Both Valeant tranches bid up 2 points in gray, Radisys up 2.5; Casual Male adds 2.5

By Ronda Fears

Nashville, Nov. 13 - Purported richness and small deal size aside, convertible players were bidding up the new paper in circulation or pending Thursday. Otherwise, traders said that converts were holding firm or up slightly despite the pullback in stocks.

"People are still grabbing for yield, so that is propping up a lot of the busted names," said a dealer.

Secondary activity was described as moderate and traders mentioned that American Tower Corp. and several satellite names were active, with some doing better, on the back of Goldman Sachs & Co. initiating coverage of that sector.

As for secondary trading, several fund managers said they are already beginning to wind down activity levels as they prepare to tackle year-end paperwork. One put it like this: "It's like the adage 'if it ain't broke, don't fix it.' So unless something blows up, I'm not moving anything."

Besides, there were new deals to stay busy with, although the spattering consisted mostly of smallish deals and buyside players were bemoaning aggressive terms.

With a new label, ICN Pharmaceuticals Inc., or now Valeant Pharmaceuticals International was the latest addition to the slate. The two-parter, $400 million altogether, was pricing after the close following a full day of marketing.

Both Valeant tranches were bid 2 points over issue price in the gray market. Since some of the proceeds are earmarked to take out the old ICN 6.5% convertible, that issue also picked up a couple of points.

Radisys Corp.'s small $75 million also was at bat after the close, and it was bid 2.5 points over in the gray.

Meanwhile, new offerings from Chesapeake Energy Corp. and Casual Male Retail Group Inc. both gained more than 2 points from par out of the gate Thursday.

AmeriCredit Corp. was the only laggard, slipping just below par, as potential buyers were leery of the credit and found the stock borrow difficult.

"They're all pretty rich, but they're all bid up, so you can take all the grumbling with a grain of salt," said a convertible salesman.

"I'm surprised they haven't repriced some of these" with tighter terms since the strong gray market bids suggested very healthy demand.

There were no changes to guidance, but demand was indeed healthy. Sources involved with selling the new deals this week indicated that the books were oversubscribed by at least two times, and in some cases overbooked by more like sixfold.

The flood of orders on the new convertibles wasn't because of such generous terms, in most cases, however. Fund managers said demand is coming from so many converts getting called away or redeemed this year and by new players cropping up in the convertible asset class.

Valeant's offering, for example, was calculated anywhere from 2% rich to 3.5% cheap.

Tranche A is $200 million of 6.75-year subordinated notes, non-callable, talked to yield 3.0% to 3.5% with a 35% to 40% initial conversion premium.

Tranche B is $200 million of 10-year subordinated notes, non-callable for 7.5 years, talked to yield 3.75% to 4.25% with a 35% to 40% initial conversion premium.

"We think the valuation is more attractive on the A [tranche] for hedgers," said a buyside trader at a huge fund in New York.

Another in New York agreed: "The A tranche looks marginally cheaper in our opinion, but both seem well bid in gray."

A fund manager who planned to add the Valeant 10-year issue said it was not cheap enough, but he wanted to be involved as he expects there to be some bounce in biotech and drug stocks, even beyond the rally seen this year.

"There could be some important mergers that would maybe help the entire biotech group," said the manager of a large outright fund based in New York.

"ICN has been in the process of a massive restructuring following the departure of Panic [controversial ICN founder Milan Panic]. There is a lot of questions about their drug pipeline, but basically it looks like the worst is behind them. Still, I think the terms should have been more generous."

Standard & Poor's assigned B ratings to Valeant's new convertibles, with a negative outlook, noting weakening in its ribavirin-related royalty stream, uncertainty about the ongoing restructuring plan and the likelihood of a more aggressive financial policy.

On the other hand, S&P said the company continues to maintain a strong position in the hepatitis C treatment market and has only minimal debt maturities over the next five years.

Financially, S&P noted the company's debt leverage has remained steady, with total debt to capital at about 40% and total debt to EBITDA of 2.5 times, both more than reasonable for the rating. Also, S&P said the new issues provide the ability to either refinance existing debt or pursue product acquisitions. Meanwhile, internal cash generation is improving from a 2002 bottom of less than $12 million, as the company is on track to generate more than $100 million of free cash flow in 2003.

Deutsche Bank Securities analysts put the 6.75-year notes 0.86% rich to 3.49% cheap, using a credit spread of 350 basis points over Libor and a 35% stock volatility.

Another sellside shop put that tranche 2% cheap, using a credit spread of 450 bps over Libor and a 38% stock volatility.

Deutsche put the 10-year notes 1.29% rich to 0.4% cheap, using a credit spread of 450 bps over Libor and a 35% stock volatility.

Valeant said a portion of proceeds would be used to hedge the notes and buy written call options, to reduce the potential dilution from conversion of the notes.

Remaining proceeds will be used to retire a portion of the old ICN Pharmaceuticals 6.5% convertible subordinated notes due 2008 by privately negotiated transactions, open market purchases, a tender offer or other means.

The ICN 6.5s closed up 1.5 points to 106 bid, 107 offered.

ICN shares closed Thursday down $1.49, or 6.2%, to $22.53 on heavy volume.

Radisys was viewed cheaper by the buyside, judging the market reaction.

Radisys was returning to tap convertible investors for $75 million in an offering of 20-year convertible notes, non-callable for three years, talked to yield 1.375% to 1.875% with a 23% to 27% initial conversion premium.

"Basically, there are plenty of buyers [for the new Radisys] at plus 2 bid," said a convert trader at a hedge fund in New Jersey.

In fact, another buyside trader said the new Radisys convertible closed in the gray market with the bid at 2.5 points over issue price. The underlying stock ended down $2.52, or 11.94%, to $18.58.

"Radisys looks cheap, we think roughly 6% cheap at middle of price talk," the trader said, noting that his firm modeled the Radisys convert using a credit spread of 650 bps over Treasuries and a 55% stock volatility.

"I hear the book is 6 times [oversubscribed], so allocations will be very thin."

Allocations were described as thin on the Casual Male deal, too, even after it was bumped up to $85 million from $75 million, and priced very aggressively.

Casual Male sold the upsized offering of 20-year convertible notes, non-callable for three years, at par to yield 5.0% with a 35% initial conversion premium - at the tight end of yield talk for 5.0% to 5.5% and aggressively outside the premium guidance for 28% to 32%.

Bookrunner Thomas Weisel Partners closed the Casual Male convert at 102.5 bid, 103.5 offered. The underlying stock ended up 11c, or 1.39%, to $8.

Chesapeake's new convert also traded well. The new 5% perpetual convertible preferred was taken out by joint bookrunner Lehman Brothers at 102.875, while the stock closed up 34c, or 2.85%, to $12.27.

AmeriCredit, on the other hand, didn't see much action and joint lead Credit Suisse First Boston closed the new 1.75% convert at 99.125 bid, 99.5 offered. The stock ended off 26c, or 1.84%, to $13.48.

"AmeriCredit you don't hear at all. The borrow is tight and the credit is questionable," said a buyside convert trader in New York.

"The convert market did not seem comfortable with the company's financials. We put on a small position. We have a large credit team here, eight, and do better with these types of names."

Another buyside trader said, "The loser of the day is AmeriCredit.

"AmeriCredit floundered and traded down from par," he continued.

"Even though AmeriCredit straights are trading in neighborhood of 500 over, the convert market seems to think that's too tight and interest in it seems light."

Looking forward, there are a couple of deals pending in the immediate offing. But, some market watchers noted that convertibles could see some issuance as a result of the refinancings seen coming down the pike in high-yield.

Moody's said in a report Thursday that there is $27 billion in high-yield bond and bank debt scheduled to mature over the next 15 months. For 2004, there's $11.5 billion in high-yield bond debt maturing and nearly a third, or 32%, has a rating of Caa1 or below, according to Moody's.

Convertible players are anticipating that guidance on the General Cable Corp. deal will be amended, likely tightened, before it prices next week, too. General Cable plans to sell $75 million of redeemable convertible preferred stock as part of a comprehensive $640 million refinancing plan that will replace its current bank credit facility, provide additional liquidity, extend debt maturities and cut leverage.

The converts will have a $50 par and initial price talk puts the dividend at 6.5% to 7.0% and the initial conversion premium between 18% and 22%.

The refinancing plan also includes a $240 million senior secured asset-based revolving credit facility, $275 million of senior unsecured notes and $50 million of common stock.

A roadshow is under way for the $275 million of senior notes due 2010 and is expected to wrap up on Monday, with the pricings soon to follow.

On the horizon, the market is looking for indicative terms to emerge perhaps next week on Komag Inc.'s registered deal. Komag plans to offer $70 million of 20-year convertible notes and 6 million shares of common stock, once the registrations clear the Securities and Exchange Commission.

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