Six Flags hit by outlook; Charter steady; Delta drifts lower; Trump news stirs sellers in casino paper

By Ronda Fears

Nashville, Aug. 10 - While stocks gained sharply on the Federal Reserve's confidence in the U.S. economy to sustain another quarter-point increase in interest rates, traders said the goings on in convertibles tended to be on a negative bias. Sellside traders said there was more selling into strength rather than buying on weakness, although there were a few exceptions.

"Everyone was happy to see the broader markets turn positive but there are some big negative overhangs in convertibles - Delta is on the brink of bankruptcy, Charter is sort of in limbo, vol [volatility] got slammed hard," one sellside convert trader said at one of the bulge bracket firms.

"Yeah, you could say the Fed move was a vote of confidence on the economy, but the reality is that earnings are not exactly stellar, at least the stories we look at, and the warnings, or negative pre-announcements, just keep coming."

Convertible players, though, said the rise in interest rates is not expected to impact issuance, which is dismally low, because the drop off in activity is more of a function of stock prices, which for many companies is now somewhat depressed. There also is the ongoing uncertainty about contingent convertibles.

Moreover, traders said there's not been a great deal of cheapening in the convertible universe to make issues heading north look attractive.

"You see days where a stock, or the market as a whole, pukes and the converts might drop 5 or 10 points, but the next day or two then they are going right back up," said a sellside market source.

"It's very frustrating."

In an example of convertible players' frustrations, gaming issues were steady in the face of market buzz that Trump Hotels & Casino is on the brink of bankruptcy. Particularly in this sector, traders said there was more paper for sale - such as the Caesars Entertainment Inc., Kerzner International Ltd. and Wynn Resorts Ltd. converts - although prices didn't change much.

Charter Communications Inc. converts also were steady, although the stock dropped sharply on the day. Traders said there were buyers for the paper, however, as a bond analyst was recommending the converts for risk tolerant players.

Delta Air Lines Inc., however, continued to drift lower with the converts decelerating to the low 30s before rebounding to the mid-30s. The converts ended the session off about 2.5 points, after dropping 4 to 4.25 points earlier in the day.

Six Flags Inc. was an exception where there were buyers on the weakness, traders said. The stock and convertible preferreds were hit by the amusement park's earnings, and particularly by the company's lowered guidance, but there were still believers taking advantage of the dip.

Six Flags flagged as discount

The Six Flags convertible is still a buy, perhaps for another couple of months, said one believer.

"It took a beating today. Taking into consideration the current dividend yield and price appreciation to its put date in 2009, it yields approximately 14.8% At the current price it's trading at approximately 8.5 times EBITDA and I value the company more at 7 to 7.5 times EBITDA, so there is the risk that you could end up with nothing," the buyside source said.

"Six Flags really lowered their guidance today, much more than I think the Street was prepared for, so I would expect some negative remarks out of Wall Street analysts during the next several days, which could drive the preferred down further. I expect S&P to lower its rating and perhaps Moody's, too, after Six Flags' next earnings release. Then may be a better time to buy."

After Monday's closed, the New York-based theme park operator reported a net loss of $12.3 million, or 13 cents per share, which was narrower than a net loss of $17.8 million, or 19 cents per share, a year before. Revenue came in at $356 million, down form $361 million, as attendance decreased 4%.

In its earnings call, Six Flags executives said they expect EBIDTA growth to slow from $40 million to $25 to 30 million in 2006. Also, however, the company said it bought back $161 million of public debt since the end of first quarter.

The Six Flags 7.25% convertible preferred slid 0.5 point to 17.25 bid, 17.75 offered, according to a sellside dealer. On the New York Stock Exchange, the issue was off 0.61 to 18.39.

"It looks like there was a lot of buying on the price drop," the dealer said.

Six Flags bonds were quoted down 2 to 3 points on the news, with the 9.5% bonds due 2009 at 94.5.

Six Flags stock lost 46 cents, or 11.65%, to $3.49.

Casinos risk/reward odds bad

Trump Hotels & Casino's upcoming return trip to bankruptcy court, following its first restructuring in 1992, was a catalyst for selling convertible casino paper, buyside traders said. With mergers in that sector in recent history - MGM Mirage/Mandalay Bay and Harrah's/Caesars - slamming convertible holders, the risk is getting too great to play, traders said.

In June, MGM Mirage agreed to purchase the Mandalay Resort Group for $4.8 billion in cash, followed a month later by a deal for Harrah's Entertainment Inc. to buy Caesars Entertainment Inc. for about $5.2 billion, and further consolidation in the industry is expected. In both cases, the convertibles of Mandalay and Caesars were crushed by the lack of cash takeover protection for bondholders.

"Consolidation in the [gaming] industry has not been friendly to convertible investors," one buyside convertible trader said.

Casinos in Las Vegas and Atlantic City have been undercut by the growth of gaming operations on Native American reservations and the weaker economy, another buyside trader said.

Charter risky, but yield-worthy

Gimme Credit bond analyst Shelly Lombard said in a report Tuesday that if you can stomach the risk, Charter's convertibles is one of the best ways to play the name.

"Risk-tolerant investors who want to hitch their wagon to Mr. Allen should consider the 2005 convertible bonds at the parent company level which mature 18 months earlier than any of the Holdings debt. The bonds trade at similar yields to worst of 16% to 17% but offer a lower current yield. Charter has enough availability under its revolver to retire the convertibles at maturity but covenants may prevent it from upstreaming cash to pay the interest and principal due in 2005," Lombard said in the report.

"Buyers would be betting that Mr. Allen [Charter chairman Paul Allen] won't stand by and let the company blow up next year but would figure out a way to handle the convertibles and buy himself more time to work out a longer term solution. In a worst case scenario, the incremental value needed to cover the convertibles is only $120 per subscriber or 0.4x EBITDA."

Buying the bonds at the Charter Holdings level takes more faith, she said, but added she would be comfortable with most of the Charter debt at CCHII and below.

Charter's 5.75s of 2005 were steady at 89 bid, 90 offered and the 4.75s of 2006 also were steady at 85.75 bid, 86.75 offered. The stock on Tuesday dropped 12 cents, or 3.91%, to $2.95, however.

Delta debt cut by Moody's

Delta's bonds continued to drift lower Tuesday, amid a downgrade by Moody's that, as one buyside trader put it, "cemented the belief that bankruptcy is around the corner" for the Atlanta-based air carrier.

Delta's converts dropped at one point by 4 to 4.25 points with the 8s at 32 bid, 34 offered and the 2.875s at 34.75 bid, 35.75 offered. However, the buyside trader said there was a buyer in early afternoon that pushed the issues to the mid-30s.

The converts ended the session off about 2.5 points, with the 8s at 34.25 bid, 35.25 offered and 2.875s at 36 bid, 38 offered.

Delta shares fell another 25 cents, or 6.53%, to $3.72.

The Delta junk bonds were seen losing around 4 points, with the 7.7s of 2005 at 42 bid, 44 offered, down from 46 bid, 48 offered.

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