Cendant gets boost from straight bond deal, Tyco putable issues gain sharply

By Ronda Fears

Nashville, Jan. 9 - Action in Tyco International's new paper leveled off in convertibles trading Thursday but the two existing converts shot up nicely. Cendant Corp. converts also got a shot in the arm from its new straight bond that was more than doubled to $2 billion.

Tone overall remains positive, but convert arbs are a bit concerned that volatility has come in at a fast clip recently. And a rich convert market continues to get richer as money that had been sitting on the sidelines moves in.

"Stock prices are up something like 20% from the trough in October, but the VIX is down from 50% to 27%," said a convertible trader at a hedge fund in New Jersey.

"The good thing that is happening as a result of that is that risk appetite has gotten a lot better. We're seeing a lot of the crossover names, particularly some of the techs and telecoms, crossing back over because high yield is beating high grade in this rally."

Attitudes about troubled credits improving were especially evident in the Tyco and Cendant events.

"The market is very encouraged by the fact that Tyco could sell $4.5 billion of new paper," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

"I am not that bullish. I think things are marginally better but we've still got a lot of busted converts."

Exchanges and tenders for out-of-the-money converts, to bring them back in the money, would be a positive force, he said.

Tyco's issuance of its recent convert, timed in conjunction with a $1.5 billion new bank line, caused many to speculate that the puts on its 0% converts would be secure, and the company validated at least half of that optimism on Thursday.

Tyco said it would pay the February put on the 0% convertible due 2021 in cash from the recent financings. The put price is 76.415 and the company said if the entire issue is put back to it the total outlay will be $1.85 billion.

The Tyco 0% due 2021 shot up 1.5 points to 76.125 bid, 76.375 asked.

The Tyco 0% due 2020, which has a $3.6 billion put coming up in November, also gained sharply, quoted ending up 2 points to 95.5 bid, 96.5 asked.

Deutsche Bank Securities Inc. convertible analysts don't think the November put will be a problem, but noted in a report Thursday that the situation could still be "problematic" for Tyco due to lingering investor concerns. (See story elsewhere in this issue.)

Tyco shares closed up 36c to $17.26.

The new 2.75% convertible debenture due 2018, or tranche A, ended off 0.25 point to 105.125 bid, 105.625 asked.

The new 3.125% convertible debenture due 2023, or tranche B, closed up 1.5 points to 105.75 bid, 106.25 asked.

Spreads on Tyco's five-year credit-default swap also continued to tighten, quoted at 330/365 basis points over Libor.

Cendant's converts also saw a direct reaction to its new bond deal.

Cendant sold $800 million of 6.25% senior bonds due 2008 at 99.484 to yield 6.372% or at a spread of 340 basis points and $1.2 billion of 7.35% senior bonds due 2013 at 99.096 to yield 7.505% or at a spread of 350 basis points.

"On the back of the strong bond deal, the converts were very, very active and moved up strongly, 2-3 points. All the converts were higher, but the [0% due May 2021] got the biggest bump because the put is now pretty safe," said a dealer.

"They placed $2 billion, and that was upsized from plans to sell just $750 million. This has been a name where people have been wavering because of all the accounting news, investigations and [ratings] downgrades. This was a big shot in the arm."

Cendant's 0% due May 2021, with a $1 billion par put in May, were quoted at 99.875 bid, 100 asked.

The Cendant 0% due February 2021 was quoted at 64 bid, 64.5 asked. The 3.875% due 2011 was quoted at 99.375 bid, 100.125 asked. And the 7.75% mandatory was quoted at 33.25 bid, 33.75 asked.

Cendant shares closed up 45c to $11.24.

The type of turnaround in attitudes toward Tyco and Cendant were also apparent in situations like Lucent Technologies Inc. and Nortel Networks Corp. as "more confident buyers" moved in for the converts, one market source said.

Lucent's 7.75% convertible preferred gained 4.75 points to 55.25 bid, 56.25 asked and the 8% convertible preferred rose 2.25 points to 66.25 bid, 67.25 asked. The stock closed up 13c to $1.65.

Nortel's 4.25% convertible due 2008 gained 5 points to 61.5 bid, 63.5 asked. The 7% mandatory gained 2845.5 points to 41,904.5 bid, 42,404.5 asked. The stock ended up 16c to $2.15.

In general, the tone remained more optimistic, even though there are persisting concerns in the convertible market.

"The tone of the day was set by the retail numbers, which were not stellar but not quite as bad as expected," said Matt Hempel, convertible analyst at Bear Stearns & Co.

Not a lot of action was seen in retail convertibles, but one dealer noted that convert players were watching Fleming Cos. Inc.'s junk bonds gain ground.

The Fleming 9.875% due 2012 junk bonds added 5 points to 62, on the heels of a 6-point gain in the 10.625% junk bonds due 2007 to 69.25 on Wednesday, he said.

Fleming's 5.25% convert due 2009 was quoted at 51 bid, 52.5 asked. The stock closed unchanged at $6.30.

Lennar Corp.'s converts also gained on the company's strong earnings and outlook news Wednesday, said Stuart Novick, convertible analyst at Salomon Smith Barney.

Novick also noted that InterMune Inc.'s decline was stalled in the low to mid-90s. He said that while recent news was a setback for the company on its product development front, he thinks there's no liquidity crisis as it appears the company has about four years of cash on its balance sheet.

Shire Pharmaceuticals stock took a beating as news broke that a general application had been posted for its Adderall drug, but the convertibles held up nicely.

The Shire 2% convertible due 2011 was quoted off 0.375 point to 92.25 bid, 93.25 asked while the stock closed down $1.15 to $17.19.

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