Albertson's mandatories lag as stock surges; Northwest Airlines, Delta weaken further

By Rebecca Melvin

Princeton, N.J., Sept.2 - The unofficial end-of-summer session was quiet in convertibles trading Friday except for a burst in Albertson's Inc., which saw its mandatory convertibles move in on swap as its stock surged as much as 27%.

The moves were spurred by news that the Boise, Ida.-based grocery store chain was putting itself up for sale.

Northwest Airlines Corp. and Delta Air Lines Inc. weakened further on Friday in thin trade, ending a grueling week of losses that resulted from the latest in a series of unfortunate events: still higher aviation fuel prices and supply problems.

The convertibles of Royal Caribbean Cruises Ltd., Chiron Corp., MGI Pharmaceuticals Inc. and Providian Financial Corp. were also mentioned as trading early in the session, but overall it was extremely quiet, traders said.

Some convertibles players headed out even before the early 2 p.m. ET bond markets close to beat the traffic, and "a lot of people didn't come in," one trader said.

Indeed, one buyside source responded to questions from Prospect News from Bermuda via his BlackBerry.

Albertson's in the dead zone

The mandatory convertibles of Albertson's rose on an outright basis, but fell 0.50 point on a hedged basis early in the session. Later it was seen in about 0.25 point delta neutral.

"They're still at fair value. They didn't do too badly," a sellside trader said, referring to convertible arbitrageurs who hedged Albertson's by shorting the stock and being long the convertibles.

"You're in the dead zone as the stock goes up even on this speculation, and you're hurt on the short while the bonds haven't appreciated," another sellside trader said.

The stock was between the mandatories' two strike prices of 23.056 and 28.82.

"With the ratio going down and still hedging at 67%, that's nasty to own; that's probably why they came in," the trader said.

The stock surged as much as 27% to $26.60 during Friday, before closing higher by less than half that amount at $23.02, up $2.29, or 11%.

Short covering was likely to have been behind the heavy trading volume of the stock, which pushed up to 56 million shares, compared to the average three-month volume of 2.9 million.

Albertson's announced right before the open that its board is exploring strategic alternatives to increase shareholder value, including a possible sale of the company.

Albertson's gave no assurance that any transaction would occur nor did it say when, but market observers guessed that it would be in the form of a leveraged buyout from a financial company, and that it was likely to occur in about nine months' time.

Albertson's said it retained Goldman Sachs and The Blackstone Group as its financial advisors.

Convertibles players also suggested large food retailers, like Safeway Inc. and France's Carrefour, as potential buyers, but said that was seen as less likely.

"That would probably raise antitrust problems," said a trader, adding that the company could be broken up to make it attractive to private equity buyers.

Albertson's operates 2,500 stores in 37 U.S. states. Its banners include Albertsons, Acme, Shaw's, Jewel-Osco, Sav-on Drugs, Osco Drug and Star Markets, as well as Super Saver and Bristol Farms, which are operated independently.

After news of the possible sale, Standard & Poor's and Fitch said they may lower their ratings on the company. S&P currently ranks the debt of Albertsons BBB-, its lowest investment grade rating.

"Although the ultimate outcome of this process is uncertain, these strategic alternatives could potentially weaken bondholder protection measures," S&P noted.

Fitch said it assumes these alternatives could include the sale of the company to a financial or strategic buyer in a leveraged transaction. It currently rates Albertson's bank credit facility and senior unsecured notes at BBB and its commercial paper F-2.

The straight bonds of Albertsons plunged after the news and the actions by the ratings agencies.

Albertson's 7.25% mandatory convertible closed up by 1.32, or 5.9%, at 23.60 on an outright basis, but was down about 0.25 on a hedged basis, a trader said.

Northwest, Delta, AMR slump further

The convertibles of Northwest, AMR and Delta were all lower on Friday, extending losses amid uncertainty related to operations, fuel costs and potential bankruptcies in the group.

AMR, the parent company of American Airlines, was further pressured Friday after Goldman Sachs downgraded the airline to "in line" from "outperform."

Due to higher fuel prices, AMR, the world's largest airline, wasn't expected to be able to earn enough going forward to support a higher stock price, Goldman noted.

The news sent AMR convertibles and stock lower. Earlier, Northwest and Delta had drifted lower.

On Thursday, the names dropped amid spot shortages in aviation fuel that began to cause flight cancellations.

"It's weaker, but not much is trading, which is typical for a Friday before a holiday weekend. They were a couple of points lower," a sellside trader said of Northwest's 6.625% convertibles and 7.625% convertibles.

The trader put Delta's 8% convertibles down another 0.50 point at 14.5.

On Thursday, Northwest's 6.625s traded at 43.50, and the 7.625s traded at 36.75. And Delta's 8s traded at 15.

AMR's 4.25% convertible due 2023 at 86.4 bid, 86.9 offered, compared to 86.9 bid, 87.5 offered, according to one sellside shop. And its 4.5% convertible was indicated down by less than 05 point to about 77 bid, 77.5 offered.

MGI Pharma eases after regulators' letter

The convertibles of MGI Pharma were lower Friday after news that the experimental treatment that it wants to market along with Dublin-based partner SuperGen Inc. was "approvable" by regulators, but will require more information before it is allowed to market.

After the close Thursday, Minneapolis-based MGI said it received an approvable letter from the U.S. Food and Drug Administration for its Dacogen (decitabine) injection for the treatment of myelodysplastic syndromes.

The letter said that Dacogen injection is approvable pending a review of requested analysis of the transfusion requirements of patients enrolled in the completed phase 3 trial, as well as submission of other information, and completion of labeling discussions, the company said.

The MGI 1.6821% convertibles due 2024 were indicated down less than 0.50 point at 74.67 bid, 75.67 offered. Shares of the company closed down 64 cents, or 2.4%, at $26.40, retracing most of an early 6% slide.

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