USA Interactive pitching overnighter; Sierra Pacific, Teekay price new deals

By Ronda Fears

Nashville, Feb. 11 - New deals provided the diversion for convertible investors Tuesday as three offerings were put into circulation, including an overnighter from USA Interactive.

Details were slim, as many market participants were involved with the USA Interactive deal. A source close to the deal, however, said Deutsche Bank Securities is lead manager. The stock closed up 76c to $24.25.

With the new deal activity, traders said converts held firm ground overall, although stocks went south in a spooked market weary with war tremors and the economic fallout from worries about a possible conflict.

New paper from Tyco International, Micron Technology and International Game Technology was still under pressure, but the new converts of McData, U.S. Steel and Freeport McMoRan Copper & Gold rose sharply.

El Paso Corp. dropped again sharply, this time as Moody's cut its senior credit rating into triple-C territory where default is a higher risk.

"Convertibles actually held up rather well today. The catchword of the day was 'spooked.' More war talk spooked investors. Greenspan spooked investors," said the head convertible trader at a major investment bank.

"Everyone is just tired of the war subject, ready to get it over and done with. If this keeps up much longer, all the gains we've seen over the past couple of months will be totally erased. We're already seeing a lot of tech names pull back, but that's probably a good thing since they were getting so rich."

Most of the buzz in the market, however, centered around a new deal from Sierra Pacific Resources.

Sierra Pacific, the troubled utility holding company for Nevada Power Co. and Sierra Pacific Power Co., sold $250 million of convertible senior notes intraday at par to yield 7.25% with a 22% initial conversion premium.

The coupon was in the middle of yield price talk and at the expensive end of premium guidance of 17.5% to 22.5% but the deal modeled up to 10% cheap, depending mostly on the level picked for the credit spread.

Analysts were using 950 to 1,400 basis points over Treasuries to model the deal.

It was a tough borrow on the stock, but upside participation was estimated at 75% to 100% with downside participation around 33% to 55%.

"People were grabbing for this cheap, cheap paper," said a convertible trader at a hedge fund in New Jersey.

The new Sierra Pacific convert ended at 108 bid, 108.5 asked. The underlying shares closed down 77c to $3.75.

"The equity sensitivity is great, so if there's any pop in the stock you do well," the buyside trader said.

"There are some restrictions to converting, like for the first six months, but eventually you get paid well for this one."

The first five coupon payments are collateralized with U.S. Treasury strips, but some analysts disregarded that as they see the principal repayment a potential problem for Sierra Pacific.

Standard & Poor's said the transaction was a positive for Sierra Pacific's credit quality. S&P expects to confirm the ratings and remove them from negative watch after the deal closed, but the outlook would be negative.

While the convertible staves off a potential liquidity crisis by enabling Sierra Pacific to redeem its $191 million of floaters that come due in April, S&P said a favorable ruling on Nevada Power's deferred cost recovery case is essential to financial recovery.

Teekay Shipping Corp. also was in the market but was overshadowed by the Sierra Pacific deal since it was bigger and cheaper.

Teekay sold $125 million of three-year mandatory convertibles to yield 7.25% with a 22% initial conversion premium - at the aggressive end of guidance.

Deutsche analysts put the deal 2.6% cheap, using a credit spread of 500 bps over Libor and 29.5% volatility in the stock, plus factoring in a 2.23% common yield.

Teekay shares ended down $2.50 to $36.02.

While the new deals prompted some selling in recent deals from Micron, Tyco and International Game Tech, traders said, Freeport and U.S. Steel benefited from commodities gaining on war prospects. In addition to the spike in gold prices and other metals, oil prices also rose.

Freeport's new 7% convert added 0.375 point to 100 bid, 100.5 asked. The stock closed up 9c to $16.81.

U.S. Steel's 7% mandatory climbed 1.25 points to 49.25 bid, 49.5 asked. The stock ended up 36c to $12.52.

Elsewhere, El Paso continued to slide as Moody's downgraded its senior unsecured debt to Caa1 from Ba2, putting it in a rating category that signals higher default risk.

Uncertainty as to whether asset sales will provide sufficient and timely proceeds to help cover a larger-than-expected cash deficit and execution risks to efforts to scale back merchant energy activities were factors in the downgrade, Moody's said.

The Moody's downgrade follows a two-notch downgrade late Friday by Standard & Poor's, which slashed the senior unsecured debt to B+ from BB.

El Paso's 0% convert dropped 1.125 points to 28.75 bid, 29.75 asked. The 9% mandatory lost 0.25 point to 24.25 bid, 24.5 asked.

El Paso shares fell 48c to $4.72.

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