Convertibles flat on whole, new issues mixed; Cracker Barrel brings overnighter

By Ronda Fears

Nashville, Tenn., March 27 - Convertibles were described as flat on whole, but telecom and cable issues sank on Adelphia's disclosure of $2.4 billion of debt that isn't on its balance sheet and its former telecom unit's bankruptcy. New issues were widely mixed, but the advanced EDO Corp. deal skyrocketed in the aftermarket.

Squeezing in one more deal before the holiday on Friday, CBRL Group Inc. launched a small $150 million overnighter that was quoted as much as 2 point over par in the gray market.

As stocks closed higher but failed to gain much ground, traders lamented the lack of opportunity in the secondary market outside of selling and that was mostly due to credit concerns.

"The secondary market is just really picked over," said a convertible trader at a hedge fund in New York.

"New issues is the only source of buying opportunity for a lot of us right now, so if there's a deal that looks attractive, people swarm it and it gets rich very quick."

CBRL, which operates the Cracker Barrel and Logan's Roadhouse restaurant chains, launched $150 million in proceeds of zero-coupon convertible senior notes that were talked to yield 2.5% to 3.0% with a 33% to 37% initial conversion premium.

The deal was being sold on swap, as the company said it would use $60 million of proceeds to buy back stock. Thus, it was being well received by hedge funds. The 30-year paper has five years of call protection and puts in years three and five, followed every five years thereafter. Moody's rated it at Baa3.

Analysts put the deal about 3% cheap at the midpoint of guidance, assuming a credit spread of 250 basis points and 33% to 35% volatility in the stock.

CBRL shares closed up 88c to $28.13 but were said to be down by 13c to $28 in after-hours trading. The new deal was not launched until after the closing bell.

Buyers were "climbing all over each other" to buy the EDO deal, as one sellside trader put it.

EDO advanced its deal and upsized it to $125 million from $100 million while pricing at the rich end of guidance.

The EDO 5.25% convertible subordinated notes due 2007, which sold with a 25% initial conversion premium, were quoted up 8.5 points to 108.5 bid as the underlying shares gained $1.08 to $26.09.

The deal sold 2.3% to 5.26% cheap, and as one buyside source put it, "at least the pricing terms weren't tightened right before it was priced."

Using a 750 basis point credit spread and 35% volatility in the stock, JPMorgan analyst Alex Robinson put the deal pricing 2.3% cheap. With a 700 basis points spread and 35% volatility, Bear Stearns & Co. analyst John Wright put it 5% cheap. With a 600 basis points spread and 35% volatility, Wachovia Securities analyst Kimberlee Brody put it 5.26% cheap.

DDi's new deal was upsized as well to $100 million from $75 million and priced at the cheap end of guidance.

The new DDi 6.25% convertible subordinated notes due 2007, which sold with a 22% initial conversion premium, were quoted up 0.125 point to 100.125 bid by one dealer but down 0.25 point to 99.75 bid at another dealer desk. The underlying shares slipped 45c to $26.09.

It was said to be priced 9% to 12% cheap. Using an 1100 basis point credit spread and 55% volatility in the stock, an analyst close to the deal put it pricing 9.5% to 10% cheap. With a 1000 basis points spread and 55% volatility, Bear Stearns analyst John Wright put it 9% cheap. With a 1000 basis points spread and 50% volatility, Wachovia Securities analyst Kimberlee Brody put it 9% cheap.

WebMD Corp.'s new $300 million of 3.25% convertible subordinated notes due 2007 were quoted at 99.25 bid, 99.75 offered by one dealer with the stock up 33c to $7.60.

The secondary market was described as widely mixed and flat in general with a good deal of negative backlash in the telecom and cable sectors stemming from the Adelphia news.

Adelphia's stock and convertibles plunged, but traders said there was some buying late in the session due to the weakness.

"You sleep better at night, ultimately, not owning something like this," so the urge is to sell, said a market source.

"But then, again, I don't see the stock going a lot lower over the next few weeks, so maybe you buy or just hold on to what you have to see if it turns around. Maybe there's a better time to get out, on down the road."

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