First Data's call catches some off guard, Delta reoffered at 97, descends to 95.75 bid; Tyco up

By Ronda Fears

Nashville, Feb. 3 - Convertible volume picked up Tuesday, but traders said the market was overall a bit weaker as more paper was coming in for sale. The market also got another call scare as First Data Corp. called its 2% issue, corralling the bond in by about 2 points.

But the egg of the day was Delta Air Lines Inc.'s overnighter, which was reoffered at 97, even cheaper than originally anticipated at 98 to 99. The deal went south out of the gate to close at 95.75 bid.

Several high-profile issues were higher, however. They included Tyco International Ltd. on blockbuster earnings, the new Teva Pharmaceutical Industries Ltd. convertibles on demand for fresh paper and the Bristol Meyers Squibb Co. convertible on demand from defensive players.

"More things are coming for sale," said one convertible dealer, who stopped short of saying the market was in a correction.

"We're still seeing lots of bids, too. There's just more offers coming in."

Cheapening began last week. Market watchers and players however, said that will not last unless issuance of new paper doesn't accelerate as anticipated.

"Some things just keep coming in and it doesn't really make any sense; there doesn't seem to be any rhyme or reason to it," said a buyside convertible trader at a large hedge fund in New Jersey.

"There's no conviction to any of the selling or the buying. People are just trying to stay busy."

From the accounts of buyside sources, however, even though the market is virtually starved for new paper, the Delta deal stretched the limits of their willingness to play a new deal for the sake of it being a new deal.

Delta pushes, market shoves

"If you said the Delta deal pushed the envelope, then the market shoved back, and hard," one buyside convertible trader said in New York.

Delta sold $325 million of 20-year convertible notes at par to yield 2.875% with a 30% initial conversion premium in the overnight Rule 144A market via bookrunner Morgan Stanley & Co.

The issue was reoffered by Morgan Stanley at 97, according to market sources, after having been talked to be repriced at 98 to 99.

Morgan Stanley closed the new Delta at 95.75 bid, 96.75 offered.

Delta shares ended down 63 cents, or 6%, to $9.82.

"This is just ridiculous, for an airline to sell something at 2.875%, up 30%," said a convertible trader at a hedge fund in Connecticut.

"Just last year, they [Delta] sold a convert with an 8 handle. You would have to give this away, and even then I'm not sure there would be any takers. All the airline paper is in meltdown right now."

Last May, Delta sold $300 million of 8%, up 99.57% converts. Those have declined sharply, sliding another 2 points Tuesday to close at 86 bid, 87 offered.

Virtually all the other airline paper in the convertibles universe was softer Tuesday as well, continuing a weeklong southerly trend after a rally that lasted several weeks. AirTrans Holdings Inc.'s 7% convertible due 2023, for example, has lost 20 points over the past week, or some 10 to 12 points on swap, a dealer said. Some convertible traders believe the slide in airline paper won't subside for another 10 points or so.

Delta's new deal also broke a recent trend of new issue terms richening. Merrill Lynch & Co. analysts said in a report Tuesday that new issue terms richened further last month with the average theoretical discount at-issue dropping from 1.90% in December to 1.38% in January.

There hadn't been cause for a bookrunner to re-price a new deal below par since Dec. 10 when both the Akamai Technologies Inc. and Emulex Corp. bonds were reoffered at roughly 1 or 2 points below par.

But at least one sellside model of the new Delta convertible didn't show in a terrible light.

Deutsche Bank Securities put the new Delta convertible at a theoretical value of 99.65, using a 55% volatility and credit spread of 1,250 basis points over Libor.

First Data converts hit

Late Monday after the market close, First Data Corp. announced it would call its $542 million of 2% convertible bonds due 2008. The decision took many by surprise.

"People got blown away on the First Data call," said a dealer.

"They [the convertible bonds] came in a couple of points."

Despite call scares that lingered throughout most of 2003 along with rising common dividend risk, the trader said the market's focus recently has been on dividends, what with it being earnings season when most companies announce dividends.

First Data's convertible lost 2 points to around par - the call price.

The company said it would finance the repurchase through current operating cash and commercial paper.

Before Tuesday's open, First Data also reported earnings. Net income in fourth quarter rose to $401.6 million, or 55 cents a shares, up from $352.5 million, or 46 cents a share on an 11% gain in revenues. For 2003, net income increased to $1.4 billion, or $1.88 a share, up from $1.24 billion, or $1.61 a share, on a 12% rise in revenues.

Full year cash flow from operations grew to about $2 billion.

The company reiterated its long-term earnings per share growth range of 14% to 17% with long-term revenue growth in the double digits. For 2004, the company expects revenue growth of greater than 20% due to the Concord EFS Inc. merger.

But the merger will entail cash outlays of some $150 million in 2004 and from an accounting standpoint, could negatively affect the 2004 earnings per share range by up to 10 cents per share. This results in an earnings per share range for 2004 of $2.00 to $2.18 from continuing operations.

Tyco soars, not toying around

Tyco also reported strong earnings on Tuesday - its biggest quarterly profit in the two years since the conglomerate came under fire amid an accounting scandal that resulted in its top executives getting arrested and restatements of financials for five past years.

In the convertible market, Tyco's converts are among the more liquid issues that trade almost daily.

On Tuesday, a dealer said the Tyco 2.75% convertible due 2018 was the focus, however, with just a "token amount" of activity in the Tyco 3.125% convertible due 2023.

The 2.75s were quoted up 2.75 points to 132.125 bid, 132.625 offered.

The 3.125s were quoted up 3.25 points to 142 bid, 142.5 offered.

Tyco shares close higher by 70 cents, or 2.58%, to $27.80.

Edward Breen, the chairman of Tyco, said on the earnings call that the company is in discussions regarding 20 potential asset sale transactions and during fiscal first quarter that ended Dec. 31 it closed 47 facilities and cut about 1,200 employees as part of its restructuring program begun last year.

Fiscal first quarter net income rose to $719 million, or 34 cents a diluted share, from $586 million, or 28 cents a share, a year ago. Revenues grew to $9.7 billion from $8.93 billion.

Tyco cut its debt in the quarter by $2.1 billion to $18.9 billion, reporting a debt-to-capitalization ratio of 40.4% at Dec. 31, down from 44.3% at Sept. 30.

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