CNet pulled, other new deals sweetened; Reliant upsizes as buyers reach for a fat coupon

By Ronda Fears

Nashville, June 18 - As several traders had suggested, pricing just got tougher in convertibles, amidst a steady stream of deals that has pushed issuance to a level suggesting the year will be a gainer from 2002.

CNet Networks Inc. pulled its deal and the four others that freed to trade Wednesday morning were sweetened or priced at the cheapest end of guidance, and three of those closed underwater with the other ending right at par. Cell Therapeutics Inc.'s deal also was downsized to $75 million from $100 million.

Reliant Resources Inc.'s deal, however, offering a fat coupon of 5% (by recent standards in the convertible market), was described by bankers working on it as the "one shining beacon in an otherwise bleak convertible market," and was said to have gotten a "good response from The Street."

Indeed, Reliant upsized its deal to $225 million from $200 million and set the final terms smack in the middle of price talk. The 5% notes have a 45% initial conversion premium.

One banker working on the Reliant deal said the response to the convert, underscored by the stock trading up since the deal was launched, was a "very strong signal to the markets," especially the high-yield market where the energy concern will be pitching a $350 million bond next week.

"With this coupon, everyone was chasing after this deal," said a buyside trader.

When asked if there were concerns about Reliant's credit quality, she said: "Who cares? We figure we've already made money on it. It's bid at 104 in the gray market, so we're not too concerned about credit quality."

The trader said her firm's valuation on the deal put it about 3.5% cheap, using a credit spread of 850 basis points over Treasuries and a 50% stock volatility.

Lehman Brothers analysts put it deal 2.76% cheap, using a credit spread of 900 bps over Treasuries and a 45% stock volatility, but acknowledged the credit assumption might be conservative given the unattractive credit metrics for Reliant along with the bankruptcy concerns that preceded its March 2003 debt refinancing.

Chubb Corp.'s $400 million mandatory also was getting finalized after the close and Genesco Corp. was at bat with a small $75 million note.

Advanced Medical Optics Inc. also was in the market with a small offering. Early Wednesday the company launched the $100 million deal to price after the close. The 20-year notes were talked to price to yield 3.0% to 3.5% with a 32.5% to 37.5% initial conversion premium.

Deals breaking to trade Wednesday from BioMarin Pharmaceuticals Inc., Amylin Pharmaceuticals Inc., Cell Therapeutics and DoubleClick Inc. had not gone so well, judging by the final terms at least.

"Even the greenhorns playing the convertible market these days eventually catch on and will at some point balk," said a convertible fund manager based in Chicago.

"We're not stupid."

Early on, CNet perhaps was a harbinger of tough times, pulling its $100 million deal.

CNet said "terms were not sufficiently attractive," although the new deal had been talked to yield 2.5% to 3.0% with a 55% to 60% initial conversion premium plus a 120% contingent conversion trigger. The proceeds were in part going to be used to take out its 5% converts due 2006.

Then came final terms on the other deals - all at the cheapest end of guidance or even cheaper than the talk had been.

Amylin Pharmaceuticals sold $150 million of five-year convertibles at par to yield 2.25% with a 33% initial conversion premium - cheaply outside price talk that put it at 1.25% to 1.75%, up 40% to 45% - and it sank right out of the chute.

Goldman Sachs, the lead manager, closed the new Amylin convert at 97.5 bid, 100 offered. The underlying stock fell $1.94, or 7.93% , to $22.53.

Cell Therapeutics cut its deal size by 25% and priced the new issue at 4%, up 23.5%. Price talk put it yielding 3.5% to 4.0% with a 25% to 30% initial conversion premium.

Still, the new Cell Therapeutics convert was lower out of the gate and lead manager CIBC Capital Markets closed it at 99.5 bid, 100 offered. The stock closed down another $1.96, or 15.73%, to $10.50.

BioMarin's $125 million deal, at 3.5%, up 30%, sold at the cheap end of guidance for a 3.0% to 3.5% coupon and 30% to 35% initial conversion premium but it also went underwater in the immediate aftermarket.

UBS Investment Bank, the lead manager, closed the new BioMarin convert at 98.5 bid, 100 offered. The stock dropped 51c, or 4.72%, to $10.30.

DoubleClick's new deal was the only one of the bunch that broke to trade Wednesday that was not underwater. The $135 million bonds sold at par to yield 0% but the initial conversion premium of 40% was sweetened from guidance for 46% to 50%.

The new DoubleClick convert was closed by lead manager Citigroup at 100 bid, 101 offered. The stock closed up 19c, or 2%, to $9.56.

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