New issue terms, credits not so fantastic, but illustrate appetite

By Ronda Fears

Nashville, Nov. 19 - The convertible market was abuzz with new deals Tuesday - with five in the market and talk of another possible deal before the week's end.

In general, players and onlookers are not thrilled with terms or the credits, however.

Many still hope that this spate of small deals will sop up enough demand to swing the pendulum of pricing power to the buyside.

"It feels like there's a lot of cash out there. It also feels like people want to try to outperform with a few new deals," said Michael Revy, who manages a convertible hedge fund for Froley Revy.

"I have played in a few deals. Teva was quality credit. Now, we get the lesser names coming to market. I just wonder how much appetite there really is."

Syndicate sources say demand is whopping and point to the aggressive pricing of deals.

Some onlookers, however, note the grand total of all five deals is just over $900 million.

"I'm not impressed. These are really small deals," said Rao Aisola, head of convertible research at Bear Stearns & Co.

"From a psychological point of view, it's important. But I don't think the floodgates are open yet."

Advanced Micro Devices Inc. priced an upsized $350 million drive-by after the close Tuesday at 4.5% up 32% - even more aggressive than the guidance that was tightened intraday. All amidst a downgrade by S&P.

Xcel Energy Inc. also priced an overnight $200 million deal after Tuesday's close at 7.5% up 25%, at the aggressive end of guidance. It came with a BB+ rating from Fitch while market watchers were expecting a BBB- rating.

Those two came on the heels of two others priced after Monday's close. PacifiCare Health Systems Inc. sold an upsized $125 million deal at 3% up 37.66% - the tight end of yield guidance and more aggressive than premium talk.

Scottish Annuity & Life Holdings Ltd. advanced its $100 million issue to price a day early on Monday at 4.5% up 30%, also aggressively.

Still to price, Ligand Pharmaceuticals Inc. was also in the market with a $135 million of five-year convertible subordinated notes talked to yield 5.75% to 6.25% with a 15% to 20% initial conversion premium and two years of collateralized coupons.

"They are cheap," said a convertible trader at a hedge fund in New Jersey.

"The companies do appear desperate."

But most of the deals were several points higher in the gray market or moved north in the immediate aftermarket.

AMD's new deal was last seen 3.125 bid, 3.1625 offer over par. The stock closed off 94c to $5.58. The existing AMD 4.75% converts were quoted down 1.875 points at 58.75 bid, 59 asked.

The Xcel deal was bid up 4.25 points over par as the stock closed up 46c to $9.86.

PacifiCare's deal slipped a bit in the aftermarket to 99.875 bid, 100.875 asked. The stock closed down $1.56 to $28.95.

"I think a lot of people were wanting to flip this paper [PacifiCare] to get into the others with higher yields," said a dealer.

"Then they got caught in the middle and another group of buyers were able to put the squeeze on them and bid it down, knowing they were anxious to get out."

Scottish Annuity's deal climbed 2 points from the gray market bid before the open and 4.75 points from par. It was quoted at 104.75 bid, 105.25 asked. The stock closed up 6c to $16.76.

The new deals stimulated a bit of secondary market action, as well.

"Without any new issues, there's nothing really to drive secondary trading," said Adrian Miller, convertible analyst at Salomon Smith Barney.

American Tower Corp. was said to still be gaining ground.

Traders described the market in general as higher, particularly the high yield group of converts. Dealers said that could illustrate some cross-over buying of converts by high yield accounts.

Charter Communications Corp., Xerox Corp. and Fleming Cos. Inc. were also seen higher.

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