Convertible market finds a foothold, but GM, Ford resume slide; EDO reoffered at 99

By Rebecca Melvin

Princeton, N.J., Nov. 16 - The convertible market firmed up slightly on Wednesday, with buyers stepping in judiciously to pick up bargains among some recently beaten down issues in the biotechnology and oil and gas sectors in particular, players said.

"People were nibbling on things that have cheapened up - things that are a couple of volatility points cheaper," a New York-based sellsider said.

Nektar Therapeutics Inc., which has been losing ground in recent weeks, was mentioned as one of the biotech names that saw firming bids, even as its underlying shares edged lower.

In oil and gas, Schlumberger Inc. of New York and Oil States International Inc. and Cal Dive International Inc., both based in Houston, were among convertible names mentioned in trade that were higher as energy prices jumped after some bullish supply news from the U.S. Energy Department.

The department said crude oil stockpiles fell 2.2 million barrels to 321.4 million last week as refiners increased production and imports slumped.

Tyco International Inc. convertibles gained in early trade after the diversified conglomerate announced earnings and said restructuring moves may include splitting up some divisions. But later in the session, Tyco's 3.125% convertible bonds retraced about 3 points of its early gains to end about even as its underlying shares held on to a 4% gain.

In the primary market, EDO Corp. priced $175 million 20-year convertibles at par to yield 4%, with an initial conversion premium of 28%. The bonds were reoffered at 99, according to a syndicate source.

The reoffering seemed to do the trick, though, and the bonds saw some decent activity, lifting in the aftermarket to as high as 100 bid, 100.5 offered before edging back down to 99.75 bid, 100.25 offered late in the session, a syndicate source said.

Casting a pall on the entire market, however, was acceleration Wednesday in the slide of automakers General Motors Corp. and Dearborn, Mich.-based Ford Motor Co. amid an outlook that appears to look more tenuous than ever, players said.

Sellers of GM credit default swaps asked for another point up front to provide default protection to bondholders and others, lifting up front points to 21, from 20 on Tuesday, a New York-based derivatives trader said. Spreads widened to 1,250 basis points, he said.

"The stock is getting crushed. It's absolute mayhem here," the trader said. "I have no idea how it's going to work out. But it doesn't look pretty."

GM's $25 convertible bonds were hit hard, after being largely spared on Tuesday. On Wednesday, GM's 5.25% convertibles slid 0.55 point, or 4%, to 14.87, in heavy volume.

"It's pretty messy," a New York-based sellsider said of GM trading. "But we've been quiet in it."

He wasn't alone in sidestepping activity - or claiming to - in the paper of the ailing automaker.

"We've stayed away from that," a West Coast-based sellsider said of GM. "We made a group decision to stay away from both autos and airlines. We made that decision about four to six months ago."

EDO reoffered at 99

The new 4% convertibles of EDO traded up as much as 1.5 points after pricing at the cheap end of talk and then being reoffered at 99. Price talk was for a coupon of 3.5% to 4%, with an initial conversion premium of 28% to 32%.

A New York-based sellside analyst said that at the final terms, EDO looked 1.4% cheap off the 99 issue price, using 20% volatility and a credit spread of 300 bps over Treasuries.

A second source said that they looked about 2% cheap using a credit spread of 300 bps over Libor and 25% volatility.

The convertible senior subordinated notes were sold via bookrunner Citigroup Global Markets Inc. and joint lead manager Wachovia Capital Markets LLC.

Proceeds will be used to redeem $137.8 million outstanding principal amount of 5.25% convertible subordinated notes due 2007 at the call price of 102.1% of the principal amount, plus accrued interest.

The company said it has no other outstanding debt and intends to use remaining proceeds for general corporate purposes.

There is an over-allotment option as part of the offering for $26.25 million.

The registered deal is being made pursuant to a previously filed shelf registration.

New York City-based EDO is a defense contractor that provides products and services in areas including electronics, communications and aircraft armament systems.

Also to price E*Trade, C&D, Pantry

Three other new deals were expected to price Wednesday after the close, including E*Trade Financial Corp.'s $450 million of three-year mandatory convertibles.

Price talk on the mandatories was for a coupon of 5.625% to 6.125%, with an initial conversion premium of 20% to 25%.

At the mid point of price talk, the E*Trade deal looked 3.2% cheap, according to one source, who used 30% volatility and a 400 basis point spread over Treasuries.

A second source saw the issue 1.5% cheap using a 30% volatility and a credit spread of 350 basis points over Libor.

"Mandatories have done well in this type of environment," a sellside trader said when asked about his expectations for the E*Trade deal. "They're not as sexy, but [a] little steadier."

The convertibles are being offered concurrently with common stock and senior note offerings by joint bookrunners Morgan Stanley & Co. and J.P. Morgan Securities.

The three offerings, including $700 million of common stock and $250 million of senior notes, will finance the company's previously announced acquisition of BrownCo., the online brokerage service of JP Morgan, for $1.6 billion.

New York-based E*Trade is an online investment brokerage.

Sanford, N.C.-based The Pantry Inc. was expected to price $130 million of seven-year convertibles via bookrunner Merrill Lynch.

Price talk on the offering was 2.5% to 3% for the coupon, and 27.5% to 32.5% for the initial conversion premium.

There was expected to be an additional $20 million of notes to cover over-allotments for the offering of senior subordinated convertible notes.

And finally, C&D Technologies Inc. was seen pricing $60 million 20-year convertible senior unsecured notes via bookrunner Credit Suisse First Boston.

Price talk for the Blue Bell, Pa.-based company's notes was for a coupon of 4.75% to 5.25% and an initial conversion premium of 21% to 27%.

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