Disney little changed on concerns besides Eisner; PSS soars to 106; Toys up on hoped-for store sales

By Ronda Fears

Nashville, March 3 - Activity remained a bit sluggish in the convertible market Wednesday, traders said. Yet, traders said the credit spread widening and weakness in technology stocks will likely lure players back into the market looking for bargains, relatively speaking.

"Between marking books Friday, wrapping that up this week, and the broader markets' influence, it was a little slow again today," said a desk analyst at one of the busiest convertible shops.

Walt Disney Co. was, of course, an active name as chief executive Michael Eisner appears to have failed to get enough re-election votes, but uncertainty about the ultimate fate of the media giant - a split among its interests, or a merger with the likes of Comcast Corp. - was keeping a lid on any sharp moves. The 2.125% convertibles are still hovering around 112.5, dealers said.

Several biotech and drug names were moving up on a variety of news, such as OSI Pharmaceuticals Inc., Genentech Inc. and Genzyme Corp.

Several retailers were higher ahead of February sales comps, which will mostly be reported Thursday morning - the traditional day for retailing comps being the first Thursday of the following month. J.C. Penney Co. Inc. and Gap Inc. were notably higher, but Toys R Us Inc. was among the biggest movers.

Despite bullish comments on the chip sector by JPMorgan, those issues flagged, including Cymer Inc., one of the firm's top picks.

Buyside traders at a couple of huge hedge funds noted some slight widening in credit spreads overall, with a volatile Treasury market as a backdrop.

"Treasuries sold off this morning so yields backed up again, but then the selling subsided and I think bonds ended pretty flat. It was a wild session," said a strategist at one of the big hedge funds.

Noting that the futures market is signaling a rise in interest rates sooner rather than later, "as early as June," the strategist added that credit spreads widened a tad Wednesday.

"But there's not enough cheapening in the convertible market overall yet to make much difference," the hedge fund professional said.

Convert bankers heed junk cue

Convertible origination officials have always had to look to the Junkland for a signal on market conditions, to some degree, although high-grade issuers have been more receptive to convertible financing in recent years.

Right now, some convertible bankers are a little anxious.

"We're seeing some digestion problems in the high-yield market," said a convertible origination official.

"So, the bankers over here in the convertible market need to be aware of that."

A buyside source in the high-yield market told Prospect News on Tuesday, "Deal quality hasn't been very exciting, and the market is getting pretty tired of it." The source pointed to Calpine Generating Co. LLC's recently postponed $2.3 billion bond and bank financing, suggesting that in the current pricing climate other companies could walk away empty handed.

Indeed, on Wednesday, Knology Inc. withdrew its $280 million junk bond offering due to unfavorable market conditions.

"We had believed that market conditions would enable us to complete an opportunistic refinancing of our existing long-term debt to realize significant cost savings," said Rodger Johnson, chief executive of Knology.

"Unfortunately, proceeding with the proposed offering in the current market environment would not have provided Knology with the interest expense savings we had expected."

Convertible investors' two latest considerations - PSS World Medical Inc. and First Horizon Pharmaceutical Corp. - priced aggressively, like Bell Microproducts Inc. immediately ahead of those two. But, Avnet Inc. and Amdocs Ltd. both sold at the cheaper end of price talk.

New issues flat in aftermarket

Outside of noting the buyers' strike of sorts in the high-yield market, which may be a harbinger of the convertible market's near future, execution on recent convert deals has been described as going very well by those involved.

The PSS World Medical deal, for example, was well received with both outright and hedged convertible players getting involved, according to a source close to the deal. While most of the new paper from this week was flat on the day, the PSS World Medical convertible was the only one making any sharp gain, even though it priced aggressively.

PSS World Medical inked its $125 million deal to yield 2.25% with a 45% initial conversion premium. The notes priced at the aggressive end of guidance for a 2.25% to 2.75% coupon and 40% to 45% initial conversion premium.

Goldman Sachs & Co., bookrunner on the PSS World Medical deal, closed it at 106.4375 bid, 106.9375 offered for a 3-point expansion on swap and a 6.4375-point gain, outright, from par. In the gray market, the issue was bid 1 point over issue price before pricing. The stock closed $1.05 higher, or 8.91%, to $12.84.

First Horizon Pharmaceutical's 1.75%, up 35% deal, which priced at the aggressive end of yield talk for a 1.75% to 2.25% coupon and aggressively outside of guidance for a 27% to 31% initial conversion premium, slipped a bit from par. The issue was seen bid at 0.25 point over issue price in the when-issued market late Tuesday.

Deutsche Bank Securities, a joint lead manager of the First Horizon Pharmaceutical deal, closed it at 99.125 bid, 99.625 offered. The stock ended off 38 cents, or 2.3% to $16.12.

Bell Micro's 3.75%, up 32.5% convert leveled off, ending Wednesday up about 0.25 point to 103.4375 bid, 104.4375 offered. The stock added a nickel, or 0.62%, to close at $8.17.

Amdocs' new 0.5%, up 54% issue was unchanged at 99.5 bid, 100 offered. The shares lost 49 cents on the day, or 1.7%, to close at $28.32.

Toys R Us applauded for sale

Toys R Us got a round of applause, in the form of heavy buying, as it announced the sale of 124 of the former Kids R Us stores for $197 million in cash plus the assumption of lease payments and other obligations to Office Depot Inc.

Also, Toys R Us reported earnings and said it has hired Credit Suisse First Boston Corp. as an adviser for restructuring options.

While the earnings were less than what Wall Street analysts expected, traders said investors were hopeful about a new playing ground for Toys R Us on the restructuring.

"This was what the market was looking for, some realignment of the store formats, restructuring," said a dealer, who noted heavy buying in the Toys R Us mandatory issue.

The Toys R Us 6.25% mandatory due 2004 was quoted by the dealer better by 2.375 points on the day to 47.125 bid, 47.375 offered. The issue closed on the New York Stock Exchange up 2.35 points, or 5.21%, to 47.45.

Toys R Us shares ended Tuesday up $1.09, or 7.12%, to $16.39.

The toy retailer reported fiscal fourth-quarter net earnings of $144 million, or 67 cents a share, down from $278 million, or $1.30 a share, in the year-ago period. The results included $158 million in charges for the closure of Kids R Us and Imaginarium stores and $6 million for a change in accounting. Sales for the quarter rose 1.4% to $4.94 billion. Same-store sales fell 5.1% in the U.S. toy store division, were flat internationally and gained 2.9% at the Babies R Us stores.

Last week, the Toys R Us mandatory convertibles shot up on a UBS Investment Bank upgrade to the stock and a boost to the target stock price to $22 from $14, fueled by optimism regarding the Babies R Us franchise.

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