Cheniere Energy plunges; El Paso gains; Legg Mason slips; Fannie Mae, TTM flat on debut; AIG to price

By Rebecca Melvin

New York, May 9 - Cheniere Energy Inc.'s convertibles dropped hard along with a 32.5% slide in its underlying shares Friday. The developer of liquefied natural gas terminals reported a wider first-quarter loss and talked about steps being taken to reduce ongoing operating costs and capital requirements and increase cash to maintain adequate liquidity.

El Paso Corp. edged higher, however, continuing a move started earlier this week, ahead of the natural gas transmission and E&P company's earnings posted on Thursday. It swung to a first-quarter profit and lifted guidance sharply, citing higher fuel prices and its hedging strategy.

The newly issued Legg Mason Inc. convertibles lost for a second consecutive day after posting a gain on its debut on Wednesday.

Mylan Inc. convertibles were also lower as their shares dropped 8% after the generic drug developer cut profit guidance going out several years.

Overall, market trading was characterized as very quiet again. "I think we're heading for an early summer," a West Coast-based sellside trader said regarding market activity.

Other than the focus on new issues, including Fannie Mae, TTM Technologies Inc., and American International Group Inc., which is expected to price convertible equity units on Monday or Tuesday, there wasn't much happening today or all week, he said.

Fannie Mae did "OK" on its first day of trading in the secondary market, a New York-based buyside trader said. It slipped early with its underlying shares but regained when the shares moved up. "They were pretty much at issue," he said of trades in the new Fannie Mae 8.75% mandatory convertible preferred.

Likewise, TTM Technologies' new 3.25% convertibles were reported to have traded at issue, with a market right around 100.

In addition, Inverness Medical Innovations Inc. closed its acquisition of Matria Healthcare Inc., which spawned the issue of about $720 million of perpetual convertible preferreds, yielding 3%, which were part of the payment to holders of Matria shares.

Lehman Brothers' convertibles research team recommended that investors buy the Inverness Medical preferreds over the common given their attractive risk-reward profile of 87% upside, 52% downside.

The analysts valued the preferred, with a face value of $400, at roughly 250 using a credit assumption of Libor plus 800 basis points and volatility of 35%.

Cheniere slides 8 points

Cheniere Energy's 2.25% convertibles due 2012 dropped about 8 points as its underlying shares spun into a freefall, sliding 32.5% by the end of the session.

One source quoted the 2.25% convertibles as low as 46.5 versus a stock price of $5.91. But others put the market at about 50 bid, 52 offered, with a trade reported at 51.

"The stock was down 30% to 40%, and the bonds came screaming in. They definitely had some financing issues. They got secured debt at 16%," a New York-based buysider said.

"There were definitely a couple of things in there that spooked investors," another source said of the earnings news.

The Houston-based company reported a loss of $49.9 million, or $1.06 per share, for the first quarter of 2008, compared with a net loss of $34.6 million, or $0.63 per share, for the year-earlier period. It cited costs associated with the startup of its Sabine Pass LNG receiving terminal and Creole Trail pipeline for the results.

In response to the poor performance the company said it was downsizing marketing operations and reducing staff and overhead costs, and in addition increasing unrestricted cash, including obtaining a secured credit facility - which bears interest at 16.458% and matures in November 2009.

"Subsequent to March 31, we received $82.3 million of net proceeds from the secured credit facility and we expect to receive $35 million to $40 million of unrestricted cash from the winding down of our marketing operations," the company said in a news release.

In February, the company said it was exploring strategic options to maximize shareholder value.

Shares of Cheniere (Amex: LNG) ended at $5.34, down from $7.91.

El Paso gains strength

But El Paso reported stronger earnings that indicated a "very impressive increase in credit metrics," according to a report by independent research firm CreditSights.

CreditSights said that leverage was down to 3.4x from 3.8x and that the company generated its first quarter of free cash flow in more than two years.

"We like the additional 2008 and 2009 E&P hedges put in place that puts a floor price on about 68% of 2008 and a little less than a third of 2009 expected production," the CreditSights report said.

"We continue to view El Paso's bond/CDS as a nice source of safe yield pick up but with no change from the April analyst meeting comments that management is seeking to grow into investment-grade ratings rather than make a transaction, we see IG status as about two years away."

The El Paso 4.99% perpetual convertible preferred was at about 1,545.7 versus a stock price of $19.23 on Friday, up from a trade at 1,477.5 versus a share price of $18.125 earlier in the week.

Shares of El Paso (NYSE: EP) ended up 11 cents, or 0.6%, on Friday.

Legg Mason, Mylan weaker

The Legg Mason 7% mandatory convertible equity notes due June 2011 edged lower to 49 versus a share price of $55.09. On the first day of trade it had gained to 51.

"I think it's cheap," a buysider said of Legg Mason, predicting that the paper will regain strength.

"It's a tough tape for buying and holding, unhedged. That's the way to do these things. If you go back, not one popped for about two weeks. That's how long it takes to hedge these up the right way," he said, referring to recent financial new issues including Wachovia's.

"So you buy them as they go down, but you have to have ice in your veins to do it; and you have to be selective," he said.

Shares of the Baltimore-based asset management company (NYSE: LM) retraced early losses on Friday to end essentially flat, or up 0.2%, to $55.09.

Meanwhile, Mylan's 1.25% convertible bonds were down about 2 points outright from its last trade. There was a market at 82.75 versus a share price of $11.25 on Friday, compared to a trade earlier in the week at 84.92.

The Canonsburg, Pa.-based generic drug maker issued a new financial forecast that was well-below many estimates. Mylan said it now sees 2008 adjusted earnings coming in by well over half to between 40 cents and 50 cents a share, with 2009 earnings pegged at between 90 cents and $1.10 a share.

Mylan, which recently acquired the generics drug division of German conglomerate Merck KGaA, also cut 2009 and 2010 guidance.

Mylan stock (NYSE: MYL) fell $1.04, or 8.4%, to $11.42 on Friday.

Upsized Fannie Mae remains at issue

Fannie Mae's new 8.75% mandatory convertible preferred traded right around issue price of 50 as its underlying shares wavered too.

The Washington, D.C.-based mortgage lender priced an upsized $2.25 billion of non-cumulative mandatory convertible preferred stock, series 2008-1, with an 8.75% dividend and an 18% initial conversion premium.

The deal came at the rich end of dividend talk of 8.75% to 9.25% and the cheap end of premium talk of 18% to 22%. It was increased from a planned $2 billion amount.

Each $50 liquidation preference share will convert into between 1.5408 and 1.8182 shares on May 13, 2011. They are convertible any time at the 1.5408 ratio.

The preferreds have a greenshoe for $337.5 million. J.P. Morgan Securities Inc., Lehman Brothers Inc. and Banc of America Securities LLC were joint bookrunners. Goldman, Sachs & Co. and Merrill Lynch were co-managers.

Fannie Mae also priced $2.25 billion, or 82 million shares at $27.50 each.

Fannie Mae shares (NYSE: FNM) closed down 18 cents, or 0.65%, at $27.91.

"Fannie Mae did fine. It traded down a little with the stock, but it's up a little now," a buysider said.

Upsized TTM issue still at par

The new TTM Technologies 3.25% convertibles closed at about 100 versus a flat closing stock price (Nasdaq: TTMI) of $12.54, up 2 cents.

The Santa Ana-Calif.-based technology company priced at the midpoint of talk an upsized $155 million of seven-year convertible senior notes to yield a coupon of 3.25% and an initial conversion premium of 27.5%. Originally, the off-the-shelf offering was expected to be for $125 million.

Joint bookrunners are J.P. Morgan Securities Inc. with 60% of the economics and UBS Investment Bank with 40%. There are no calls or puts.

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