Convertibles gain ground in busy session on new issue activity

By Ronda Fears

Nashville, Tenn., Oct.18 - Convertible traders said the market went north Thursday - although stocks were mixed - in a busy session, driven mostly higher by a spurt of new issue activity. AT&T Corp. sold a mandatory exchangeable deal that converts into Cablevision Systems Inc. shares in what sources said was a blowout. And added to the roster of business after the closing bell was a hotly sought after deal from L-3 Communications, joining another hotly pursued deal from Symantec Corp. Right after the close, Teradyne Inc. launched a deal to price Friday.

"The market looked higher for the most part," said a convertible trader at one of the major investment banks in New York. "All the new issues were higher, those that have freed to trade and the ones coming up were higher in the gray market."

Convertibles were mixed like the underlying stocks, several traders said, but higher on average as the Dow industrials ended down 69.70, or 0.75%, to 9163.20 but the Nasdaq eked out a 6.38 gain, or 0.39%, to 1652.72. Outside of new deals, which moved higher, traders said there was selling that dragged down a fair portion of the market.

"There was, and is still, great demand for new paper," said a dealer. "To some extent, that causes some selling in the secondary, but there was not as much as you'd maybe expect. There is a lot of new money to put to use by the hedge fund guys, either from money they've made or new money."

AT&T Corp.'s mandatory exchangeables, which convert into Cablevision stock, was a smash hit, as expected. The deal was upped from $750 million to $843.8 million and the companion secondary Cablevision stock sale by AT&T was reduced from $750 million to $690 million due to the popularity of the convertible. The convert priced to yield 6.5% with a 22% initial conversion premium, which was more aggressive than guidance for the premium. AT&T essentially liquidated its stake in Cablevision with the offerings.

"It was a blowout," a sell-side source familiar with the deal said.

Originally, AT&T planned to divest its stake in Cablevision by selling 50% in stock and 50% in the mandatory convertible offering. However, demand for the mandatory convertible was so high, the source said, the split was amended to 55% for the convertible and 45% for the stock sale. The issue was trading up about 0.625 point in the gray market before Thursday's open and final terms were set, sources said. The mandatory convertible structure gained considerable interest from outright investors, sources said. Even though stocks are at depressed levels, which typically would be a deterrent to mandatory structures, there was demand because of the downside protection and interest income as an alternative way to play the stock.

In the immediate aftermarket, the AT&T/Cablevision convert was about flat with the issue price at 35.98 as Cablevision shares slipped by 9c to $35.96.

After the close, buyers were lining up for two more deals - both in high demand from what syndicate sources say. And, there was talk of a pop-up overnight deal, which indeed was launched by Teradyne Inc.

Symantec Corp. is pitching $425 million of five-year convertible subordinated notes that were launched late Wednesday. Price talk puts the Rule144A deal pricing to yield 3.25% to 3.75% with a 25% to 30% initial conversion premium. Credit Suisse First Boston is lead manager. Symantec stock closed up $5.29 to $53.06.

Also, coming back to tap the convertible market is L-3 Communications Inc.

L-3 launched early Thursday $350 million of 10-year convertible senior subordinated notes with pricing guidance of a 3.75% to 4.25% yield and 23% to 27% initial conversion premium. Bear Stearns & Co. and Lehman Brothers are joint lead managers of the Rule144A deal. L-3 stock ended down $3.17 to $86.03.

Symantec and L-3 are popular, sources said, because of the nature of their businesses as well as the deal structures. Symantec is a network security solutions firm and L-3 has significant business with the U.S. government security and defense agencies.

Teradyne is selling $300 million of five-year convertible notes with talk of a 3.25% to 3.75% yield and 30% to 35%initial conversion premium. Goldman Sachs is lead manager of the Rule 144A overnight deal. Teradyne shares closed off $1.25 to $20.

New paper from earlier this week were mixed.

ASML Holding NV's new 5.75% convertible subordinated notes due 2006 slipped 0.5 point on the day to 99.625 bid, 99.875 offered with the underlying common off 24c to $12.82. The new Lowe's 0.82% convertible (A), which sold at 86.103 earlier this week, added 0.25 point on the day to 88.75 bid, 89.25 offered. The Lowe's zero-coupon convert due 2021 (A3/A), which was issued at 60.841 in February, gained 0.75 point to 70.125 bid, 70.625 offered. Lowe's common stock edged up 11c to $33.66.

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