Agilent issue gains to par on call; Fleetwood in for bumpy ride; Calpine issues up despite warning

By Ronda Fears

Nashville, Aug. 15 - Agilent Technologies Inc. announced Monday a restructuring that includes a cash call for its $1.15 billion convertible. On the news, the issue edged up a little more than a point to around par, while the underlying stock zoomed up nearly 15%, but convertible arbitrage players were hit in the crossfire.

Otherwise, traders said the convertible market felt a little heavy, although upswings were mentioned more than the downdrafts.

Calpine Corp., a chronic problem child in the convertible market, gained on news of a new $150 million preferred deal, although analysts warned of a cash crunch still looming and that the seemingly bondholder-friendly ruling in Canada earlier this month may hide a dangerous omen for creditors.

To the downside, recreational vehicle manufacturer Fleetwood Enterprises Inc. was rumored to be finding a rocky road ahead in its efforts to exchange its old 6% convertible preferreds - which have a backlog of deferred distributions - for new convertible bonds.

Also of note was mention of a volatility play emerging in Abgenix Inc. while typically the summer doldrums provide little impetus for such opportunities. A sellsider spotted a cheap vol opportunity in Abgenix, which is one of a large crop of biotechs viewed to be a prime takeover target.

Abgenix shares ended Monday up 22 cents, or 2.14%, at $10.52. Having run up with the rest of the biotech pack this year, the stock is near the 52-week high of $11.30, but a spike in October call options makes the name look cheap as a volatility play, said the convertible market source. The $10 call options were showing a spike in open interest Monday, to a whopping 11,066, and were bid up a dime.

Agilent news hits convertible arbs

Agilent Technologies' news Monday that it would make a series of asset sales totaling more than $3.5 billion to fund the call of its 3% issue due 2021, among other strategic business strategies, sent the issue up 1.125 points to around par, but convert arb players were hit hard by the run-up in the stock.

The Agilent 3% convertible ended Monday at 100.25 bid, 100.5 offered, a sellside trader said. But, he added that the nearly 15% gain in the stock hurt hedge funds holding the convert, as they were holding it on a delta hedge of around 80%.

Agilent shares rose $3.92, or 14.84%, to $30.33, and the gain was largely attributed to convertible players short covering.

The company said it would fund the call with proceeds from the sale of its semiconductor products segment to Kohlberg Kravis Roberts & Co. and Silver Lake Partners for $2.66 billion and the sale of its stake in Lumileds to Royal Philips Electronics for $950 million.

Agilent also announced it will return the cash proceeds of the divestitures to its owners through a $4 billion share repurchase program to commence immediately. The company also said plans to call the convertible would potentially reduce its outstanding shares by 36 million.

Agilent repositioning positive

In addition, Agilent plans to spin off its SOC and Memory Test businesses as soon as practical in 2006. The company expects the divestitures will be completed by the end of its fiscal year, Oct. 31.

As part of its repositioning as a "pure play" measurement company, Agilent said it expects to reduce its cost structure by $450 million, in part with the removal of about 1,300 jobs as a result of the divestitures and spinoff in addition to some job cuts.

"Removing several volatile businesses should help Agilent management focus on building the testing and measurement equipment operations. Share buybacks could provide another fillip. But investors must still take a leap of faith that the core businesses really can hit, and maintain, growth and margin targets. On revenue growth, both the electronic and bio-analytical measurement businesses have been well short of the new 10% target in recent quarters," said a buyside source from the outright convertible community.

"On operating margins, overhead cost-cutting in conjunction with the break-up should help. But the two businesses made 10% and 12%, respectively, last quarter. That leaves a certain amount to be taken on trust especially since the restructurings of recent years failed to let Agilent hit its 14% profitability target."

The company expects this restructuring to be largely completed by the middle of fiscal 2006, and the roughly $200 million implementation cost to be essentially offset by the proceeds of property and other asset sales as the company reduces its global footprint.

Fleetwood hits roadblock

Fleetwood Enterprises is about to run into a battle with holders of its 6% convertible preferreds who are ready to stand in the path of its efforts to exchange the issue for new convertible bonds, a sellside trader said Monday.

The issue did not trade at all Monday but ended Friday at 52.8125, versus a par of 50. Another sellside trader, however, said he saw a bid of 52 on it Monday that was never hit.

Nearly a month ago, Fleetwood announced plans to make an exchange offer of new convertible senior subordinated debentures due 2025 for all the $201.25 million existing 6% convertible trust preferreds due 2028. But the July 22 filing at the SEC had no terms of the offer, and traders said negotiations seem to be breaking down.

Fleetwood said in the filing that the exchange is intended to reduce its outstanding liabilities, eliminate "all or a substantial portion" of the outstanding deferred distributions on the trust preferreds, reduce its interest expense and improve its capital structure as well as credit statistics. The company said a minimum of $100 million of the preferreds would have to be exchanged for it to proceeds with the offer.

Lehman Brothers, manager for the deal, could not comment on the matter.

"There is an interesting battle starting," one sellsider said.

"The company is in arrears of $13.40. Lehman is trying to do an exchange for debt, which is dumb. They don't need that on their balance sheet. They should just exchange additional common shares. The Lehman deal will not work with large, smart aggressive holders of the preferred, unless the stock [conversion price on a new bond] is struck at a premium - par is 50, so terminal value is 63.40."

Calpine sells straight preferred

Calpine convertibles edged up Monday despite some warnings from analysts circulating through the market, but traders noted that despite the slight uptick there are concerns overshadowing several bits of recent seemingly good news in the story.

Calpine's newest convertible, the 7.75% issue due 2015, added 0.5 point to 94.75 bid, 96.75 offered, said a sellside trader at one of the bulge bracket firms who also put the 4.75% convert due 2023 up 0.375 point at 63 bid, 64 offered and the 6% issue due 2014 up 0.625 point at 80.125 bid, 81.125 offered. Calpine shares closed Monday up 3 cents, or 1%, at $3.04.

The San Jose, Calif.-based independent power producer announced Monday that its subsidiary, CCFC Preferred Holdings LLC, has completed a $150 million private placement of preferred shares that will pay an initial dividend of Libor plus 950 basis points and may be redeemed in whole or in part at any time by the issuer at par plus accrued dividends.

The issue must be redeemed in full on Feb. 13, 2006, and meanwhile the company said proceeds would be used as permitted by Calpine's existing bond indentures. In general, Calpine said the transaction represents another milestone of its 2005 debt-reduction strategy.

CCFC LLC is an indirect parent of Calpine Construction Finance Co. LP. CCFC owns a portfolio of seven operating natural gas-fired power plants with the generation capacity of more than 4,200 megawatts.

Analyst see ruling, cash trouble

Analysts said, however, that Calpine is still facing a cash crunch this year and that the ruling earlier this month regarding the assets from its Saltend power plant sale is a potential power zap to bondholders.

"The most interesting tidbit from the 10-Q is that the company has negative $555 million in working capital," said a buyside convertible trader. "Our analyst suggests Calpine will be fresh out of cash by the end of the year."

CreditSights analysts said in a report Monday that all bondholders should be aware that if the Aug. 3 Saltend decision stands, a dangerous precedent against the principle of pari passu - which provides that holders of the same security must be treated the same - could be set just by dividing the group according to when they bought the bonds.

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