Financial Federal bid 100.5 in gray market; Decode Genetics emerges; gaming paper on fire

By Ronda Fears

Nashville, April 5 - Convertibles, like the markets as a whole, were quiet Monday in general and players were anticipating a rather subdued holiday-shortened week. Yet, two small new deals emerged from Financial Federal Corp. and Decode Genetics Inc. for a combined $215 million.

In secondary trading Mandalay Resort Group issued an upbeat forecast for the quarter, stoking the flames of optimism that made gaming paper one of the hottest areas in recent weeks.

Mandalay Bay's floater shot up and Kerzner International Ltd., Caesars Entertainment Inc., Wynn Resorts Ltd. and Gtech Holdings Inc. tagged along as the prevailing mood suggests strong results this year across the entire gaming industry.

The opposite was the case with Concord Communications Inc., which warned that it would likely miss its previous first quarter estimates. The stock got whacked, plunging more than 12% on the day, but traders said the busted convertible bonds actually held up rather well against the pressure.

Nortel Networks Corp. also fell after the Securities and Exchange Commission inquiry into its restatement of financial results turned into a formal investigation. Corning Inc. and Agere Systems Inc. also were sharply lower, but traders noted that Lucent Technologies Inc. found buyers from among those exiting the other issues.

J.C. Penney Co. Inc. announced the long-awaited sale of its Eckerd drugstore chain at $4.5 billion, slightly more than it had been looking to get, but the bonds moved up just about a half point. Although the three-way sale was structured differently than anticipated, the amount was not a surprise; thus, the converts had priced in a transaction months ago.

Rubble from Treasury fallout

Convertible players in the hedge fund community were still licking their wounds caused by the dive in Treasuries that caused a sharp backup in yields on Friday, further compounded by the plunge in stock volatility and premium contraction.

"Obviously, the big news was the huge move in rates on Friday," said a manager running a multi-strategy hedge fund in New York.

"I think people are still sorting out how their hedges worked, didn't work, and [looking at] theoretical values, with rates up so much. With stocks up and vols down and with higher rates, theoretical values are lower."

Another fund manager noted premium contraction was a trouble spot, particularly for holders of interest rate sensitive, longer duration picks, while high premium paper has been unexpectedly resilient.

For mangers not wanting to change the structure of their portfolio due to transaction costs, tax consequences or otherwise, Treasury bonds and futures can hedge interest rate risk exposure.

"Interest rates are trading higher, on the catalyst of a greater-than-consensus non-farm payrolls number. I have seen longer duration securities experience some premium contraction, for example, the GM 6.25% notes," he said.

"Surprisingly, however, many high premium names have not been hit too badly. So many are now trading on a yield-to-call basis that their prices are relatively sticky. This would change should the high-yield market experience a sustained sell off, which though possible would seem to have a low likelihood of occurring soon."

Financial Fed, Decode emerge

Despite the short week and short-handed shops, buyside and sellside, two deals were launched Monday. Both were small, though, which onlookers said should find no trouble getting placed.

Early in the day, Financial Federal launched a quick marketing effort for $115 million of 30-year convertible notes talked to yield 1.75% to 2.25% with a 30% to 35% initial conversion premium, with final terms expected to be set after the closing bell.

In the gray market, a bid of 0.25 point over issue price was seen around noontime. By the end of the day, the new Financial Federal convertible was seen with a bid of 0.5 point over.

Financial Federal shares ended Monday off by 7 cents, or 0.21%, to $33.28.

After the close, Decode Genetics, an Iceland-based genetic research company, launched $100 million of seven-year convertible notes talked to yield 3.5% to 4.0% with a 30% to 35% initial conversion premium with pricing scheduled after the market close Wednesday.

Nothing surfaced in the gray market on the Decode Genetics deal yet, but the stock was down 41 cents, or 3.61%in after-hours trading after closing on the Nasdaq up 20 cents, or 1.79%, to $11.35.

Mandalay casts rosy shadows

The gaming sector excitement ratcheted up several notches Monday on word from Mandalay Bay that strong growth at its flagship property in Las Vegas should push its fiscal first quarter earnings up by nearly double.

"Everybody wants to play this group, right," said a convertible trader at one of the big sellside desks.

"All this paper is pricey, you could argue that, but not really that big a gamble. If these stocks continue the way they're headed, everyone will be paid well."

Right at the opening bell, Mandalay said it sees fiscal first quarter earnings of more than $1.10 per share versus 69 cents a share in fiscal first quarter 2003. It also is far above the First Call analyst consensus estimate of 84 cents a share.

"Our company has continued to achieve strong momentum in revenue per available room on the Las Vegas Strip, at a double-digit clip similar to recent quarters," said Glenn Schaeffer, president of Mandalay, in a news release.

Mandalay is scheduled to report fiscal first quarter results on June 3.

The Mandalay convertible floater sot up to 144 bid, 144.5 offered while the stock rose $3.02, or 5.19%, to $61.23.

Caesars' new floater was range-bound but busy at 101.875 bid, 102.125 offered as the stock gained 49 cents, or 3.61%, to $14.08.

The new Kerzner 2.375% issue gained to 103.125 bid, 103.625 offered with the stock up 29 cents, or 0.64%, to $45.90.

Lottery name Gtech joined the party, but it also reported Monday that it was buying a lottery operator based in the Caribbean for $40 million in cash. The Gtech convertibles were 217.5 bid, 218 offered as the stock rose $1.01, or 1.73%, to $59.41.

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