Convertible market ends flat, new deals getting richer

By Ronda Fears

Nashville, Tenn., Nov. 8 - Convertibles were described as flat overall, although there were some sharp spikes in sectors that traders said demonstrated some profit-taking in technology and healthcare issues and increased buying in media and telecom issues. New deals late this week were getting criticism from investors that said terms were getting rich. Corning Inc. was returning to tap convertible investors after the bell Thursday, along with a convertible trust preferred from IndyMac Bancorp. And Sepracor Inc. surprised the market early Thursday with an overnight deal.

"It was very disjointed today, the market was higher early and then there was a lot of selling in healthcare and tech that dragged on the market," said a convertible trader at one of the major investment banks in New York. "But the bulk of telecoms were higher, except for a few like NTL. And cable, or media, did very nicely today."

Stocks began bullish Thursday but turned south in the late afternoon, with the Dow Jones Industrial Average closing up 33.08, or 0.35%, to 9587.45 while the Nasdaq ended off 9.76, or 0.53%, to 1827.77.

In the convertible market, eyes were on the new deals and the Corning deal specifically got a lot of attention. Buy-side sources said the deal looked expensive and was trading in the gray market below par. Corning launched $600 million of seven-year convertible senior unsecured notes with pricing guidance of a 3.0% to 3.5% yield and a 25% to 30% initial conversion premium. Goldman Sachs & Co. is sole lead manager of the registered deal, which is pricing after the market close Thursday.

Key to the valuation of the new Corning convertible is the credit spread, and analysts said the Corning zero-coupon convert was trading at about 875 basis points over Libor. Fitch assigned a BBB rating to Corning's proposed new convertible, noting that the new deal would boost the company's already high leverage. Moody's did not rate the new Corning convertible, but on Thursday downgraded its senior debt rating for Corning to Baa1 from A3, noting continuing rapid erosion of profitability and cash flow generation associated with the company's fiber business, which previously enjoyed rapid growth and strong margins.

Corning's existing convert gained Thursday, however, against an 11.5% drop in the underlying stock. The Corning zero-coupon convertible due 2020 added 2.25 points on the day to 51.5 bid, 52.5 offered. Corning shares fell $1.01 to $7.74.

Sepracor's newest convertible was described as very expensive, chiefly because of the lack of much call protection. Sepracor sold $400 million of five-year convertible subordinated notes at par to yield 5.75% with a 24.7% initial conversion premium. There is one year of provisional call protection with a make-whole feature for coupon payments if the issue is called early.

Once the difficulties with gauging the credit on Sepracor are factored into evaluating the new deal, as well as the attractiveness of the two existing Sepracor converts, one source said, the new paper looks like it might "experience a somewhat difficult birth." Indeed, the new Sepracor convert lost 2.5 points from par to close at 97.5 bid, 98.5 offered. The other two Sepracor converts lost ground, as well. The Sepracor 7% convertible notes due 2005 fell 7.5 points on the day to 96.5 bid, 97.25 offered and the 5% converts due 2007 dropped 4 points to 79 bid, 79.5 offered. Sepracor stock plunged $4, or 9.5%, to $47.10.

Also at bat after Thursday's closing bell was IndyMac Bancorp with a registered $150 million of 30-year warrants and income redeemable equity securities (WIRES), or convertible trust preferred, talked to price to yield 6.0% to 6.5 with a 20% to 25% initial conversion premium. Morgan Stanley is lead manager of the deal. IndyMac shares dropped $1.01 to $24.65.

Still no price talk out on the upcoming Northrop Grumman Corp. deal, but the company's $2.5 billion merger with Newport News Shipbuilding Inc. got a thumbs-up from Newport News board members. Northrop shares added $1.87 to $97.95 and Newport News stock rose 70c to $67.75. Northrop Grumman has announced plans to sell $1.2 billion convertible and stock but no other details have been outlined, except that the deal is anticipated to come to market next week.

Recently price converts were mixed, traders said. There still was a fair amount of interest in the new ATMI Inc. convertible while the new American International Group Inc. convert was flat. ATMI's 5.25% convertible subordinated notes due 2006 added another 2.3125 points to 109.3125 bid, 109.6875 offered as the underlying common stock added 94c to $19.15. AIG's new zero-coupon convertible senior notes due 2031 (AAA), which sold at 65.801, ended flat at 65.75 bid, 65.875 offered with the underlying stock down 10c to $80.87.

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