Traders see activity pick up, largely in anticipation of new deals waiting in the wings

By Ronda Fears

Nashville, Sept. 2 - Ears were perked, figuratively, in the convertible market Tuesday as players awaited the anticipated resumption of new deal activity. Only three small deals, $335 million together, emerged but traders said secondary activity stepped up in anticipation of a busier new issue slate in general.

"Generally, I think there's a backlog from August, but it's just a matter of timing," said one capital markets source.

Several capital markets sources said they believe issuance will be brisk this fall, with the bulk of new deals coming from small cap issuers, with small deal sizes, and junkier credits, sprinkled with a few high grade names and possibly a jumbo deal or two.

The emergence of the first post-Labor Day deal was true to that speculation.

Openwave Systems Inc. launched $100 million of five-year convertible notes talked to price to yield 2.75% to 3.25% with a 20% to 25% initial conversion premium in the Rule 144A market, with pricing set after the close Thursday.

OSI Pharmaceuticals Inc. returned to the convert market, launching $135 million of 20-year convertible notes. The OSI 4% convertible due 2009 was quoted Tuesday down 0.125 point to 105.5 bid, 106.5 offered with the stock ending off 12c, or 0.32%, to $37.89.

And, NII Holdings Inc. launched $100 million of 30-year convertible notes.

Those provided at least a small move toward fulfilling the prophesy of a busier new issue market and more than the convertible market has seen in almost two weeks, as convertible deals dried up completely in the last half of August.

Yet, Citigroup convertible analyst Stuart Novick said there are signs that demand is slowing and, thus, he sees issuance for the remainder of 2003 "decidedly less bullish."

In addition to a couple of deals getting pulled at the eleventh hour, due to the familiar "market conditions," Novick said that maybe more telling was the majority of deals that hit the tape at the cheap end of respective price talk or cheaper than guidance. (See full story elsewhere in this edition.)

With regard to jumbo or larger-sized deals, there has been some speculation in the convertible market that Charter Communication Inc. would revisit convert investors in some form soon.

The buzz in circulation puts the cable company reviving a $2 billion junk deal that was scrapped last week, reforming it into a split junk bond/convertible offering, and one buyside source added that the company might follow that with a mandatory.

Meanwhile, Charter's converts moved up Tuesday, and one dealer noted that there was renewed interest linked to the company pitching a successful deal that could mean some of the converts would be repurchased. The tender for a portion of the converts was withdrawn when the junk bond was scrapped.

Charter's convertibles both gained 1 point, with 4.75s due 2006 at 77 bid, 79 offered and the 5.75s due 2005 at 80 bid, 82 offered. Charter shares dropped 6c, or 1.33%, to $4.44.

In general, dealers said the market is better bid, after a wave of selling, although there were some "for sale" signs going up Tuesday - in reaction to some richening issues and to make room for the expected new deals coming down the pike.

Michael Revy, veteran convertible portfolio manager, who now oversees both outright and hedged strategies, said he has sold a lot of converts, enough to make him a little nervous, but those were issues that reached a target so he's not fretting too much. He is looking for a nice new issue slate to fill the gap, to some extent.

It wasn't so much that the returns weren't there, he said, as he had insulated his portfolios, for the most part, by shorting 10-year and 30-year Treasuries.

"I thought I better short the 10-years and 30-years but then I just had to keep shorting," Revy said.

"If you had an okay hedge, you came out all right. And I expect a lot of people did."

Outside of looking to the new issue segment of the convertible market, Revy said he's eyeing some of the mandatories in what's considered high dividend risk territory.

"In some of these mandatories where there's the threat of a dividend risk, when you short the vol you almost come out even," he said, noting that many mandatories that are at the money are better bid right now.

Chubb Corp is one issuer with mandatories that is seen by analysts as posing a high risk of raising its common dividend. It was mentioned by a preferred trader Tuesday, though not by Revy.

The Chubb 7% mandatory due 2005 gained 0.25 point to 28.3125 bid, 28.8125 offered and the 7% mandatory due 2006 added 0.375 point to 28.5 bid, 29 offered. Chubb shares ended $1.15 higher, or 1.69%, to $60.09.

Traders also said a good deal of activity Tuesday was focused on gaining equity exposure through delta and the like and/or covering shorts.

Yahoo! Inc. was in that group, with the 0% due 2008 adding 1 point to 105.625 bid, 106.375 offered while the stock gained 80c, or 2.4%, to $34.19. Symantec Inc. was another mentioned by traders, as the 3% due 2006 climbed 4.5 points to 174.25 bid, 174.75 offered with the stock up 18c to $57.60.

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