Convertible buyers flock to new deals, groping for paper

By Ronda Fears

Nashville, Tenn., Feb. 12 - The convertibles primary market came to life Tuesday with a pair of small new deals but terms remained aggressive as buyers have become starved for new paper because of the few attractive opportunities in the secondary. On the heels of a couple of plus days for stocks, although the market struggled to stay in positive territory, Cymer Inc. returned to the market with an overnight deal that traded up slightly in the aftermarket and Computer Network Technology Corp. launched a deal.

"Buyers are out there poring over the market and not finding a whole lot. There have been a fair amount of high-yield fixed-income buyers looking over convertibles and finding more to their liking than who we refer to as traditional convertible investors," said the head convertible trader at a major investment bank in New York.

"So, just about anything that is put on the table will find buyers. These two new deals are small, too, so that makes it even worse."

Cymer sold overnight $200 million of 3.5% convertible subordinated notes due 2009, with a 22.7% initial conversion premium. The Rule 144A paper gained 1 point from par in the immediate aftermarket to 101 bid, 101.5 offered, while the underlying shares fell $2.65 to $38.30.

On the open, price talk emerged for Computer Network Tech's $125 million of five-year convertible subordinated notes putting the yield at 2.75% to 3.25% and initial conversion premium between 20% and 24%. The storage networking specialist has earmarked proceeds for working capital, including potential acquisitions. Bear Stearns & Co. is lead manager of the Rule 144A deal, which is set to price after the close Wednesday.

Analysts said the CNT deal was about 2.5% cheap, assuming a credit spread of about 900 basis points and 50% volatility in the stock. After Monday's close, the company said it expects weaker results for fiscal fourth quarter ending Jan. 31, although revenues were higher. CNT reported preliminary operating income of about $950,000, or 3c to 4c a share, on a 29% gain in revenues to about $60.7 million for the quarter, down from operating income of $5.8 million, or 17c a share, a year earlier. CNT shares closed down $2.70 to $16.94.

While both were structured as no-frills, vanilla convertibles, sans the fancy contingency or put features, buy-side sources were not expressly happy about the terms. Still, market sources said the Cymer deal - estimated 1% rich assuming a credit spread of 750 basis points and 50% volatility in the stock - was way oversubscribed and interest is running high on the CNT paper.

"Pricing has not gotten any better," said a convertible trader at a hedge fund in New Jersey. "People are just groping right now for anything."

Beyond the primary, traders said the market was very quiet Tuesday as attitudes reverted to a more negative tone with the Nortel news and several poor earnings reports from the likes of XL Capital and MetLife, among others. Adding to the weight of Nortel's announcement late Monday that its chief financial officer resigned amid a dark cloud of allegations, the company said Tuesday it still expects to return to profitability by fourth-quarter but meanwhile first quarter revenues are likely to be about 10% lower than a year ago.

The Nortel 4.25% convertible note due 2008 was fell 4 points to 89.5 bid, 90 offered with the stock down 42c to $6.42.

"I was hoping to bid it down but I didn't chase it after it traded above the offer in the Street," said a convertible trader at a hedge fund in New Jersey, who said the Nortel convert saw buyers on the weakness.

In general, traders said the Nortel news put a damper on the positive sentiment that had been building the past few days.

"Nothing is very attractive right now," said a convertible trader at a major investment bank in New York. "It was really pretty dead outside of what was going on in new issues, nothing was moving."

On a positive note, however, WellPoint Health Networks Inc. went soaring after posting strong fourth quarter profits and the company stood by the projection for a spike in earnings this year. The company reported a 23% rise in fourth-quarter earnings to $1.65 per share, which beat analyst's estimates, and said it still expects to earn $7.70 to $7.75 per share in 2002. The company first provided that guidance in December.

The WellPoint 0% convertible due 2019 rose 2 points to 91 bid, 93 offered as the stock climbed, hitting an all time high before slipping back to a close of $130.02, up $2.73.

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