CommScope soars to 103.375 bid; New Century up on REIT hoopla; techs, telecoms eyed on weakness

By Ronda Fears

Nashville, March 19 - Convertibles stepped down for the most part Friday but trading was thinner particularly as the day worn on, as many eyes turned from business screens back to the college men's basketball tournament.

Early in the day, the markets were roiled by potential terrorist threats in the United States with Washington, D.C., police dispatched to schools in the nation's capital after a bomb threat. Short selling pressured stocks as no one wanted to be long going into the weekend, especially with so much uncertainty surrounding the al Qaeda standoff at the Pakistan-Afghanistan border.

Convertibles reacted in kind, with most of the market getting marked lower.

All the airline paper continued to trend lower.

However, dealers noted strong interest in several technology and telecom issues, such as Lucent Technologies Inc., Ciena Corp., Veritas Software Corp. and Motorola Inc., a result of weakness over the past three weeks or so.

New paper in circulation this week was mostly standing pat as many of the underlying stocks weakened in Friday's market downdraft. CommScope Inc., however, shot up right out of the gate, after pricing tight to the middle area of the indicative terms.

On the positive side, where there were very few names involved, New Century Financial Corp. moved sharply higher on excitement about real estate investment trusts since the company is considering a transition from being a specialty mortgage bank to a REIT.

CommScope up out of the box

Orders were heavy for the CommScope deal and traders said the buying continued hotly out of the gate with the issue adding more than 3 points by day's end.

"There was excellent execution in this deal," said a syndicate source working on the deal.

"It was oversubscribed, that's all I can say. And it did very well in the aftermarket. Investors see this as a growth story with a lot of potential upside."

CommScope sold $225 million of 20-year convertible notes at par to yield 1.0% with a 33% initial conversion premium - at the tight end of yield talk for a 1.0% to 1.5% coupon and around the middle of premium guidance for 30% to 35%.

Analysts put the new CommScope convertible about 2 to 3 points cheap.

Merrill Lynch & Co., a joint bookrunner on the deal, closed the new CommScope convertible at 103.375 bid, 103.5 offered. It had been bid 0.875 point over issue price in the gray market right before pricing.

CommScope shares closed up 13 cents, or 0.8%, to $16.48.

Hickory, N.C.-based CommScope, which makes cable products, said proceeds would be used to retire all of its $172.5 million 4% convertible subordinated notes due 2006 at a redemption price of 101.7143 plus accrued interest, to repay $25 million of outstanding revolving credit loans and for general corporate purposes.

The company is partly refinancing the bank debt borrowed for its recent acquisition of Avaya Connectivity Solutions. In February, CommScope completed the purchase of the unit of Avaya Inc. for $250 million in cash and about 1.8 million shares of common stock; the company also assumed up to $65 million of liabilities, primarily related to employee benefits.

Analyst says bag Saks bonds

Saks Inc.'s new 2.0% convertible edged up about 0.25 point to 101 bid, 101.5 offered, and was steady on swap, according to a buyside trader, while the underlying shares closed off a nickel, or 0.31%, to $16.22.

Meanwhile, a credit analyst was pounding the table for Saks bonds, speculating the company may reward bondholders similarly to its special one-time $2 per share cash dividend to shareholders that was announced Monday just ahead of the convertible offering.

"Saks is using some of its excess cash to reward shareholders," said Gimme Credit high yield bond analyst Evan Mann in a report Friday.

"In its drive to lower interest expense and boost earnings per share, we believe [Saks] management will use the company's available funds to repurchase higher coupon debt opportunistically this year."

Despite the company repurchasing some $80 million of common stock, reducing debt by $50 million, contributing $70 million to its pension plans, investing $180 million in capital spending and boosting year-end inventory to a level consistent with current sales trends last year, the analyst noted that cash balances at Jan. 31, 2004 were $366 million, up from $210 million a year earlier.

Thus, Mann has a buy on Saks bonds.

New Century pushing higher

New Century Financial continues to rack up the bids, traders said, noting that the company cashed in on gains in REITs on Friday.

The New Century Financial 3.5% convertible due 2008 added 2.25 points outright to 154 bid, 155 offered. The stock rose $1.13, or 2.32%, to $49.86.

"REITs are on fire today and with New Century planning or looking at transitioning to a REIT, they were reaping those windfalls too," a dealer said.

"It's a very interesting situation and we are watching similar stories to see how it goes. Of course, if New Century in the end doesn't choose the REIT route then there will be some dumping."

He specifically mentioned the market eyeing Capital Lease Funding Inc.'s plans to become a REIT.

Lehman highlights vol plays

For volatility watchers in the convertible universe, and there are plenty, Lehman Brothers has begun a new volatility tracking report, which debuted Feb. 24. The report screens stocks' six-month at-the-money option implied absolute volatility for moves of 1 standard deviation away from the one-year average.

With volatility running below average and a positive view on the stock, Lehman analysts suggest consider buying calls for holders of the BJ Services 0.40% due 2022, Cendant 3.875% due 2011, Liberty Media/Motorola 3.5% due 2031, Reebok 4.25% due 2021 or TJX 0% due 2021.

With volatility running below average and a negative view on the stock, Lehman analysts suggest consider buying puts for holders of Xcel Energy's 7.5% due 2007.

With volatility running above average and a positive view on the stock, Lehman analysts suggest consider selling calls for holders of Countrywide Credit's 0% due 2031.

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