Upsized Lennox International trades higher; jobs data halts momentum

By Peter Heap

New York, May 3 - Lennox International Inc.'s newly priced convertible moved smartly higher in secondary trading - but its pricing after the close Thursday left the forward calendar pretty much cleaned out.

Otherwise, any upwards momentum that convertibles had managed to accumulate over recent sessions was quickly lost in response to the unemployment data released Friday morning. Nonetheless, some names still managed to firm.

Lennox's deal had already been trading above par in the gray market ahead of pricing.

When terms were set after Thursday's close, the offering was both increased to $125 million from a planned amount of $100 million and brought to market by UBS Warburg at the aggressive end of talk.

The deal had been expected at a yield of 6.25% to 6.75% and an initial conversion premium of 20% to 25%; it priced to yield 6.25% with a conversion premium of 25% over the $14.47 stock price.

Towards the end of the session the bonds were bid 2½ points above their pricing level at 102½ with the stock at $14.40 - and that was before the underlying equity spiked up in the last hour of trading to and at $15.00.

"It was attractively priced relative to where we have seen some recently in the marketplace," said one hedge fund manager who participated in the offering.

He said he had sat out Sonic Automotive, Inc.'s $130 million offering earlier in the week because he was "not comfortable with the company."

Although he liked Lennox better, he nonetheless added that the deal was small which means "it's going to be locked up pretty tightly" after the first days of trading.

He also noted that the underlying stock pays a dividend yield of 2.6% (with the stock at $14.80) which explains "why they had to pay the coupon they did."

On the other hand, the Lennox bonds had three years of hard call protection, a "relatively modest" conversion premium and a short maturity.

Other deals this week have been mixed once trading has begun.

Alltel Corp.'s $1.25 billion of three-year mandatory convertibles priced after the close Tuesday finished Friday's session at $49.25, down 41 cents on the day and 75 cents or 1.5% down from their pricing level, while the underlying stock has dropped to $48.39, down $1.11 or 2.2% from $49.50 when the deal came to market.

KeySpan Corp.'s $400 million of three-year mandatory convertibles have pretty much stayed where they came to market. They closed Friday at $50.06, down three cents on the session but 6 cents above the $50 at which they priced. The stock, meanwhile, finished at $35.50, up 20 cents from $35.30 when the convertibles priced.

And CenturyTel Inc.'s $500 million of ACES closed at $25.05 Friday, up 40 cents on the day and 5 cents better from the $25 pricing level even though the stock has declined to $28.95 from $30.10 at the time the deal priced.

With Lennox priced, the forward calendar is now bare, with just three deals on the horizon - and doubts about whether two of those, Agere Systems and Qwest Communications, are likely to see the light of day anytime soon.

However the third issuer waiting in the wings, Toys "R" Us, said in a filing with the Securities and Exchange Commission Friday that it is just waiting for the SEC to declare the registration effective on its proposed $350 million of equity-linked securities. Once that happens, the Paramus, N.J. retailer said it plans to come to market "promptly" (See story on page one of this issue).

More broadly, the improving tone seen much of this week was halted in its tracks by the jobs report Friday morning, specifically the data which showed unemployment rose to 6%, the highest level in 7½ years.

Stocks too suffered. The Dow Jones Industrial Average fell 85.24 after three previous up days while the Nasdaq, which had not been having a good weak, shed a further 31.79.

"The unemployment number this morning didn't help," said one hedge fund manager Friday.

However he added that he has concerns beyond the headline numbers pointing to the health of the economy, specifically his main worry is equity valuations.

"Even if the economy does pick up, stocks are still way ahead with these multiples," he explained.

"Everyone has got these rosy projections and put whatever spin on it," the manager continued, referring particularly to sell-side analysts.

"You just can't do that. You are not going to have any credibility in the market. A P/E of 35 is not a normal thing."

Generally Friday was described as a quiet day. But despite the negative tone, some of the individual names which have attracted headlines recently did better.

Xerox Corp.'s convertibles were modestly higher after suffering Thursday in the wake of a multiple-notch downgrade from Moody's Investors Service.

Xerox's 7.5% convertible trust preferred due 2021 closed at 561/4, up ¼ on the day, while its 0.57% due 2018 added a full point to 55. The stock rose 4 cents to $8.03; it had fallen $1.08 of 11.9% the day before.

Cendant Corp.'s 0% convertibles due May 2021, newly sweetened with the addition of another put and cash interest, firmed slightly to 101½ from 101 3/8 the day before even as the stock gave up 25 cents to $18.23.

And Tyco International Ltd.'s 0% due 2021 was also firmer, rising 3/8 to 70 on the session. Its stock rose 50 cents to $21.65.

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