Convertible market gains with spate of new deals

By Ronda Fears

Nashville, Tenn., Nov. 7 - Convertibles rose as three new deals freed to trade and another deal is slated to come to market after the close Thursday. Chesapeake Energy Corp. and ATMI Inc. sold smaller deals, but insurance giant American International Group Inc. trotted out a quick-sale zero-coupon deal that fetched $1 billion in proceeds. Traders said the new deals were mixed in the aftermarket, but the overall market was mostly higher. After the bell, Sepracor Inc. announced it would return to the convertible market to tap investors for $400 million.

"It's hard to comprehend just how hot convertibles are right now, new deals," said a trader at a convertible hedge fund in New Jersey. "We're already two-thirds past what we did last year, and they keep coming. But we keep getting new money, too. It's a great way to play the stock story with a lot less risk."

Stocks stalled after rallying Tuesday on the Federal Reserve's interest rate cut, with the Dow Jones Industrial Average closing off 36.88, or 0.38%, to 9554.24 while the Nasdaq edged up 2.45, or 0.13%, to 1837.53. But traders said convertibles were higher in the session, although probably not by more than 1% or 2%.

"We didn't have what I'd call a surge in prices, but we did better than stocks," said one trader.

New issues typically cause a sharp uptick in secondary market activity, both in selling and buying. And, while the most popular new deals freed to trade on Wednesday were small, there was a lot of interest especially in the ATMI paper because there is renewed interest in growth sectors like chips. ATMI makes semiconductor equipment.

ATMI's $100 million of convertible subordinated notes due 2006, which sold at par to yield 5.25% with a 25% initial conversion premium, soared 7 points to 107 bid, 107.875 offered as the underlying common stock added 45c to $18.20. The Rule 144A deal sold at the aggressive end of pricing guidance.

Chesapeake Energy Corp.'s upsized $150 million of five-year mandatory convertible preferreds sold at par of 50 to yield 6.75% with a 26% initial conversion premium. The Rule 144A deal, which was upsized from $125 million, sold at the cheap end of yield price talk and at the rich end of premium guidance. The converts were said to be flat with issue price at the close, but a firm quote could not be obtained. Chesapeake Energy common shares ended up 6c to $6.17.

Market sources said there was considerable enthusiasm for the new AIG convertible, although it was not priced as cheap as the market has seen lately. One buy-side analyst said that the deal priced just 1% cheap, whereas new deals lately have been as enticing as 10% cheap to fair value. Credit analysts have been anticipating more new paper from the insurance sector.

AIG's $1 billion in proceeds of zero-coupon convertible senior notes due 2031 (Aaa/AAA), which sold at 65.801 with a yield-to-maturity of 1.4% and a 31% initial conversion premium, ended flat with the issue price. The new AIG was quoted at 65.80 bid, 65.90 offered with the underlying stock down $1.88 to $80.97. AIG, a U.S.-based international insurance and financial services organization, plans to use proceeds for general corporate purposes, including debt repayment, working capital, capital expenditures and acquisitions. AIG is not new to the convertible market, either. The AIG 0.5% convertibles were quoted down 2 points on the day to 101.125 because of the new deal, traders said.

After the close, Sepracor announced a new Rule 144A deal for $400 million of five-year convertible subordinated notes with a $100 million greenshoe. No other details were immediately available. Sepracor's 7% convertible notes due 2005 added 0.5 point on the day to 104 bid, 105 offered and the 5% converts due 2007 added 0.375 point to 83 bid, 83.5 offered as the underlying stock rose 47c to $52.12.

Sepracor said it would use proceeds for general corporate purposes, including working capital.

Next week, Northrop Grumman Corp. has plans for a $1.2 billion convertible and stock deal, and Sierra Pacific Resources has a $300 million of convertible preferreds scheduled for next week's business. Price talk has yet to emerge on the Northrop Grumman deal, but the Sierra Pacific Resources deal is seen coming with 8.75% to 9.25% yield and an 18% to 22% initial conversion premium.

Market sources said pricing guidance on the Northrop Grumman deal will probably not emerge until the company's buyout with Newport News Shipbuilding Inc. is on more solid ground. Board members of Newport News met Wednesday to discuss Northrop's $2.3 billion offer, but the outcome was unknown. Northrop shares fell $2.44 to $96.08.

Sierra Pacific shares closed off 6c to $13.94.

Hewlett-Packard Co. converts retreated Wednesday as both the company and Compaq Computer Corp. stressed the merger between the two computer-makers would proceed despite opposition from the Hewlett family. Hewlett-Packard's zero-coupon convertible notes due 2017 lost 0.5 point on the day to 47.875 bid, 48.375 offered as the common stock slipped 63c to $19.18.

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