FelCor, Albertson's, Regal-Beloit deals emerge; Millennium Chemicals paper boosted by Lyondell buyout

By Ronda Fears

Nashville, March 29 - Convertible traders said window dressing dictated a lot of the trades Monday and contributed to healthy flow for the day, but was dwindling by the end of the day. Beyond the end-of-month and end-of-quarter stuff, players are anticipating another busy week for new issues.

"Window dressing type stuff and profit taking probably accounted for selling in some names like Globespan or UTStarcom," a dealer said.

"The market was good to us today, though, for the most part. Tyco, Lucent, the old standards were a couple of points better."

Albertson's Inc. disclosed plans for a $1.15 billion convertible in tandem with a $1.15 billion stock sale in an SEC filing, but the deal could be anytime during second quarter as proceeds are earmarked for a $2.5 billion acquisition expected to close by mid-year.

More closely at hand, FelCor Lodging Trust Inc. and Regal-Beloit Corp. pitched out small deals for Tuesday's business.

FelCor is shopping a $100 million add-on to its existing 7.8% series A convertible trust preferred - at a discount to the $25 par to boost the yield to between 8.125% and 8.375%. The issue sparked some speculation that the big hotel REIT may be looking to make an acquisition.

Regal-Beloit is marketing $100 million of 20-year senior convertible notes talked to yield 2.5% to 3.0% with a 25% to 30% initial conversion premium.

Meanwhile, dealers said new paper from Freeport McMoRan Copper & Gold Inc. and Chesapeake Energy Corp. was flat.

Reach for yield necessary risk

In general, players and market observers commented that the convertible market was evermore a tough place to find value. And those wanting to pocket any yield to speak of are having to adjust their risk tolerance to accommodate a deeper reach into Junk Land.

Merrill Lynch's convertible hedge index moved slightly lower for the previous week, off 0.05% net of a 2% annual management and a 20% performance fee in the fourth week of March. Spread widening was the main culprit.

But with convertible prices continuing basically to trend higher and higher, players are forced farther out the risk curve to pick up yield. Thus, some wonder if the potential consequences are truly taken into account.

Yet, market observers said there is still money getting poured into convertibles. One suggested a good portion of the money is coming out of bonds into an equity-related market, sans a good portion of the volatility in stocks.

One equity fund manager in Chicago said that with an inevitable "shake out, correction, I'm not sure what it will be or what I'd call it," there will be a serious flaw surface in the strategy to reach for yield.

Another at a hedge fund in Chicago acknowledged that it is "scary" to delve very deep into the high-yield world, but added, "You have to if you are looking for any decent income, capital appreciation, that sort of thing. You certainly aren't going to get paid to pick up any of the new deals."

Albertson's to bag fresh money

With Albertson's planning to bag up $2.3 billion of fresh capital from the convertible and equity markets, many onlookers were expecting a full roadshow to be in order - particularly as the company is just coming off a five-month strike at its stores in California and is now looking at a $2.5 billion acquisition.

The big question, buyside market sources said, will be where the deal is expected to price.

"I might be interested," depending on where the deal is priced, said a holder of Albertson's common stock. In general, the fund manager said he has switched to holding more of the underlying stocks rather than convertibles, due to the richness of the convertible market.

Terms on new deals lately have been aggressive, but some onlookers note that Albertson's is an investment-grade issuer with a relatively strong balance sheet.

Boise, Idaho-based Albertson's, the second largest U.S. grocery and drugstore chain, said last week it would buy Shaw's, which is the second largest grocery chain in the New England area. If the acquisition closes before the capital-raising efforts, Albertson's plans to use commercial paper for the $2.1 billion cash portion of the acquisition and then use proceeds from the offerings to repay the commercial paper debt.

In addition to coming off the longest running grocery union strike in U.S. history, credit analysts noted some increased leverage from the acquisitions near term. But Fitch Ratings, Moody's Investors Service and Standard & Poor's affirmed Albertson's senior debt at BBB/Baa2.

Credit analysts are more concern about competition from Wal-Mart Stores as well as non-traditional retailers selling food.

"The Shaw acquisition is a smart play on behalf of Albertson's. It will add to earnings and revenues, within a relatively short period of time, accounting for the synergies cost," said a Connecticut fund manager.

"Using the mandatory type structure to finance it is very smart, too, because there's less debt on the balance sheet."

FelCor deal sparks M&A talk

FelCor's add-on to its series A 7.8% perpetual convertible preferred, which will be a new issue technically, sparked some speculation that the owner of Embassy Suites, Crowne Plaza, Holiday Inn and Doubletree hotels may be looking to make an acquisition.

The Irving, Texas, hotel real estate investment trust said proceeds from the $100 million offering (CCC) would be used for general corporate purposes, including investments in existing or additional hotel assets, retirement of debt and additional liquidity.

"You have to be impressed that a CCC credit can pull this type of financing off," said a convertible trader at a hedge fund in New York.

"It begs the question, with some of the recent pullback in hotel REITs, whether FelCor may be looking to make a play for something like, say MeriStar."

MeriStar Hospitality Corp., based in Arlington, Va., owns Hilton, Sheraton, Westin, Marriott and Radisson hotels.

FelCor shares closed Monday up 17 cents, or 1.67%, to $10.34. Its existing 7.8% convertible preferred edged up to 24.46.

Millennium climbs 16 points

Millennium Chemicals Inc.'s convertible bonds gained 16 points outright on its acquisition by Lyondell Chemical Co. on Monday. Traders said that although Lyondell is a weaker credit, investors believe that together they will be a stronger force in the chemicals industry.

The $1 billion stock deal will create the third largest North American chemicals producer. The deal, expected to close in the third quarter, involved Lyondell assuming some $1.3 billion of Millennium net debt, including its convertibles. Under deal terms, Millennium shareholders will get 0.95 to 1.05 shares of Lyondell shares, depending on the average price of Lyondell shares before closing.

The Millennium 4% convertible due 2023 gained 4 points to 138 on the news. The stock soared $2.56 on the day, or by 20.5%, to $15.11.

"Lyondell is much more leveraged and this is pushing Millennium considerably father down the credit scale, but the chemical sector is relatively hot right now," said a buyside trader.

"There will probably be a restructuring on the acquisition - job cuts, asset sales, reducing some duplications - that will improve the credit picture, too."

Hunt Valley, Md.-based Millennium has had its share of problems, too, he added. The company has suspended its dividend, laid off employees and restated results due to accounting errors. The company has also had trouble staying in compliance with some of its financial covenants, he added.

Standard & Poor's said Monday it is likely to cut Millennium's ratings on a merger with Lyondell Chemical due to Lyondell's highly leveraged balance sheet.

The watch also will allow for a review of the implications for Millennium's existing debt issues and bank facilities, including the potential for some of the company's debt to accelerate because of change of control provisions, S&P said.

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