Lions Gate, BlackRock, Sybase weak; Sepracor's older convertibles bleed; Fannie credit holding up

By Ronda Fears

Nashville, Feb. 18 - Convertible players were in slow gear moving into an extended weekend due to the markets being closed Monday in observance of Presidents Day. Amid lousy inflation data and rising oil prices, many just took off early rather than scroll through screens of sagging convertibles.

"Everything is feeling pretty heavy right now," a sellside convert trader said, adding that the external factors impacting convertible prices was mitigated by the thin trading volume.

To many players, though, the economic data Friday was viewed as a harbinger of perhaps a substantial correction in the convertible market based on the reaction in the broader markets, not the least of which was an extended sell-off in Treasuries that exasperate the back-up in yields. But, while the pain to portfolio returns is not exactly welcomed, many acknowledge the need for rationalization and some add that the situation would open a buying window.

"The inflation numbers, the PPI, was not good," said a buyside trader.

The increase reported Friday by the Labor Department in the Producer Price Index was most disturbing, onlookers said, because the core index figure excluding food and energy jumped by 0.8% - four times what analysts had been expecting and the biggest one-month jump since a 1% increase in December 1998.

"One month does not make a trend but it does illustrate the complacency in the markets," the trader said. "That's all changing now. As for converts, it sucks; it's horrible. It's like the hockey strike, we've overpaid for a lot of the new issues that came and now we're having to pay the piper."

New paper recently put into circulation was indeed easier Friday, including the latest Lions Gate Entertainment Corp. convertible. BlackRock Inc.'s 2.625% issue was at 100.875 bid, 101.375 offered with the stock at $80.85, down from 101 bid at the close Thursday; BlackRock shares ended Friday up 28 cents, or 0.35%, at $80.53. Sybase Inc.'s 1.75s slipped to 100.5 bid, 101.5 offered, off from 101 bid Thursday, with the stock at $18.74; Sybase shares closed Friday off 11 cents, or 0.58%, at $18.78.

Lions Gate prices at cheap end

Lions Gate printed its $150 million convertible with a 3.625% handle and 38% initial conversion premium - at the cheap end of guidance for a 3.125% to 3.625% coupon, up 38% to 43% - but the issue failed to rouse much action.

"Dead," in fact was the most common adjective attached to Lions Gate's third convertible in relation to trading Friday. Buyside traders said it broke without a bid, offered at 100.5, and the only two-way market spotted showed a bid at 99.5 with the offer still at 100.5.

Lions Gate shares ended Friday down by another 49 cents, or 4.73%, at $9.86.

The Santa Monica, Calif., filmmaker has earmarked proceeds to repay its bank revolver and possible facility acquisitions as well as stock buybacks, possibly from short-sellers participating in the convert.

"Looks like it probably is just sitting in a handful of buyers' hands," said a hedge fund trader. "We haven't seen the convert at all today."

Sony chatter prompts risk arbs

While some onlookers thought buzz that Lions Gate could be ripe for a plucking by the likes of a Sony was "a leap," the noise has already impelled a risk arb play in the name.

"We took a pass on the convert. No thanks," the hedge fund trader said. "We are setting it up on a risk arb, though, buying the stock and selling calls at a premium."

There are "lots of believers," he said, in an article two weeks ago in the Hollywood Reporter which regurgitated rumors that Lions Gate could be a takeover target of Sony and/or Metro-Goldwyn-Mayer. He said the Sony angle is "probably more probable," but there could be other suitors for Lions Gate.

Earlier this month, Lions Gate increased its financial guidance, moving its projection for fiscal 2005 adjusted net earnings to $35 million from $25 million. The company expects to end the fiscal year, on March 31, with free cash flow of more than $80 million and revenue of more than $750 million.

Sepracor issues hemorrhage

Takeover speculation targeting Sepracor Inc., however, caused "a bloody mess" for its in-the-money convertibles, buyside traders said, although the biotech concern's newer zero-coupon issue and older 5% converts were doing "okay" in the face of the news.

"I'm going to guestimate that arbs were hit probably 15 to 20 points on the older zeros, the As and Bs, since they have no takeover protection language," one holder said. "That's a collective estimate, from the damage on both Thursday and today [Friday]."

After adding 8.44% on the rumor Thursday, Sepracor shares on Friday traded as high as $66.55 before easing back to close at $64.70, for a gain of $1.10, or 1.73%, on the day.

Marlborough, Mass.-based Sepracor has approval pending for a sleeping pill that it says could bring in up to $1 billion sales and already markets a treatment for asthma, plus earns royalties on sales of other drugs marketed by Aventis and Schering-Plough.

Take a load off Fannie

Comments by Federal Reserve chairman Alan Greenspan urging restrictions to the growth of Fannie Mae's portfolio, which increases risk to the United States government by virtue of its sponsorship of the quasi-government agency, pressured the stock, but traders said the credit was holding up rather well.

Fannie Mae's 5.375% perpetual convertible preferred was quoted off a quarter-point at 101.25 bid, 101.75 bid with the stock at $58.72.

"The best trade of the year was buying the FNM preferred and shorting common when the deal came [in early January]," said one trader. "The stock is down 11% and the preferred is still up 2."

Fannie Mae shares on Friday lost $1.71, or 2.82%, to close at $58.90. When the convertible came to market in January the stock was at about $70.

CMS short paper at risk of call

Credit spreads for CMS Energy Corp. widened out Friday, which traders blamed in part on widespread concern about call risk to the power firm's shorter dated paper, and the convertibles were easier by 1.25 to 2.25 points.

A report from Merrill Lynch credit analyst David Silverstein earlier in the week was at the heart of the increased concern about call risk, one sellside trader said.

"The credit is cracking and basically the convert market feels these [convertibles] are just too pricey," he said.

Merrill changed its recommendation for CMS bonds to overweight from neutral earlier in the week, based on a view that the company's liquidity outlook remains strong and bonds maturing through 2009 are candidates for a tender.

"While continued improvement in CMS' credit profile appears long-term, we believe there exist opportunities to accelerate this process through the application of cash on hand, tendering for maturities through 2009 and issuing new callable and non-callable debt," Silverstein said in a report.

"Given CMS' strong liquidity position and economics we see available in the market, we believe CMS would benefit from a refinancing of $1.1 billion of senior note maturities between now and the first quarter of 2009. We estimate the total value of the tender would approximate $1.3 billion, of which $300 million could be funded with cash on hand.

"This would leave the parent with a little more than $200 million of availability on its credit facility, which we see as adequate given our view that the parent should be FCF positive. The balance of the tender could be funded with a combination of callable and non-callable debt in the form of term loans and/or bonds."

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