Convertibles gain with stocks, new deals keep coming

By Ronda Fears

Nashville, Tenn., Oct.22 - Convertible traders said the market was sharply higher Monday as stocks gained ground. Pharmaceutical and healthcare issues were markedly better with their respective stocks, and after the closing bell Cubist Pharmaceuticals Inc. marched out a small overnight deal that was turning heads with conversion premium guidance in a low range the market hasn't seen for nearly two years.

"This looks pretty good," said a convertible trader at a hedge fund in Connecticut

Market sources said the Cubist deal would likely draw mostly hedge fund interest because of the price talk. The $125 million of seven-year convertible subordinated notes are expected to price to yield 5.0% to 5.25% with an initial conversion premium of 10% to 15%, market sources said.

With the softness in stocks, the convertible market hasn't seen initial premiums so low on a regular basis since early 1999 when some stocks began to show signs of weakness. As stocks slid, investors wanted downside protection in the convertibles, hence high premiums came into vogue.

Cubist launched its capital-raising effort on a day when drug and healthcare stocks soared. Cubist shares closed up $2.35 to $43, but traders said the stock lost as much as $4 in after-hour trading on the convertible news. Convertible traders said Alza, Ivax, Genzyme, Health Management Associates and several other health industry names were higher in the session.

Elsewhere in primary market activity, Motorola Inc. announced its will return to the convertible market, aiming to raise $875 million with a three-year mandatory convertible. The wireless phone maker also is selling $400 million of 10-year senior notes. The convertibles will be registered, but the straight debt is being sold in the Rule 144A market.

Price talk did not emerge on the new Motorola convertible Monday, but market sources were anticipating guidance early Tuesday. Motorola common shares closed up 45c to $17.95. Market sources were unsure how the Motorola debt deals would be received, given the company's struggle with flagging profits.

"This will be interesting to watch," said one convertible hedge fund trader. "We are anxious to see the price talk on this."

Motorola posted a $1.4 billion third-quarter loss and announced Monday more layoffs that will bring its total cut in jobs over the past year to 26%. The company said it sees a fourth-quarter loss of 4c to 5c per share and it expects fourth-quarter sales to be flat with third quarter to 3% higher.

Convertibles were mostly higher as stocks firmed after a shaky, mostly negative open. The Dow Jones Industrial Average ended up 172.92, or 1.88%, to 9377.03 and the Nasdaq added 36.77, or 2.20%, to 1708.08.

Demand for new paper remains strong, dealers said. The nearly $4 billion of new paper put into circulation last week continued to move higher, dealers said, and there was no sign that demand was softening.

"There is a very healthy appetite for new paper right now," said a syndicate source working on several new deals. "You can look at how these deals are getting bid right now and see that demand is very heavy. We are encouraged."

Symantec Corp.'s new 3% convertibles due 2006 added 0.75 point on the day to 108 bid, 108.25 offered as the common gained 35c to $54.23.

L-3 Communications Inc.'s new 4% convertibles due 2011 rose 1.375 points on the day to 101.75 bid, 102.25 offered as the common added $1.15 to $87.65. Moody's on Monday rated the new L-3 convertible at Ba3.

Teradyne Inc.'s new 3.75% convertible senior notes due 2006 climbed 2.8125 points on the day to 103.75 bid, 104.5 offered as the common rose 88c to $19.89.

J.C. Penney Co. Inc's new 5% convertible notes due 2008 were also higher, although traders said there was no news moving the issue. The convert rose 1.5 points on the day to 105 bid, 105.5 offered as the underlying common stock rose 56c to $24.

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