Walter bid at 100.25 in gray; Manugistics up on IBM deal; insurers, healthcare issues dive

By Ronda Fears

Nashville, April 14 - Concerns about higher interest rates vis-à-vis cost of capital seemed to hone in on the real estate, insurance and healthcare sectors, convertible traders on the sellside said Wednesday.

In insurance, Anthem Inc. - scheduled to consummate a $16.4 billion merger with former convertible name Wellpoint Health Networks Inc. around midyear - was particularly hard hit. Fairfax Financial Holdings Ltd. also took a dive on weakness in the sector along with selling after the company got such a poor response from an exchange offer for its straight debt.

Healthcare names like LifePoint Hospitals Inc. and Community Health Systems Inc. were lower in sympathy with Tenet Healthcare Corp. and HCA Inc., which both had bad news on the tape.

On the positive side, however, Manugistics Group Inc. moved up on reports that it is about to announce a deal with International Business Machines Corp. that would be a boon for its lagging revenue stream.

Convertible traders on the sellside commented that flow picked up as the broader markets started on higher ground Wednesday and really stayed fairly steady even as the major indexes turned south. As evidence mounts of an economy in rebound, the likelihood that the Federal Reserve will move interest rates higher has strung out the markets.

Again, stocks and bonds were lower but by a far lesser degree than on Tuesday when robust retail sales figures sent the markets into a tailspin. A higher cost of capital via rising interest rates was particularly weighing on groups like real estate, financial services and homebuilders.

The new deal on tap from Walter Industries Inc. - a homebuilder as well as dealer in commodity price sensitive industrial products like steel pipe - was feeling some pressure due to those types of concerns as well as a sharp drop off in mortgage applications, but the market's reaction was a mixed bag.

Walter last seen 100.25 in gray

The gray market perked up Wednesday and the Walter deal was active, buyside traders said. It was erratic, though. The paper was underwater early in the day, when stocks were positive, but then traded above par in the afternoon, when stocks backtracked into negative territory.

Buyside sources said the major point of contention on the Walter deal is where to put the credit. One trader also noted that the company's common stock dividend yield of 0.92% also weighed on it.

The $125 million of 20-year convertible notes are talked to yield 3.5% to 4.0% with a 35% to 40% initial conversion premium for Wednesday's business. The notes will be sold on swap, with about $10 million of proceeds slated to purchase shares sold short by convertible note purchasers.

Early Wednesday, the issue had a bid of 0.25 point over issue price in the Street, but later in the afternoon it traded at plus 0.25 and the bid stuck there, with an offer at plus 1.25 points.

Walter 1.5% rich to 2% cheap

Buyside traders were thinking the Walter deal would get priced somewhere around the midrange of price talk. Sellside sources said orders were building nicely and the book was apt to close a little before the market close.

At the midpoint of guidance, Deutsche Bank Securities analysts put the deal 2% cheap, using a credit spread of 375 basis points over Libor and a 38% stock volatility. Deutsche analysts noted that the company generates free cash flow and has reduced debt in recent years from more than $700 million to $113 million.

Another market source put the deal 1.5% rich at the middle of price talk, using a credit spread of 500 basis points over Libor and 38% volatility.

"We're looking at it as a single-B credit," the market source said. "I'm a little wary of it. The business is a little messy, with the pipe segment, coal, that sort of stuff. Of course, buying out KKR would eliminate some of the overhand on the stock."

Walter Industries has agreed to use some $25 million to purchase shares owned by affiliates of Kohlberg Kravis Roberts & Co., which hold a 33.3% equity stake in the company, at an agreed price of $12.75 per share.

The Tampa, Fla.-based company intends to use the bulk of proceeds, together with available cash or borrowings under its senior secured bank revolver, to prepay in full the $113.8 million outstanding term loan portion of its senior secured credit facilities plus fees and accrued interest on that loan.

In addition, Walter Industries has earmarked about $10 million of proceeds to purchase shares sold short by convertible note purchasers. And, any remaining funds may be used for general corporate purposes, including additional share repurchases of up to $25 million possibly from KKR.

Manugistics up on IBM news

Manugistics had a nice day after Forbes.com reported the network software firm would announce on Thursday a major partnership with IBM whereby the computer giant's sales force will begin pushing Manugistics software, and possibly boost Manugistics' revenues by as much as 25%.

The Manugistics 5% convertible bonds moved up about 1 point to trade at 98 and the bid was hanging at that level, a buyside trader said. A sellside shop closed the issue at 98.5 bid, 99 offered.

Manugistics stock also shot up, gaining 53 cents, or 9.89% on the day, to close at $5.89. There also was huge volume in the stock, which the buyside trader attributed to short covering. Some 6.7 million shares changed hands, compared with the three-month running average of 1.5 million.

The Forbes online article quoted Manugistics chief executive Gregory Owens as saying the alliance would start adding to the company's revenue and bottom line by 2005.

Earlier this month, Manugistics reported a fiscal fourth quarter net loss of $56.6 million, or 73 cents a share, versus a net loss of $111.4 million, or $1.59 a share, a year earlier. Revenues dropped to $57.8 million from $65.5 million.

For fiscal 2004, the company posted a net loss of $102.9 million, or $1.42 a share, versus a net loss of $212.2 million, or $3.04 a share, for the previous fiscal year. Revenues declined to $243 million from $272.4 million.

Revenue declines were blamed on weak service revenue, which could be boosted by the IBM pact. In the Forbes article, Owens said the company is not adjusting its earnings guidance but he noted that 30% of Manugistics' sales come from services.

Insurers smacked on rate woes

Worries about higher interest rates brought out sellers for insurance paper on Wednesday, traders said, but there also was news specific to certain names that fueled the selloff, particularly for Anthem and Fairfax.

Anthem's 6% mandatory dropped 1.6344 points on the New York Stock Exchange, or 1.52%, to 105.8056 with the stock closing down $1.02, or 1.11%, to $91.20. A dealer quoted the convertible down 0.75 point to 106.5 bid, 106.625 offered.

A dealer said that in addition to the interest rate concerns, there may be some qualms about the company trying to force the conversion early, ahead of the merger with Wellpoint that is expected around midyear. It would be a similar move to that of Solectron Corp. recently with its mandatory.

Fairfax's 5% convertible bond fell 2.75 points to 104 bid, 105 offered with the stock plunging $8.00, or 4.83%, to $157.52.

Along with the rate fears, a buyside trader said that the company's "lousy" success in getting early participation in its recent debt exchange was a red flag.

Earlier this week, Fairfax announced that just $200.4 million of notes were tendered in its exchange offer, just 37% of the total notes eligible for exchange.

Toronto-based Fairfax was seeking to exchange up to $97.7 million of the TIG Holdings Inc. 8.125% notes due 2005, $275 million of the Fairfax 7.375% notes due 2006 and up to $170 million of the Fairfax 6.875% notes due 2008 for a combination of cash and new 7.75% senior notes due 2012.

Based on the results, Fairfax said it will issue $156.8 million of new notes and pay $57.4 million in cash to tendering noteholders, plus accrued and unpaid interest to the settlement date of April 29.The results were based on an early participation date and included a $30.00 per $1,000 noted incentive payment; otherwise, the exchange offers expire at 5 p.m. ET on April 26, unless extended.

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