Convertible market digests $3.4 bln of new paper this week

By Ronda Fears

Nashville, Tenn., Oct.19 - Convertible traders said the market was struggling to maintain an optimistic tone amid a host of bad news related to corporate earnings Friday while absorbing $3.4 billion of new paper for the week, which could balloon to at least $3.9 billion if the greenshoes are exercised. Weak earnings overshadowed the new deal excitement, and Providian Financial Corp. was dealt a hard blow as disappointment turned to panic.

"The Providian situation was awful," said a convertible trader at one of the major investment banks in New York. "Everyone started bailing out of the stock and it was a disaster, but the convertible had already taken the dive so it held up today rather well today. The market overall probably closed out a little higher, and new deals certainly helped with that."

Amid credit downgrades, as well as equity downgrades, Providian stock plunged by nearly 60% as equity investors reacted to weak earnings and the shocking news Friday that the credit card issuer's chief executive had resigned. Providian had lowered its third-quarter earnings estimates twice before reporting on Thursday that profits declined around 70% as rising loan losses, the flagging economy and declining loan demand took a toll on its bottom line. Providian said it would suspend risky lending, a sector that traditionally played a dominant role to its profit growth. Investors began dumping the stock Friday, however, after the company announced that its CEO had resigned and the company slashed its earnings guidance for fourth quarter.

The Providian 3.25% convertible due 2005 was quoted down 1.5 points on the day to 54.5 bid, 55.5 offered as the underlying stock fell $7.25, or 58.5%, to $5.15.

Convertibles were widely mixed, but described as holding up well against stocks that were striving to stay in positive territory. The Dow Jones Industrial Average ended up 40.89, or 0.45%, to 9204.11 and the Nasdaq added 18.59, or 1.12%, to 1691.31.

New deals moved higher on demand for the higher premiums seen lately, but dealers said sharp movements were curtailed Friday because of so much new paper getting put into circulation. More than $1.6 billion of new paper freed to trade Friday, following $1.78 billion earlier in the week.

"The new paper did very well, but we didn't see some of the big gains that we've seen recently," said one dealer. "That is, outside of Symantec, which shot up right out of the gate and was incredible. It was a big hit."

Market sources said new deals continue to be well over-subscribed and demand still appears to be very healthy for new issues. There is nothing scheduled to price next week, but sources anticipate that next week could produce a few overnight deals like those seen this week. Symantec and Teradyne both upsized deals on high demand.

Symantec Corp. sold $525 million of five-year convertibles, boosted from $425 million, in the Rule 144A market at par to yield 3.0% with a 30% initial conversion premium. The issue sold more aggressive than yield price talk that had put the coupon at 3.25% to 4.25%. In the immediate aftermarket, the new converts climbed 7.25 points from par to 107.25 bid, 107.75 offered as the common gained $1.30 to $53.88.

L-3 Communications Inc. sold $350 million of 10-year convertible senior subordinated notes in the Rule 144A market at par to yield 4.0% with a 25% initial conversion premium. The deal sold in the middle of price talk that put the yield between 3.75% and 4.25% and initial conversion premium at 23% to 27%. In the immediate aftermarket, the new converts edged up 0.375 point from par to 100.375 bid, 100.875 offered as the common added 40c to $86.50.

Teradyne Inc. sold $350 million of five-year convertible senior notes at par to yield 3.75% with a 30% initial conversion premium. The Rule 144A deal sold at the cheap end of price talk, which put the yield at 3.25% to 3.75% and initial conversion premium at 30% to 35%, and was upsized from $300 million. In the immediate aftermarket, the new converts gained 0.4375 point from par to 100.4375 bid, 107.6875 offered as the common dropped 99c to $19.01.

In another quick-sale deal, Carnival Corp. sold $400 million in proceeds of 20-year zero-coupon convertible notes in the Rule 144A market at 47.566 for a yield-to-maturity of 3.75% and a 35% initial conversion premium. In the immediate aftermarket, the new converts edged up 0.125 point from issue price to 47.625 bid, 48.125 offered as the common dropped 62c to $20.61. Carnival's 2% convertible due 2021 (A2/A), which sold at par in April, dropped 0.5 point on the day to 92.75 bid, 93.25 offered.

New paper from earlier this week also was higher.

ASML Holding NV's new 5.75% convertible subordinated notes due 2006 added 0.875 point on the day to 100.5 bid, 101 offered with the underlying common up 20c to $13.20. The new Lowe's 0.82% convertible (A), which sold at 86.103 earlier this week, added 0.3125 point on the day to 89.0625 bid, 89.5625 offered. The Lowe's zero-coupon convert due 2021 (A3/A), which was issued at 60.841 in February, gained 0.75 point to 70.625 bid, 71.125 offered. Lowe's common stock gained 55c to $34.40.

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