Another $2.575 billion of deals; Akamai, Emulex both reoffered at 98

By Ronda Fears

Nashville, Dec. 9 - Shopping continued at a rapid-fire pace in the convertible market Tuesday as another $2.575 billion of deals were launched with more expected this week. That's okay, buyside sources said, because their carts are not yet approaching full.

Demand is so strong, sources said during the session, that Serena Software Inc.'s $150 million deal would likely be advanced to price a day early, after Tuesday's close - as indeed happened. The offering was also upsized to $190 million. At bat for sure after the closing bell Tuesday were Hanover Compressor Co.'s $100 million deal and another $100 million deal from Affymetrix Inc.

Hanover's issue was bid 2.375 points over issue price in the gray market, and Serena's was bid 1.5 points over. Affymetrix's was bid 1.875 points over.

Even with heavy demand, though, buyside sources said overnight deals from Emulex Corp. and Akamai Technologies Inc. were re-offered by the underwriters below par, all at 98. Credit Suisse First Boston, lead manager on the Emulex and Akamai deals, was mum.

Richness, or aggressiveness of the terms, aside, the market seems to be overwhelmingly excited about the level of issuance activity under way.

There are still more deals to come this week as well as the remainder of the month, or at least up until the Christmas holiday, capital markets sources said.

"We're glad to see a heavy calendar. The more, the merrier," said a fund manager in New York.

"And we're glad to see a variety of industries, a variety of sizes, and a variety of types of deals, even a mandatory. There're plenty of choices for various strategies, plenty of issues that will provide opportunities now or in the aftermarket.

"God knows why the calendar is picking up during party season, maybe some issuers feel that the market party will soon be over. Whatever the cause, bring us more convertibles."

Indeed, there were a variety of deals added to the hopper. They include a $325 million mandatory convertible from Interpublic Group of Cos. Inc., a jumbo $850 million floating-rate convertible from Wyeth and a $1.4 billion exchangeable deal guaranteed by Pemex that converts into Repsol YPF SA shares.

Another manager, of a hedge fund in New Jersey, agreed that it's a good thing - such a heavy flow of deals.

"Maybe this will sop up some liquidity and we can get some decent pricing [terms] going into next year," he said.

It was not immediately apparent that the Pemex/Repsol deal was widely bought in the United States, but sources said the reaction in Europe was "very receptive."

"I didn't spend too much time on it; the ADRs are not really that liquid in the U.S.," said a multi-strategy hedge fund manager in New York.

A buyside convertible trader in London said right after the Pemex/Repsol issue launched it was bid minus 0.25 point with an offer at minus 0.5 point in the gray market but later firmed to around par.

RepCon Lux SA sold $1.4 billion of seven-year exchangeable bonds guaranteed by Pemex that convert into Repsol YPF SA shares, at par to yield 4.5% with a 31% initial conversion premium. The notes priced at the cheap end of yield talk of 4.0% to 4.5% but at the more aggressive end of premium guidance of 30% to 35%.

Deutsche Bank Securities analysts put the issue 1.026% cheap, at the final terms, using a credit spread of 204 basis points over Libor and a 20% stock volatility. They also noted that there is a 2.715% common dividend yield on Repsol shares.

A sellside source in London said it has been an incredible week there, mirroring what's been going on in the United States to some extent.

"We are clearly seeing a move by issuers to tidy up, monetize their equity stakes via exchangeables and to lower the cost or extend the term of their financing," he said.

"Timing makes sense as conditions for convertible issuance are favorable but also in terms of having one's house in order for the year-end show."

Right after the close, Wyeth launched $850 million of 20-year convertible floaters talked to yield Libor minus 25 to 75 basis points with a 55% to 60% initial conversion premium. Pricing was slated to occur after the close Wednesday.

The Madison, N.J.-based major drug concern said the convertible proceeds, together with available cash, would be used to fund the redemption of its $1 billion of 6.25% senior notes due 2006.

Wyeth also plans to sell $2.5 billion of straight unsecured senior notes with those proceeds earmarked to fund an offer to buy any and all of its $1 billion of 7.9% senior notes due 2005.

"It sounded so rich, yet it models okay, and now I'm trying to figure out why," said a convertibles arbitrage manager in New York.

"I guess the vol is pretty high for a good credit."

For next week, Interpublic launched $325 million of three-year mandatory convertibles talked to yield 5.5% to 6.0% with an 18% to 22% initial conversion premium.

Lehman Brothers analysts put the Interpublic mandatory 2.68% cheap, at the middle of price talk, using a credit spread of 300 basis points over Treasuries and a stock volatility skew of 32% to 35%.

Deutsche Bank Securities analysts put the Interpublic mandatory convertible 4.5% cheap, at the middle of guidance, using a credit spread of 325 basis points over Libor and a 30% to 32% stock volatility skew.

The New York-based advertising agency also plans to sell $325 million of common stock.

The company said proceeds would be used to redeem its 1.8% convertible subordinated notes due 2004. Any remaining proceeds would go toward general corporate purposes and to further strengthen its balance sheet and financial condition.

Interpublic also has a 1.87% convertible due 2006 and earlier this year in March sold $700 million of 4.5% convertibles due 2023.

The 1.8s were quoted up 1 point to 97.5 bid, 98.5 offered, and the 1.87s were up 0.5 point to 92.5 bid, 93 offered.

Interpublic's new 4.5% due 2023 was quoted flat at 143.5 bid, 144 offered.

Interpublic shares closed off 18 cents, or 1.27%, to $14.02.

Deals at bat after the close were doing well in the gray market, buyside sources said. But there were no sellers evident, which could mean they will be priced aggressively.

Hanover is pitching $100 million of 10-year convertible senior notes talked to yield 4.75% to 5.25% with a 43% to 48% initial conversion premium.

Merrill Lynch analysts put the Hanover deal 4.52% cheap, at the middle of price talk, using a credit spread of 600 basis points over Treasuries and a 33% stock volatility.

Lehman analysts put the Hanover deal 5.58% cheap, at the middle of price talk, using a credit spread of 525 basis points over Treasuries and a 35% stock volatility.

Deutsche analysts put the Hanover convertible 3.04% cheap, at the midpoint of guidance, using a credit spread of 600 basis points over Libor and a 35% stock volatility.

"That deal [Hanover] is very, very cheap," said a buyside source.

"Someone was paying 102.5. I don't think you're going to see any sellers. It's going to be hard to find a two-sided market."

Hanover shares ended Tuesday up 10 cents, or 1%, to $10.13.

Serena Software's deal was equally successful, if not more so because three years of coupons are collateralized. Market sources said the pricing was likely to be advanced from Wednesday's close to Tuesday's.

Serena was marketing $150 million of 20-year convertible senior notes talked to yield 1.25% to 1.75% with a 27.5% to 32.5% initial conversion premium.

Lehman analysts put the Serena convertible 1.9% cheap, at the middle of price talk, using a credit spread of 375 basis points over Treasuries and a 40% stock volatility.

Deutsche analysts put the Serena deal 1.91% rich to 2.26% cheap, at the midpoint of price talk, using a credit spread of 500 basis points and a 40% stock volatility.

Serena Software shares closed Tuesday down $1.85, or 9.95%, to $16.75.

Also, Affymetrix is pricing its new convert after Tuesday's close. The $100 million of 30-year non-callable convertibles are talked to yield 5.5% to 6.0% with an 18% to 22% initial conversion premium.

Affymetrix also on Tuesday announced, as expected, plans to redeem its 5% convertible subordinated notes due 2006, which has $102 million outstanding. Subject to the completion of the new convertible offering, the company said it also plans to redeem its 4.75% convertible subordinated notes due 2007, which has $165.5 million outstanding, and will fund the redemption with the proceeds from the sale of the notes and available cash.

Merrill Lynch analysts put the new Affymetrix convertible 1.69% cheap, at the midpoint of price talk, using a credit spread of 500 basis points over Treasuries and a 40% stock volatility.

Lehman analysts put the Affymetrix deal 2.45% cheap, at the middle of price talk, using a credit spread of 400 basis points over Treasuries and a 40% stock volatility.

Deutsche analysts put the Affymetrix convertible 3.51% rich to 0.67% cheap, at the midpoint of guidance, using a credit spread of 425 basis points over Libor and a 35% stock volatility.

A buyside trader said the Affymetrix deal was bid at 2 points over issue price early in the session and backed off that by 0.125 point before the close.

Affymetrix shares closed down $1.08, or 4.27%, to $24.23.

Dealers said the overnighters that came out of the gate Tuesday morning were active early, but the action died down rapidly during the afternoon as market participants began to look for what was to come out of wings.

Sepracor Inc. sold $600 million of convertible notes in two parts with a portion of proceeds earmarked to redeem its 5.75% convertible notes due 2006.

Tranche A, a $200 million five-year non-callable convertible issue, was sold at par to yield 0% with a 24% initial conversion premium - at the cheap end of price talk for a 0% yield, up 24% to 32%.

Tranche B, a $400 million issue of seven-year non-callable converts, was sold at par to yield 0% with a 16% initial conversion premium - at the cheap end of price talk for a 0% yield, up 16% to 24%.

Morgan Stanley, lead on the Sepracor deal, closed tranche A at 99.375 bid, 99.875 offered and tranche B at 98.875 bid, 99.375 offered.

A buyside trader said the new Sepracor convertibles steadily lost ground all day after opening "barely above par."

Sepracor shares ended down $1.35, or 5.25% to $24.37.

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