Convertibles lower on tech sell-off, but new issues gain on demand

By Ronda Fears

Nashville, Tenn., April 2 - Convertibles were mostly lower, but the latest new issues from GenCorp and Documentum gained on high demand as investors are starved for opportunity. Otherwise, traders said volume picked up in a selling mode aimed at shedding tech issues, with Adelphia Communications leading the downward surge.

While new deals from GenCorp Inc. and Documentum Inc. were higher, other recent new issues were widely mixed as traders noted liquidity falling off in many of the smaller issues.

"New issues are all that's driving this market right now, outside of selling on a sporadic basis," said a convertible trader at an investment bank in New York.

"But a lot of the deals lately are really small, so liquidity dries up really quick in some cases. People are just starving for something to sink their teeth into right now."

Indeed, high demand caused the GenCorp deal to be advanced and upsized.

GenCorp had planned a full road show with pricing after Thursday's close, but on strong demand the deal was upsized by a quarter and sold with just a day of marketing. It also priced at the rich end of yield talk and more aggressive than premium guidance.

"We saw an overwhelming response come from predominantly outright convertible investors and cross-over equity buyers looking for a way to play a compelling equity story," said a source familiar with the deal.

"A significant response also came from relative value funds, all of which enabled GenCorp to accelerate their offering and achieve a truly exceptional execution."

The GenCorp issue gained 2 points in the immediate aftermarket, with the upsized $125 million of 5.75% convertible subordinated notes due 2007 quoted at 102 bid, 102.5 offered. The Rule 144A deal sold with a 27% initial conversion premium and was upped from $100 million.

GenCorp shares closed down 72c to $13.73

Kimberlee Brody, a convertible analyst with Wachovia Securities, said the GenCorp convert modeled out at 6.11% cheap, assuming a credit spread of 800 basis points over the comparable Treasury note and 42.5% volatility in the stock.

"Based on the small market cap and cyclicality of the defense industry along with its high leverage, this will probably trade like a B or B- credit, but we like the fact that the company continues to make money and has around $1.5 billion in sales," said Bear Stearns & Co. convertible analyst John Wright, who also noted that GenCorp sales were six times more than EDO Corp.

GenCorp is a Sacramento-based aerospace and defense company that also has automotive, chemicals and real estate interests. EDO, which sold a convertible last week, is a New York-based capital goods company that makes electronic and other products for the aerospace and defense industry.

EDO's convertible has climbed since coming out of the gate, as dealers said investors are eager for some diversification and like the perceived stability of defense issues in light of America's war on terrorism.

On Tuesday, the EDO 5.2% convertible note due 2007 added 1.375 points on the day to 113.5 bid, 114.25 offered with the stock up 30c to $28.36.

Documentum also was in the market, upsizing an overnight Rule 144A deal that market sources said was almost exclusively bought by hedge funds that liked the high volatility of the underlying stock and a perception that the company is in a turnaround.

The Pleasanton, Calif.-based enterprise content management provider sold $125 million of 4.5% convertible senior notes due 2007 with a 22% initial conversion premium, boosting it from $100 million.

Assuming a credit spread of 900 basis points over the comparable Treasury note and 50% volatility in the stock, Wachovia's Brody said the Documentum convert modeled out at 6.51% cheap.

Documentum's deal sold at the cheap end of yield talk and at the midpoint of premium guidance but was quoted higher in the immediate aftermarket. At around midday, the issue was seen at 104 bid, 104.5 offered by one market source, but a closing price was not available.

Documentum shares ended down $2.11 to $22.50, falling victim to the tech slide.

Other new issues suffered from the huge sell-off in tech, as well as the overall market's negative sentiment.

Adaptec's 3% of 2007 (B3/B-) lost 1.25 points to 109.625 bid, 110 offered with the stock off 25c to $13.24.

DDi Corp.'s new 6.25s of 2007 (Caa1/B-) were down 1.125 to 99.5 bid, 100.5 offered with the stock down 13c to $8.56, while the old DDi 5.25s of 2008 lost 0.375 to 71 bid, 72 offered.

The Computer Associates 5s of 2007 (Baa2/BBB+) dropped 1.875 to 113.125 bid, 113.625 offered with the stock down 60c to $20.70.

Also lower was Airborne's 5.75s of 2007 by 1.625 points to 101.875 bid, 102.375 offered as the stock lost 54c to $16.61 and Navistar's 4.75s of 2009 (Ba2/BB-) were off 0.625 to 103.5 bid, 104 offered as the stock dropped 51c to $43.83.

Lehman's floater due 2022 (A2/A) was down 0.125 to 101.375 bid, 101.625 offered with the common down 54c to $63.20. Merrill's floater due 2032 (Aa3/AA-) dropped 0.625 to 102.625 bid, 102.875 offered with the stock down 78c to $54.21.

There were several new issues higher, though.

Ohio Casualty's 5s of 2022 (Baa2/BB) added 1.5 points to 108.125 bid, 108.625 offered with the stock gaining 46c to $19.22.

St. Mary Land & Exploration's 5.75s of 2022 gained 1.625 to 110.125 bid, 111.125 offered as the stock added 58c to $21.81.

Amid the market's decline, Adelphia remained one of the high profile names losing ground as the fallout continues from its surprise disclosure last week of some $2.3 billion of off-balance sheet debt, and now the requested extension to file its annual report at the SEC.

Adelphia's 6% convertible notes due 2006 (B3/B) fell another 1.75 points to 69.5 bid, 70.5 offered and the 3.25% convertible notes due 2021, which are putable in May 2003 at par, lost 2.5 to 84.5 bid, 85.5 offered.

Adelphia shares closed down $1.29 to $11.83.

Calpine rebounded, traders said, despite Moody's downgrade of the 4% senior unsecured convertible notes due 2006 to B1 from Ba1 and the three convertible trust preferred issues to B2 from Ba2.

"The Moody's downgrade was entirely priced into the bonds when S&P downgraded Calpine, so that was no big surprise," said a convertible trader at an investment bank in New York.

The Calpine 4% convertible notes due 2006 were quoted up 3.75 points to 96.75 bid, 97offered with the stock up 59c to $13.10.

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