Convertible market braces for heavy new deal slate up to holiday

By Ronda Fears

Nashville, Tenn., Nov. 16 - Convertible market players were preparing for a busy new deal plate all the way up to the Thanksgiving holiday next week, and for that matter the remainder of the year. Four deals totaling $1.65 billion are on next week's calendar, with Xerox Corp. and Agilent Technologies Inc. taking the spotlight as both of those deals were up sharply in the gray market Friday.

"I really was hoping we'd get a break next week with the holiday. It was an extremely busy week. But it looks like we'll be working right up to the wire," said a convertible trader at one of the major investment banks in New York. "Well, we have a lot to be thankful for, though, lots of business, good health, a lot to be thankful for. We can't complain. I'm not complaining."

With the four deals next week, plus another $6.9 billion of new convertibles put into circulation this month, the year-to-date issuance tally will be nearing $100 billion. And, there's a full week of business after the Thanksgiving holiday, plus December, yet.

"It will be a benchmark year for this market. We will continue to see the market stay busy through the end of the year. I expect the market to hit and surpass $100 billion," said Sanjay Arora, head of the U.S. convertible origination desk at Deutsche Banc Alex. Brown. "In times of great volatility, the convertible market has been a natural source of capital for issuers and a great source for returns for investors."

As interest continued to mount for Agilent's upcoming $1 billion deal, Xerox Corp. launched a $500 million convertible trust preferred that was creating a great deal of buzz in the market. Both are slated for next week, but are already trading up in the gray market.

Xerox's new deal, which is talked to price to yield 7.5% to 8.0% with a 15% to 20% initial conversion premium, traded 3 points over issue price, one trader at a convertible fund in New York said. Agilent's deal, talked to price to yield 3.0% to 3.5% with a 26% to 30% initial conversion premium, traded 2 to 4 points over issue price, the trader said.

"Xerox and Agilent are both high profile names and the deals are good sizes," said a convertible hedge fund trader in New York. "With Agilent, the good thing is that it's investment-grade. But even the small deals are going well, if it can be set up well with the hedge funds. Any time you can have a deal like Riverstone price intraday, that tells you that demand is really strong."

Riverstone Networks' new 3.75% converts, which sold at par with an initial conversion premium of 27%, retreated a bit Friday, closing down 1.75 points on the day to 103 as the common stock lost 38c to $14.20.

Deals continue to get upsized with heavy orders, though, another sign of healthy demand.

Northrop Grumman bumped its mandatory convertible preferreds from $400 million to $600 million, pricing the deal at the aggressive end of price talk with a 7.25% dividend and 22% initial conversion premium. The order books were more than five times the deal size with participation running the gamut of dedicated convertible funds, outright equity funds, convertible arbitrage and retail accounts, according to a source that worked on the deal. In the immediate aftermarket, the issue gained 2.75 points from par of 100 to 102.75 bid, 103 offered. The underlying stock added $2.82 to $91.50.

"Mandatories are doing well right now," said Marshall Nicholson, head of equity-linked origination at J.P. Morgan. "The overall economic climate is not robust, and when an issuer chooses to sell a mandatory convertible it says there is a positive view of where management thinks their stock is going."

PartnerRe Ltd. also upsized its mandatory convertible preferreds deal. From $150 million to $175 million. The deal sold at par of 50 to yield 8.0% with a 23.4% initial conversion premium - at the aggressive end of yield price talk and the premium was more aggressive than guidance. The issue gained 2 points to close at 52 with the underlying common up $2.44 to $49.16.

In addition to the big Agilent and Xerox deals, there are a couple of small deals scheduled next week that have the potential of getting upsized as well. Profit Recovery Group International Inc. is pitching $75 million of five-year convertible subordinated notes with price talk of a 4.5% to 5.0% yield and a 17.5% to 22.5% initial conversion premium. Profit Recovery Group shares ended Friday down 57c to $6.85. Anadigics Inc. is selling $75 million of five-year convertible senior notes with price talk of a 5.0% to 5.5% yield and a 21% to 25% initial conversion premium. Anadigics shares closed down $1.13 to $18.80.

All of the deals next week are Rule 144A deals, which could hamper participation but not demand.

"People are starving for new issues. The equity markets aren't cooperating and interest rates are falling," said John Seibel, a convertible trader at Silverado Capital Management. "The overall convertible market is firming up but these new deals are holding their own, the premiums are not expanding way out. Look at the new Corning issue. It's up over 20% in just about a week. That tells you there's demand out there."

Corning Inc.'s new 3.5% convertible due 2008 gained 9.75 points on the day Friday to 122 bid, 122.375 offered as the underlying stock rose $1.05 to $10.05. The Corning zero-coupon convertible due 2015 added just 0.5 point on the day to 52.25 bid, 53.25 offered.

Volume in the secondary market Friday was again described as moderate, outside activity related to new deals that is. "Stocks were sluggish and there seemed to be less direction about where the war is going, whether it is going to drag on or end any time soon," said a convertible trader at one of the major investment banks. Stocks closed slightly lower with the Dow Jones Industrial Average down 5.40, or 0.05%, to 9866.99 and the Nasdaq off 1.99, or 0.10%, to 1898.58.

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