Atlantic Coast up 1.25 points in gray market; CP Ships, Fisher, Sovereign gain out of the gate

By Ronda Fears

Nashville, Feb. 19 - Convertible trading continued at a nice clip Thursday with help from a fresh crop of paper, traders said. Despite the short holiday week, five new issues totaling $2.2 billion turned up - including a $900 million deal from AngloGold Ltd. that was pricing intraday.

Atlantic Coast Airlines Holdings Inc. was the only pending deal seeing activity in the gray market, with a bid late in the session of 1.25 points over issue price for the $125 million deal.

Meanwhile, new convertibles from Fisher Scientific International Inc., CP Ships Ltd. and Sovereign Bancorp Inc. were all higher in the immediate aftermarket.

Elsewhere in secondary action, dealers noted considerable flow in General Motors Corp. and Ford Motor Co., chiefly due to those being very liquid issues. GM's three converts and Ford's 6.5% convertible preferreds were slightly higher.

"There were some movements because of earnings but there really wasn't a whole lot of news specifically moving our market or particular converts," one dealer commented.

Walt Disney Co. was still a very active name in converts, too, moving sideways to slightly higher.

Flextronics International Ltd. was another range bound issue with a lot of activity.

"It was sort of a crazy day in the markets with Treasury yields backing up, then going flat and the dollar was stabilizing," said a buyside convertibles trader.

"So, we were mostly trying to focus on the new issues in converts. There's been several over the past two or three months that are becoming interesting."

Going for the gold

At the open Thursday, AngloGold Holdings plc, a unit of AngloGold, launched $900 million of five-year convertible notes to price intraday with price talk for a yield of 2.125% to 2.625% with a 60% to 65% initial conversion premium.

Buyside sources said there was nothing showing up for the AngloGold deal in the gray market, but it was a popular item.

"We've been told this is way, way oversubscribed," said a convertibles trader at a huge hedge fund in New York. "With gold prices where they are, this is perfect."

Gold futures were weaker Thursday with the April contract ending at $410.30 an ounce, down $2.50. But the convertibles trader said there seems to still be a bullish outlook for the precious metal and the stocks directly linked to it.

The South African gold concern said proceeds would be used to reduce debt, to fund costs related to the proposed merger with Ashanti Goldfields Co. Ltd. and for general corporate purposes.

AngloGold said last week that the pending merger with Ashanti Goldfield, based in Ghana, would make it the world's largest gold mining concern and boost its ore reserves by 30%. AngloGold reported its total ore reserves fell in 2003 by 9.2 million ounces to 63.1 million ounces. The merger is expected to be completed in April.

AngloGold shares ended in the United States down $1.39, or 3.3%, to $40.69.

Atlantic Coast flies solo

Atlantic Coast, which just a couple of months ago staved off a merger proposal from Mesa Air Group Inc. and is in the process of stepping away from the security of ties with big airlines to fly an independent (literally) airline, was the only mover in the gray market all this week.

The $125 million of 30-year convertible senior notes - talked to yield 5.75% to 6.25% with a 40% to 45% initial conversion premium - was stuck at a bid of 0.25 point over issue price for most of the morning. But buyside traders said the bidding picked up after the management call on the deal, closing out the day with a bid of 1.25 points over.

Merrill Lynch & Co. analysts put the deal 4% cheap, at the middle of guidance, using a credit spread of 850 basis points over Treasuries and 45% volatility.

Lehman Brothers analysts put it 1.5% cheap, at the midpoint of price talk, using 1,050 basis points over Treasuries and 47% volatility.

Atlantic Coast shares ended down $1.14, or 13%, to $7.64.

Late in 2003, Mesa Air Group abandoned efforts to gain control of Atlantic Coast, which was tied to an agreement with United Airlines, which Atlantic Coast contested. In mid-December, a judge agreed with Atlantic Coast that there were antitrust conclusions that would be an obstacle in a merger with Mesa.

Standard & Poor's rated the Atlantic Coast convertible CCC with a negative outlook, noting the company's planned transition to an independent low-fare airline entails significant risks.

Atlantic Coast currently operates two regional airlines that offer feeder service for both United Air Lines Inc. and Delta Air Lines Inc. under fee-per-departure agreements, which removes virtually all the risks for Atlantic Coast.

Last July, though, Atlantic Coast announced that it planned to establish a new low-fare, independent airline - Independence Air. In addition, the company said it anticipated its relationship with United will end when United exits from bankruptcy protection and its new operating strategy may lead to ending the partnership with Delta.

Independence Air expects to begin operations by Nov. 1.

Merrill Lynch & Co. equity analyst Michael Linenberg said he didn't expect Atlantic Coast to be profitable until 2006, but 2004 is a milestone for the airline.

"This year should be a year of transition for Atlantic Coast as it moves away from its contract flying for United to becoming Independence Air," Linenberg said in a recent report.

"As such, Atlantic Coast is already incurring start-up costs for its new operation. Introduction of new aircraft and brand development are key expense items for 2004. Given the uncertainty of Atlantic Coast's transition, the stock is likely to tread water at best."

New paper trending higher

While the gray market hasn't been a bundle of activity before new deals price, this week's fare of fresh convertibles was doing very well in the immediate aftermarket.

Sovereign Bancorp's $700 million 30-year convertible preferred priced to yield 4.375% with a 35% initial conversion premium - at the cheap end of price talk for a yield of 3.875% to 4.375%, up 35% to 40%.

Sole bookrunner Lehman Brothers closed the new Sovereign convert, which has a par of 50, at 50.375 bid, 50.625 offered. Sovereign shares ended off 51 cents, or 2.24%, to $22.21.

CP Ships' $175 million of 20.4-year convertible senior subordinated notes were priced to yield 4.0% with a 35% initial conversion premium - smack in the middle of price talk for a yield of 3.75% to 4.25%, up 32.5% to 37.5%.

RBC Capital Markets, a joint bookrunner on the CP Ships convertible, closed the issue at 103.5 bid, 104.5 offered. CP Ships shares ended in the United States down 60 cents, or 3.21%, to $18.08.

Fisher Scientific's new 3.25%, up 50% convertible - which priced at the cheap end of yield talk for a 2.75% to 3.25% coupon and at the middle of premium guidance of 47.5% to 52.5% - gained 3 points to 103.5 bid, 104 offered. The stock closed up $1.38, or 2.57%, to $54.98.

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