Convertibles higher as stocks shrug off earnings, new paper mostly better

By Ronda Fears

Nashville, Tenn., Oct.11 - Convertible traders said it was another busy session as investors scrambled to latch onto some of the nearly $2 billion of new paper put into play this week. TXU Corp. and Performance Food Group Inc. both trotted deals out ahead of plan, so both were freed to trade Thursday and held to par or gained ground.

The Federal Bureau of Investigation warning that a retaliatory terrorist attack may occur in the next few days was unsettling for many of the market players in New York. It was particularly troublesome after Lehman Brothers and Merrill Lynch traders and sales people were evacuated in a false alarm from a Jersey City office building, where they had been moved to since the World Financial Center was damaged from the attack on the World Trade Center on Sept. 11.

But despite some nervousness, the market tone was good.

"We are seeing a lot of more outright players in the market these days, and actually buying instead of selling," said a convertible trader at one of the major investment banks in New York. "That's been refreshing. The arbs have been busy all along, but we've seen some nice traditional converts come to market this week."

Most new issues gained and the market overall was described as higher Thursday as stocks rose with bulls at the reins in defiance of weak results for retailers and continued earnings misses and warnings. In the second straight advance, the Dow Jones Industrial Aberage gained 169.59, or 1.84%, to 9410.45 and the Nasdaq rose 75.21, or 4.62%, to 1701.47.

TXU and Performance Food both priced their deals a day ahead of schedule, and both were upsized amid heavy buyer demand. Both also priced at the aggressive end of guidance, as has been the case with all new convertibles since the market re-opened late last week after a two-week hiatus due to the Sept. 11 terrorist attacks on the U.S.

TXU sold $875 million of mandatory convertible units to yield 8.75% with a 22% initial conversion premium, upsizing the deal amount from $750 million. The registered deal sold at the aggressive end of price talk that put the yield between 8.75% and 9.25%. The deal sold beyond the aggressive end of premium guidance, which was in a range of 18% to 20%. Each unit consists of two par $25 notes with forward stock purchase contracts.

In the immediate aftermarket, the TXU convert slipped a bit with some stock weakness early in the session but recovered nicely by the closing bell, a dealer said. The convert was quoted at par of 50 bid, 50.1 offered as the stock closed off 5c to $45.59.

Performance Food sold $175 million of seven-year convertible subordinated notes at par to yield 5.5% with a 25% initial conversion premium, upsizing the deal amount from $125 million. The registered deal sold at the aggressive end of price talk that put the yield between 5.5% and 6.0% with an initial conversion premium of 20.5% to 24.5%. Performance Food also sold 5 million shares of common stock at $26.36 each, fetching another $131.8 million.

In the immediate aftermarket, the Performance Food convert gained 5.25 points from par to 105.25 bid, 105.75 offered with the common stock ending up $1.35 to $27.73.

The darling of the recent new issues continues to be Finisar, however.

"People are excited about a techy name and Finisar has fiber optic business. Everyone was wanting to get their hands on this," said a convertible hedge fund trader. Finisar's 5.25% convertible subordinated notes due 2008 skyrocketed 20.3125 points on the day to 127.5 with the underlying shares at $6.10. The common stock closed up $1.40 to $6.40.

J.C. Penney's 5% convertible senior notes due 2008 gained 2.5 points on the day, although retail sales figures released Thursday showed considerable weakness in the group. The converts closed at 103 bid, 104 offered as the underlying stock gained $1.07 to $23.36.

Community Health Systems Inc.'s 4.25% convertible subordinated notes due 2008 slipped, although traders and dealers had no explanation other than the stock lost ground and many convertible investors were flipping this paper to buy into the newer deals. The Community Health convert dropped 2.375 points on the day to 99.375 bid, 99.875 offered as the underlying stock declined $1.30 to $25.45.

Market participants expect the new issue pipeline to continue to be busy, although nothing is firmly set in the near future aside from the AT&T Corp. exchangeables that convert into Cablevision stock, which is set to price after the market close next Wednesday.

No one readily expected the FBI warning to obstruct business, but many were uncertain.

"We're a little uneasy right now. The situation is deplorable and one I never dreamed I'd live in as an American," said a trader based in New York. "But, we're just going to go ahead with each day in a business as usual manner, or as close to it as possible." End

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