S&P cut puts brakes on El Paso gains; Fleetwood, Agco deals emerge; Interpublic bid 1.25 over issue

By Ronda Fears

Nashville, Dec. 15 - On the weekend capture of Saddam Hussein, the convertibles market began strong but petered out swiftly. The dip in technology stocks, however, supported a heavy load of bids for tech issues, traders said.

El Paso Corp. was a big generator Monday for trading flow on its massive restructuring plan, but the convertible bonds ended the day flat as a downgrade by Standard & Poor's to the credit stemmed a strong gain in the bonds during the morning.

"There was not a lot of flow today in general. It was more of a typical Monday that way," said a convertible dealer.

"We were seeing a lot of bids for tech paper - Lucent, Corning, Adaptec, names like that."

In recent sessions, though, traders have mentioned more sellers, outside of the tech area, that is.

"The market is still better bid, but it looks like there are some people just looking to get rid of some stuff they're ready to get off their books," one dealer said.

Returns for the convertible arbitrage strategy are still looking very good, though, he added.

The CSFB/Tremont hedge fund sub-index for the convertible arbitrage strategy returned 1.25% in November, contributing to the 12.11% gain year-to-date through the end of November.

Merrill Lynch's convertible hedge index is up 14.7% for the year, before fees, through the second week of December.

New paper is where most of the buying is taking place, traders said.

There are four deals pending this week, but there was little gray market activity mentioned by traders other than Interpublic Group of Cos. Inc.'s mandatory convertible, which around the close Monday was bid 1.25 points over issue price.

Two deals were added to the calendar Monday.

Before the open, Fleetwood Enterprises Inc. launched $80 million of 20-year convertible notes talked to yield 5.0% to 5.5% with a 20% to 24% initial conversion premium with proceeds earmarked to buy back portions of its 9.5% and 6% convertible preferreds. The Rule 144A deal is scheduled to price after the close Wednesday.

Then, after the close, Agco Corp. launched $150 million of 30-year convertible notes talked to yield 1.75% with a 23% to 31% initial conversion premium for pricing after the close Tuesday.

Otherwise, the market is looking to Interpublic Group of Cos. Inc.'s $325 million mandatory convertible and Roper Industries Inc.'s $150 million in proceeds of discount cash-to-zero convertible notes.

Also, Taiwanese semiconductor testing firm Advanced Semiconductor Engineering Inc. plans to sell $135 million of five-year convertible notes once the Securities and Exchange Commission registration statement becomes effective.

Along with Agco, after Tuesday's close Interpublic will be pricing its mandatory convert, which is talked to yield 5.5% to 6.0% with an 18% to 22% initial conversion premium.

Buzz in the market also put the Fleetwood deal advancing to price after the close Tuesday.

Sometime around midweek, Roper Industries will be at bat with its 30-year notes, which are talked to yield of 4.0% to 4.5% with a 27.5% to 32.5% initial conversion premium.

Much like the broader market, El Paso began the session very strong. But that was squashed by the S&P downgrade, traders said.

El Paso's convertibles, the 0% bonds, "traded up to 46.5; that was the high, then they fell apart after one of the rating agencies, S&P, around 11 o'clock [Eastern] cut the rating," said a convertible trader.

"They closed at 45.5 bid, 46 offered, essentially unchanged," the trader said. "So, they went up about a point and then came back to end virtually unchanged."

The flow in El Paso convertibles was "busier than usual," he said, given that the restructuring plan was expected to be coming down the pike soon and was not really a big surprise.

El Paso announced a long-range plan that, in the company's words, "defines the company's future businesses, targets significant debt reduction, establishes specific financial goals, and closely aligns compensation with shareholder interests."

"The plan is the roadmap for the future of El Paso," said Doug Foshee, president and chief executive of El Paso, in the company statement.

"It provides the details of how El Paso will reduce debt to $15 billion by the end of 2005, identifies the long-term businesses of the company, details a corporate reorganization that will result in significant cost savings, and establishes a new strategic direction for El Paso's exploration and production business.

"The plan is clear, achievable, and is the first step to making El Paso a strong natural gas provider that generates long-term value for our shareholders. It establishes specific performance objectives and clear milestones so that our shareholders can measure our progress."

The long-range plan aims to reduce total debt to $15 billion at year-end 2005 from $22 billion at Sept. 30, primarily through $3.3 billion to $3.9 billion of additional asset sales, the sale of restructured power contracts and the recovery of $500 million to $600 million in working capital.

Also, El Paso plans the conversion of its 9% mandatory convertible, which is a $575 million liability.

Free cash flow generation and actions already taken in fourth quarter also will contribute to the plan.

The company expects that the majority of its plan will be complete by year-end 2005.

Then, for 2006, the company has targeted $500 million to $725 million of net income, or earnings per share of $0.75 to $1.10, cash flow from operations of $1.9 billion to $2.2 billion with free cash flow after capital expenditures and dividends of $200 million to $400 million. Among other things, the company also aims to reduce costs by $150 million in addition to the $445 million already identified.

El Paso expects to maintain significant liquidity through 2005, based upon operating cash flow generation, $2.1 billion of available cash and lines of credit on Nov. 30 and the completion of planned asset sales.

Still, S&P lowered El Paso's corporate credit rating to B from B+, with a negative outlook.

"The long-range plan released by El Paso has many credit-friendly elements, but considerable risks remain as the company tries to execute the plan," S&P said in the rating release.

If the company is successful, S&P said "it could provide a foundation for stabilizing and eventually improving El Paso's credit profile. The heightened risks during the transition period necessitate a lower credit rating and a continuation of the negative outlook, until some progress on the plan is accomplished."

While near-term liquidity is not a concern, S&P added that the company "will produce enough cash flow to barely cover its debt service as it tackles the challenges in its plan."

Moody's, on the other hand, confirmed the El Paso's ratings (B3 senior implied) with a negative outlook, noting that the plan "provides only a modest near-term change from its pre-existing initiatives and limited immediate change from factors we considered in changing its outlook to negative last month."

"The negative outlook reflects the numerous challenges and extended time frame in executing this plan and our assessment that there will not be a material improvement in the company's credit profile in the immediate future," Moody's said.

The convertible trader said it seemed to be a matter of more closely aligning the ratings of the two agencies - S&P and Moody's. Before the S&P downgrade, he noted, they were two notches apart on El Paso's senior credit rating and now are just one notch apart.

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