Issuance seen slowing, with more classic small cap issuers; Gap plunges; techs mostly higher

By Ronda Fears

Nashville, Sept. 4 - Traders said retailers, airlines and techs - chips, network security and software - were active Thursday on a variety of news, and the market was generally described as firmer.

"The market is strengthening, it is getting a little easier to find value," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

"You just have to look under every rock. Really, the market is getting better. Vols have been crushed but it's either going to stay like this or expand. There are two camps on that, and I don't know which is right."

Gap Inc. was crushed, with the convert dropping 12 to 13 points on disappointing August same-store sales figures. Airline paper was mixed on traffic figures and a Standard & Poor's downgrade to the aircraft-backed debt of six airlines.

Tech issues were mostly higher, though, as UBS upgraded of a slew of semiconductor equipment names, Symantec Corp. was upgraded by Banc of America Securities and Network Associates Inc. was upgraded by Merrill Lynch.

Traders said there has been a rush of convertible investors seeking equity exposure to Symantec and Network Associates.

In the primary market, another tiny deal emerged - from Primus Telecommunications Group Inc. - and capital market sources said the outlook is looking increasingly bearish for issuance trends.

"A strong IPO market could take some of the froth out of convertible issuance," said one market source.

There has been a surge in IPO filings, he said, noting an industry report that puts the filings in August at the highest level in nearly two years, even at a paltry seven.

The line of thinking is that with stocks in general moving higher, which fuels the IPO market, potential convertible issuers might rather look to the equity market to raise new capital.

"It [a strong IPO market] hurts the convertible market," Seidel said.

"That said, I'm not sure the calendar is all that robust right now anyway. There's not a huge pipeline."

With regard to issuers turning away from the convertible market to raise capital in the equity market, he said that would have a direct impact but would be nearly impossible to quantify.

In any event, the convertible market had a strong run from April through early August and really all of 2003 so far, and there's still enough in the offing to stay busy.

"You can't go on doing what the convert market was doing," Seidel said. "But the convert market has plenty to look at."

After the close, Primus launched $75 million of seven-year, non-callable convertible senior notes talked to yield 3.5% to 4.0% with a 22.5% to 27.5% initial conversion premium, with pricing set after the close Tuesday.

Merrill Lynch & Co. analysts put the Primus deal 3.5% cheap at the midpoint of guidance, using a credit spread of 1,250 basis points over Treasuries and a 50% stock volatility.

"Given the recent cheapening trend, we think 3.5% cheap is 'fair' and expect the deal to price at mid-range," said Merrill convert analyst Tatyana Hube.

Meanwhile Openwave Systems Inc., as some had anticipated, advanced its deal to price before the open, rather than after the close, and it was upsized to $135 million from $100 million on strong demand. The five-year convertible notes sold at par to yield 2.75% with a 20% initial conversion premium - at the aggressive end of yield talk and cheap end of premium guidance.

At the midpoint of price talk - 2.75% to 3.25% yield, up 20% to 25% - Lehman Brothers analysts had put the Openwave deal 5.29% cheap, using a credit spread of 800 bps over Treasuries and a 45% stock volatility.

The new Openwave deal had been bid 1.5 points over issue price in the gray market on Wednesday and bookrunner Merrill Lynch closed it Thursday at 102.75 bid, 103.25 offered. Openwave shares closed off 19c, or 3.72%, to $4.92.

Price talk on NII Holdings Inc.'s $100 million of 30-year convertible notes, which isn't scheduled to price until after the close next Wednesday, is now expected next Tuesday, according to buyside sources. The roadshow began Thursday in New York.

NII shares dipped 8c, or 0.12%, to $65.

OSI Pharmaceuticals Inc.'s new 3.25%, up 32.5% convertible continued to flag in the aftermarket. Bookrunner Merrill Lynch closed it off 0.1875 point to 99.1875 bid, 99.6875 offered, as the stock dropped 26c, or 0.72%, to $35.77.

Elsewhere, traders said convert players searching for delta looked to the tech sector. Fueling stock gains in that area were an UBS upgrade of a host of semiconductor equipment names and a Merrill Lynch upgrade of Network Associates to buy from sell.

Network Associates' 5.25% due 2006 rose 1.5 points to 108 bid, 108.5 offered with the stock up 99c, or 6.82%, to $15.50.

Symantec gained in sympathy and also from an upgrade by Banc of America. The 3% due 2006 added 3 points to 172.75 bid, 173.25 offered as the stock climbed $1.47, or 2.51%, to $59.95.

There was no sympathy extended to retailers outside the discount or off-price area, however, traders said. Gap posted a 4% gain in August same-store sales but it was a disappointment to The Street, and also sparked a downgrade to the stock from Wachovia Securities.

Gap's 5.75% convertible due 2009 plunged nearly 13 points to 130.375 bid, 130.625 offered while the stock fell $2.82, or 13.43%, to $18.18.

Standard & Poor's lowered the aircraft-backed debt ratings of six U.S. airlines - including America West, American Airlines, Continental Airlines, Delta Air Lines and Northwest Airlines, all of which have converts - due to lowered aircraft value. S&P stressed, however, that the debt ratings not collateralized with aircraft, such as the convertibles, were not cut.

S&P did cut Alaska Airlines' ratings, though, with a negative outlook.

Most of those issues were either flat or slightly lower, though, traders said, on general negative sentiment about the prospects for air traffic continuing to gain ground, especially during the upcoming Thanksgiving and Christmas holidays.

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