Convertible market continues to see new deal flow swell

By Ronda Fears

Nashville, Tenn., Nov. 15 - Convertibles were mixed Thursday with moderate activity in the secondary market. But most of the attention continues to stay on the hot new issues market as Agilent Technology trotted out an overnight $1 billion deal. Swiss Re's new $1 billion issue saw heavy demand as outright convertible investors flocked to something they could find value in, syndicate sources said. Meeting with open arms from hedge funds was Riverstone Networks Inc.'s small deal that was launched before the opening bell and priced intraday. ASM International also priced a deal that was doubled due to strong demand.

With the Agilent deal, there has already been $3.5 billion of new paper injected into the market this week. Also, Northrop Grumman Corp. and PartnerRe Ltd both have deals coming to market after the closing Thursday, totaling $550 million.

"It's really quite incredible, the pace of new issues," said a convertible trader at one of the major investment banks in New York. "It's great for everybody and it always helps the secondary market. I know the outright players were a lot more active today."

There was "huge interest" in the Agilent deal, according to a trader at a convertible hedge fund in New Jersey. "People are chomping at the bit to play this name."

The Agilent deal is for 20-year paper and talked to yield 3.0% to 3.5% with an initial conversion premium of 26% to 30%.

Outright players were the dominate buyers for the Swiss Re deal, which was a 20-year bond structured as a convertible for 10 years that then switched to a 10-year floating rate note, sources said. The deal was about seven times over-subscribed, a syndicate source said, because outright convertible funds are "starving for something to participate in." The syndicate source added that some of the Swiss Re appeal was the lack of liquidity in the insurance firm's ADRs in the U.S. and the convert offered a way to play the stock story.

The Swiss Re convert was set with a 3.25% coupon and sold at par. It traded as high as about 2 points over par, one trader said, but closed at 100.875 bid, 101.25 offered.

Riverstone Networks' new deal gave hedge accounts something to focus on, but the deal was just $150 million. Analysts said the deal priced about 3% rich to fair value, but that didn't dissuade buyers.

"This deal would do okay with arbs because the implied volatility was so high, but the premium was pretty aggressive and that could hurt it a little," said a convertible hedge fund trader in New York.

The new 3.75% converts, which sold at par with an initial conversion premium of 27%, gained 4.75 points out of the gate to 104.75 bid, 105.75 offered as the common stock fell $1.24 to $14.58.

ASM International Inc. also sold a small deal, $100 million, which was doubled in size because of strong demand. The 5% converts, which sold at par with an initial conversion premium of 20%, were about 8% cheap to fair value but a closing price indication was not available.

Part of the continuing appeal to convertibles is the return for the asset class, particularly compared to stocks, although stocks have staged a turnaround the recent weeks following the Sept. 11 terrorist attacks on the U.S. The CSFB/Tremont hedge fund index was up 0.44% in October, bringing the year-to-date (through Oct. 31) return to 2.63%, according to a report Thursday. Convertible arbitrage was among the biggest gainers of the month, posting a 1.11% gain during the month for a year-to-date return of 13.41%. The monthly comparison is weak compared to the major stock benchmarks, but far exceeds the year-to-date returns for stocks. CSFB/Tremont reported that the Dow Jones Industrial Average was up 2.57% in October while down 15.87% year-to-date and the Nasdaq gained 12.77% in the month but was off 31.59% for the first 10 months of 2001.

TASS Research, a unit of Tremont Advisors Inc. which is a minority owner of CSFB/Tremont, reported that hedge fund flows grew by $6.9 billion in third quarter, with convertible arbitrage once again one of the main beneficiaries. It was one of the largest inflows ever, TASS said, noting that the net flow for all of 2000 was just $8 billion. Event driven funds and convertible arbitrage saw the largest flows, accounting for 64% of the third-quarter gain between them. The money being poured into convertible arbitrage this year already has surpassed the net flows for 1999 and 2000 combined, according to TASS Research.

"Hedge funds are just sloshing over with money, a lot of it new money," said a market source at one of the major investment banks. "A lot of the new deals are tailored to hedge funds because that's where the money is. And, they account for something approaching 75% of the secondary market activity. So, the bankers have to be aware of where the money's coming from."

Volume in the secondary market Thursday was again slower than it has been in recent weeks as stocks closed mixed. One convertible trader said the decline in weekly jobless claims, the third in as many weeks, was a positive factor but there was some growing skepticism that there will be a rapid turnaround in corporate profits. The Dow industrials rose 48.78, or 0.50%, to 9872.39 while the Nasdaq slipped by 2.60, or 0.11%, to 1900.59.

"We are encouraged by the Nasdaq holding above 1900 but there's still a long way to go to restore investor confidence," the trader said. "But there are so many conflicting indications of what's going on that a lot of people are taking a wait-and-see attitude, trying to hold on until there's more light on the subject."

Indeed, Tyco International announced more job cuts Thursday, in its electronics unit, while Cendant Corp. boosted its guidance for 2001 and 2002.

Tyco announced 6,000 job cuts at its electronics unit but said it was on track to meet full-year earnings estimates. The Tyco zero-coupon convertible due 2020 gained 0.375 point to 78.25 bid, 78.5 offered and the Tyco zero-coupon convertible due 2021 rose 0.25 point to 75.5 bid, 75.75 offered as the common stock added 95c to $57.55.

Cendant boosted its guidance for fourth quarter 2001 and 2002. At present, the company said Thursday that it believes its current business trends support a fourth quarter 2001 projection for EPS of 20c, which would exceed the high end of the previously announced range of 15c to 19c. In addition, the company increased its outlook for 2002 EPS to $1.25, compared to the previously announced range of $1.15 to $1.25. The Cendant zero-coupon convertible due February 2021 gained 1.5 points on the day to 66 bid, 66.25 offered and the zero-coupon convertible due May 2021 added 0.625 point to 98.375 bid, 98.625 offered while the underlying stock rose 89dc to $15.73.

End

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.