up, quiet after busy week of new deals

By Ronda Fears

Nashville, Tenn., March 15 - Convertibles were higher but quiet Friday after $3 billion of new paper was put into circulation, and the market was preparing for another active week as restructuring remains the theme. Navistar and Airborne have already put their names in the hat, and the Travelers mandatory comes alongside the IPO. More pop-up deals are also likely, sources said.

"They just keep coming to the trough, issuers, I mean. But the appetite of buyers is strong, too, so we don't see much let-up for a while," said the head convertible trader at a major investment bank in New York.

"The secondary was pretty quiet today as the market digests the week's new deals. Most of the market was higher, a lot of the down-trodden names were bouncing back. One of the stand-out decliners was Rational Software, which was down on a JPMorgan cut to its EPS."

In the secondary, new issues were higher and Sepracor was showing a strong recovery effort from the devastation a week ago on the setback in regulatory approval of one of its new drugs. The market overall was described as higher along with stocks. Next week, the market is looking for guidance from the FOMC meeting.

Credit quality is still an issue at the forefront of investors' minds, traders said, and the importance of security ranking of convertibles in a company's capital structure was becoming more of a concern.

"The fact that Moody's rated Avaya's new senior note higher than to where they downgraded the senior convertible was like a hammer hitting a lot of people," said a convertible trader at a hedge fund in New York.

"A lot of convertibles have been issued probably over the past year as senior bonds because there had been a ruckus raised about the subordination of converts, due to credit quality concerns with a lot of the issuers. But what a lot of convert people forget is to look at the secured issues that rank ahead of an unsecured convertible. It's basic credit work."

Moody's assigned a Ba2 rating to Avaya Inc.'s new $300 million of senior secured notes, noting they are superior to existing senior unsecured debt, like the 0% convertible senior notes, currently rated Ba3.

Avaya's convert was flat at 40 bid, 40.25 asked as the stock edged up 11c on the day to $6.55.

Similarly, Moody's rated Airborne's upcoming convertible senior note at Ba3 as it lowered ratings for Airborne's senior notes to Ba1 from Baa3, noting the convertible rating reflects support from guarantees of the company's operating subsidiaries but also subordination to a currently undrawn $275 million bank line of credit, $200 million accounts receivable securitization and existing senior notes.

Standard & Poor's assigned a BBB- rating to the new Airborne issue.

Airborne is pitching $100 million five-year convertible senior notes with guidance of a 6.0% to 6.5% yield and 18% to 22% initial conversion premium. Airborne shares closed off 45c to $19.20

Navistar International Corp.'s $200 million seven-year exchangeable note that converts into Navistar stock is expected to be rated Ba2/BB-. Price talk on the deal put the yield at 5.0% to 5.5% and initial conversion premium at 22.5% to 27.5%. Navistar shares closed down $1.10 to $42.95.

Both are expected to see good demand.

"Both of these new names are in areas that there are not a lot to choose from so there should be really nice demand for this paper," said a convertible syndicate source, noting United Parcel Service would compare to Airborne and Briggs & Stratton to Navistar.

The UPS 1.75% convertible due 2007 (Aaa/AAA) was flat Friday at 95.5 bid with the stock up 41c to $60.33.

The Briggs & Stratton 5% convertible due 2006 (Ba1/BBB-) lost 1.25 points on the day to 112.25 bid while the stock dropped 83c to $47.04.

New issues were higher along with the broader market, however, and Sepracor was showing an impressive recovery.

Lucent's new 7.75% convertible due 2017 added 0.25 point to 99.625 bid, 99.875 offered while the existing 8% convertible preferred due 2031 rose 1.125 points to 94.25 bid. Lucent shares edged up 6c to $4.89.

The Computer Associates 5% convertible due 2007 added another 2 points to 106 bid, 106.5 offered with the stock up 39c to $18.50.

Ohio Casualty's new 5% convertible due 2022 gained 2.5 points to 106.5 bid, 107 offered as the stock rose 62c to $$18.66.

Dominion's new 8.75% mandatory convertible due 2006 was up 0.5 point from par to 50.75 bid, 50.875 offered as the stock added 67c to $62.

Significant recovery was noticeable in Sepracor after a surprise setback last Friday regarding regulatory approval of its new antihistamine Soltara.

Sepracor's 5% convertible due 2007 on Friday was up 0.125 point to 57.75 bid, 58.5 offered after sinking to 52.125 a week ago.

The 5.75% convertible due 2006 on Friday added 0.375 point to 65.5 bid, 66.5 offered after sinking to 58.75 a week ago.

The 7% convertible due 2005 on Friday gained 0.625 point to 70.625 bid, 71.375 offered after sinking to 64 a week ago.

Sepracor shares closed up 23c to $21.38. The common fell to $19.64 a week ago.

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