Allied Waste thrashed about on tighter talk but firms back up to 101 in gray; Decode at 101.25

By Ronda Fears

Nashville, April 7 - Amid a waning stock market, new issues were the focus of the convertible market and Allied Waste Industries Inc.'s refinance package was at the forefront. But the new deals of Decode Genetics Inc. and Financial Federal Corp. were hot, too.

Onlookers believed the Allied Waste convertible would be bumped up and, in fact, the Scottsdale, Ariz.-based trash hauler boosted its junk deal to $675 million from $650 million. The new convertible waffled in the gray market as price talk was tightened by some 25 basis points but rebounded back to the 101 area by day's end.

Decode Genetics' deal priced right at the bell with a 3.5% coupon and a 35% initial conversion premium. The notes priced at the aggressive end of guidance and were upsized to $125 million on strong demand. That followed the Financial Federal deal, which was upsized to $150 million while pricing smack in the middle of guidance for a 2.0% yield, up 32.5%.

Generally, convertible players are pleased to see a variety of issuer types in the market.

"We need more breadth and depth, so all these new issues are good to see, [in] a variety of terms and issuers," said Hart Woodson, portfolio manager of the Gabelli Global Convertible Securities Fund, although he did not say he was participating in any of the deals on the table.

In Europe, where new deal flow has practically dried up recently, there was a €1 billion exchangeable from Capitalia SpA - convertible into Assicurazione Generali SpA - that priced at 1.625%, up roughly 21%. The issue priced in the mid area of guidance for a 1.375% to 1.875% coupon, up 20% to 25%. It was three times oversubscribed.

Secondary sleepily slogs along

New deals hogged a lot of the market's attention, but there was a little action in the trading trenches, too. In fact, traders said volume was up considerably on Wednesday from Tuesday.

Still, traders emphasized that volume was rather thin, what with the Passover holiday and Good Friday shortening the week to just a couple of actual business days.

One buyside trader noted a Merrill Lynch report from Tuesday on Citizens Communications Co., which asserted its bond prices do not adequately compensate for the risk of a leveraged buyout. The report created a minor exodus in the name. He said Merrill analysts recommended either risk reduction or convexity strategies in Citizens Communications.

Citizens' 5% mandatory convertible on Wednesday closed off 0.23, or 0.9%, to 25.32 on the New York Stock Exchange. The stock ended down 11 cents, or 0.85%, to $12.86.

A sellside market source noted some action in cruise ship paper.

Royal Caribbean Cruises Ltd.'s zero-coupon February 2021 issue was at 56.5 versus the stock at $45.75, stepping down about 0.25 point on the day. And, Carnival Corp.'s cash-to-zero convertible was at 79 with the stock at $45.50.

A dealer said there was no news on Royal Caribbean or Carnival; it just appeared to be some rotation out of the cruise lines, perhaps into other leisure type issues such as gaming paper, or to buy into the new issues.

The new Saks Inc. convertible was mentioned in trade, quoted at 106.625, off slightly, with the stock at $17.75.

Allied Waste tossed around

Enthusiasm in the new Allied Waste Industries Inc. convertible was only briefly curbed by the squeeze put on the yield, and many believed the "way oversubscribed" deal would be upsized in the end.

The $200 million off-the-shelf 30-year issue was talked at the open with a yield of 4.5% to 5.0% and a 53% to 57% initial conversion premium. As the book built up and a gray market showed a fairly good response, the guidance was tightened to 4.25% to 4.75% yield, with the premium left at 53% to 57%.

Buyside traders said the new Allied Waste issue rose from a bid of 0.25 point over issue price in the gray market early in the day and hit 1 point over before the guidance was tightened. Then, it snapped back to 0.5 point over but rebounded to a bid of 1 point over by the end of the day. The offer at day's end stood at 1.5 point over.

Allied Waste stock closed off 29 cents, or 2.18%, to $13.01 with moderately heavy volume as 5.8 million shares changing hands versus 1.1 million as a three-month running average.

Deutsche Bank Securities analysts put the new Allied Waste convertible about 2% cheap, at the middle of original guidance, using a credit spread of 375 basis points over Libor and 32% volatility. The analysts noted that Allied Waste credit default swaps, referencing its senior convertibles, were in the 275 basis points context.

Merrill Lynch analysts put the issue 1.2% cheap, at the midpoint of original price talk, using a credit spread of 470 basis points over Treasuries and 32% volatility.

Another sellside shop put the issue right at fair value, or worth 100.3, at the middle of original talk, using a credit spread of 400 basis points over Libor and 30% volatility.

At the midpoint of revised price talk, yet another sellside shop put the new Allied Waste convertible around fair value, or worth 99.6, using a credit spread of 400 basis points over Treasuries and 35% volatility.

Trash or treasure?

One man's trash is another man's treasure. So goes the old adage, and the market's reaction to the new Allied Waste convertible.

"For better or worse, this is our time, and interest rates are down so far that 4.75% looks high and premiums are so high that 55% looks modest," said a fund manager in New York involved in several convertible strategies.

"Moreover, this is a real company, and it's a real bond, and seven years to put is the traditional convertible maturity. It's even registered. It's one of the more attractive new issues. How can we money managers resist?"

A source in Europe said that, as an owner of the Allied Waste mandatory, the new issue was appealing as a fan of the underlying story. The manager was not getting involved in the deal prior to it pricing.

The London-based fund manager noted, however, that the stock could easily be worth $20. That would be in close proximity of a conversion price on the new issue if it priced up 55% or around the midpoint of premium guidance, since Allied Waste shares closed at $13.01 on Wednesday.

Not everyone was enthusiastic about the new Allied Waste deal, of course.

"I think a lot of people are familiar with the name and like the story so it'll probably do fine, even if they priced it at the rich end," said a convertible trader at a hedge fund in New York.

"The gray is pretty much all risk and little reward," he added, saying his firm would not be getting involved in the Allied Waste issue. "All the juice is out of the bond as far as we are concerned."

Allied Waste ups junk deals

The convertible is part of a $1 billion refinancing package to partially redeem Allied Waste's $1.4 billion of 10% guaranteed senior subordinated global notes due 2009. Allied Waste North America Inc. also was pitching $250 million of seven-year senior notes and $400 million of 10-year senior unsecured notes, plus had a new $150 million term loan funded.

Those junk bonds, a two-part deal, were boosted to $675 million from $650 million and priced Wednesday afternoon just ahead of the convertible.

Allied Waste sold an upsized $275 million of seven-year senior secured notes (Ba3/BB-) at par to yield 6.375% - a little tighter than price talk in the area of 6.5%.

The $400 million of 10-year senior unsecured notes (B2/B+) sold at par to yield 7.375% - right at guidance in the area of 7.375%.

Decode Genetics at 100.25

Decode Genetics was seen at 0.25 point over issue price in the gray market around midday, and market sources said the deal was very cheap, particularly relative to other new issues of late.

Right at the close, the Reykjavik, Iceland-based genetics company sold an upsized $125 million of seven-year convertible senior notes at par to yield 3.5% with a 35% initial conversion premium - at the tight end of guidance for a 3.5% to 4.0% coupon and a 30% to 35% initial conversion premium.

At the midpoint of the price talk, a sellside source who was not involved in the deal put it about 3% cheap, using a credit spread of 800 basis points over Libor and 50% volatility.

Decode Genetics stock closed Wednesday up 31 cents, or 3.08%, to $10.37.

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