Actuant trades pat with gray market at 102; Amkor tracks another 1 to 2 points higher

By Ronda Fears

Nashville, Nov. 5 - With a lackluster stock market as a backdrop, convertible trading was described as listless Wednesday. The bond market also was little impetus for lethargic convertible players, and the trickle of small new deals did nothing to help traders get busy either.

There wasn't a great deal of movement one way or another, traders said, but sellside sources said there seems to be an inclination toward selling under way, especially among outright managers.

New deal activity also continues to flag, although another tiny $75 million convert was launched by General Cable Corp. for pricing the week of Nov. 17. Capital market sources are beginning to talk more optimistically about issuance for the remainder of the year, but nothing big has materialized.

Actuant Corp. upsized its deal to $125 million from $100 million, pricing it at the aggressive end of guidance - 2%, up 35% - but it traded even with the gray market with little activity outside of a spurt early in the day. Bookrunner Wachovia Securities closed it at 102 bid, 102.5 offered with the stock ending 50c higher, or 1.69%, to $30.06.

Navigant International Inc.'s new $60 million convertible, which priced considerably cheaper at 4.875%, up 24%, also was flattish as volume thinned out quickly on the tiny deal.

"We would really like to see some bigger deals," said a convert trader at a hedge fund in New Jersey.

"Navigant was just too little. It was so thin we didn't play it." Regarding the Actuant deal, he added: "Thanks for nothing."

There are some promising trends for some players, though.

"Most of these deals don't have the low premium, high growth characteristics that interest me," said Richard Russell, president of ACM Management Co.

"However, the one generalization that I can make is that the new issues are becoming more appealing to the long-only investor as opposed to the hedgers. October averages were 3.9% yield up 41% versus year-to-date averages of 2.98% yield up 46.7%.

"As the bull progresses, I predict this trend to continue. A year out we could be seeing premiums closer to 30%."

A top convertible origination professional said new deal flow should pick up before year-end, although there is only another two or three weeks before the holidays begin to interfere, but he did not address deal sizes or new issue terms.

Looking to 2004, it's another matter also.

"We should have some [new issue] acceleration toward the end of the year, but next year is the big question mark," the banker said.

After so much refinancing with convertibles this year, continuing the strong numbers since 2001 hit a record issuance level that broke $100 billion, he said it's tough to see where the issuers will come from.

Mergers and acquisition activity may be the saving grace, he said. Indeed, M&A activity has picked up in recent weeks, and many onlookers speculate there could be considerable consolidation ahead for sectors like finance and insurance.

Meanwhile, there's still some refi activity going on. Hence, the General Cable Corp. deal that emerged Wednesday.

General Cable announced a comprehensive $640 million refinancing plan that will replace its current bank credit facility, provide additional liquidity, extend debt maturities and cut leverage. Part of that will be $75 million of redeemable convertible preferreds, with a $50 par, that are talked to price with a dividend of 6.5% to 7.0% and initial conversion premium of 18% to 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 begins for the $275 million of senior notes due 2010 on Thursday and is expected to wrap up on Nov. 18.

Immediately following the roadshow, the convertibles are expected to price alongside the senior notes.

"It looks cheap," said one fund manager, referring to the indicative terms on the General Cable convertible.

Nothing developed on the deal in the gray market, however, with pricing so far off.

Besides, as a hedge fund manager put it: "By the time that [General Cable] hits the market, they are going to reprice it," likely tightening terms. "It's too generous, even with that credit."

General Cable's proposed converts are not rated, but the senior notes are rated B2 by Moody's and B by Standard & Poor's.

As for Wednesday's trading, dealers said the convertible market was widely mixed with pockets of activity in the "headline names" but the market overall was described as rather flat and uneventful.

Cisco Systems Inc.'s earnings, which hit the tape after the close and beat analysts' expectations, may spur a broad based boost to tech stocks, but many convertible players are not believers in the rally.

"They will probably take the market up tomorrow on the Cisco numbers. We're already trading at over 36 times next year's earnings. Are things so good as to justify those multiples? I don't think so," said John Siebel, head of trading at Silverado Capital Management.

A sellside market source said there may not be a broad based reaction to the Cisco numbers. In fact, he said there has been more selling interest among convertible accounts, particularly outrights, recently.

"People are trying to decide what they don't want to own any more, and we hadn't seen that for a while," he said.

"They are wanting to get that risk off the page."

Hedge fund managers said they are not yet looking to take a lot of profits, especially if it is a convertible issue that has produced good returns.

"Basically, if it's not broke, don't fix it," said a manager at a huge hedge fund in New York.

"We're just looking to hold on to what we've made so far. Right now, the October numbers look sort of flat for us and I think that's about the way it looks at most of the hedge funds."

A pop in stock volatility would make players happy in virtually every corner of the convertible market, but the VIX continues to sit below 20.

Dealers said there hasn't been a lot of two-way activity in the tech sector, as a whole, but there have been certain names seeing nice action. Mostly, though, brokers say it's a matter of reaching for yield, picking some older issues with fat coupons that have been "in the tanks."

Amkor Technology Inc. again was mentioned Wednesday, with the converts moving up another 1 to 2 points.

Also of note, there was considerable disappointment, although no surprise to some, that Union Pacific Corp. is redeeming the remaining $500 million of its 6.25% convertible preferreds. Still, traders said the issue had tracked upward recently, despite the call scare that has been abuzz in the convertible market for most of 2003.

"There was an 11% premium attached to those [Union Pacific] converts," said a convert trader at a hedge fund.

"So, people are going to get burned with that."

The Union Pacific convert was quoted at 51.125 on Wednesday. The redemption price is 50.52.

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