Rite Aid lingers at par; Beverly drops to around parity on buyout; Fleetwood firms, Mercury steady

By Ronda Fears

Nashville, Aug. 17 - Rite Aid Corp.'s new convertible held at issue with little activity Wednesday, and that was pretty much the observation for the convertible market as a whole, which is typical for mid-August.

"The market has been really quiet this whole week. The volume is a lot less than normal," said a convertible trader at one of the bulge bracket firms, noting a lot of players are out on vacation in August. Those who are in the office, he added, "don't want to play in an illiquid market."

For a second day in a row, Delta Air Lines Inc. convertibles were a little better but activity trailed off sharply Wednesday, traders said. One sellside trader said the issues really were sort of in a holding pattern, hovering in the low teens. Another sellsider said he was holding his position, but speculated a bankruptcy filing for the Atlanta-based legacy carrier would trigger a buying spree.

Rite Aid prices wide, flags

Rite Aid sold the small $115 million issue of 3.25-year mandatory convertible preferreds at par of 25 to yield 5.5% with a 20% initial conversion premium - at the wide end of guidance for a 5.0% to 5.5% dividend and initial conversion premium of 20% to 24%.

Still, the issue opened at par in the immediate aftermarket and never really came off the issue price, a buyside trader said. A sellside trader said very little activity in the issue was seen at all Wednesday, which he partly attributed to the thin market overall in convertibles.

The Camp Hill, Pa.-based drugstore chain plans to use proceeds, along with cash on hand, to take out its 8% series F cumulative convertible pay-in-kind convertible preferreds at 105 plus accrued interest.

Rite Aid shares closed up a penny Wednesday at $4.43.

Beverly 2.75s drop 6.25 points

Beverly Enterprises Inc.'s convertible traded down about 6.25 points Wednesday to slightly over parity on news of the Fort Smith, Ark.-based nursing home operator's $1.9 billion buyout. Beverly shares traded down 3% as the price tag was off roughly 1% from the stock's close on Tuesday.

The sale of Beverly has been anticipated for more than six months now so the news was not entirely a surprise, but the price tag was a big disappointment, players said. Beverly put itself on the auction block to take bids in March, on the heels of an unsuccessful takeover offer from Formation Capital in late December for $11.50 a share.

"A lot of optimism was priced into the stock and the convert went along for the ride," said one buyside trader. "Beverly's 52-week high went to $13.18, a lot more than the Formation bid at $11.50. It's been well over $12.00 for the several months now, so this was really a low-ball offer."

The 2.75% convertible was quoted at the close at 0.5 to 1 point over parity, which was pegged at around 168.5. Beverly shares lost 39 cents, to 3.01%, to end at $12.55. Conversely, Beverly's junk bonds gained ground on the news, with the 7.875% bonds up nearly 3 points to 112.5.

North American Senior Care Inc. is buying Beverly for $1.9 billion in a cash deal, including the repayment of Beverly debt, which amounts to $12.80 a share versus Tuesday's close of $12.94.

North American is an entity that was created for this transaction. Its sponsors, who have not been identified, have acquired 400 nursing facilities in more than 35 states, according to the parties. Beverly executives said the selling price came after a "robust" bidding process in which it contacted 47 potential buyers that resulted in 10 making initial bids.

Fleetwood puts brakes on plans

Recreational vehicle manufacturer Fleetwood Enterprises Inc. abandoned the exchange offer for its 6% convertible trust preferreds, saying it had become "uneconomical" since the convert has risen against the drop in the underlying common stock.

The 6% issue on Wednesday was quoted a half-point higher at 52.5 on the event and Fleetwood's 5% convertible bonds climbed 1.25 points to 116.5 bid, 117.5 offered, while the stock added 15 cents on the day, or 1.49%, to $10.19.

On Monday, traders had told Prospect News that Fleetwood was running into a roadblock in the exchange effort, and by late Tuesday, the company announced it would forfeit the exchange plans. On Wednesday, the company filed the withdrawal at the Securities and Exchange Commission.

Fleetwood had begun the exchange effort July 22, aiming to exchange new convertible senior subordinated debentures due 2025 for all the $201.25 million 6% convertible trust preferreds due 2028. The company is in arrears to the tune of $13.40 on the par 50 issue, so traders figure it is trading nearly 11 points below accreted value of 63.40.

Mercury issues easier on news

Mercury Interactive Corp. shares pulled back but its two convertible issues were described as steady to a little easier Wednesday on the company's statement in an SEC filing that it anticipates a high likelihood of "material" restatements to past financial reports.

The 4.75% convertible edged off par to around 99 bid, while the 0% issue was steady at 94.5, a sellside trader said. On Tuesday, the 0% convertible, which was one of the infamous "no-no" zero-coupon issues sold at par in foregone days when the convertible market was hopping, was said to have climbed to near par, but the sellsider on Wednesday said he never saw it hit par.

Part of that dip was some rethinking about moving the issues to around par on speculation that its late filing of financial reports at the SEC, which prompted a Nasdaq delisting on Friday, would trigger a default. The 8-K filed late Wednesday at the SEC, which referred to the restatements, may push the issues lower, the trader said.

Mercury shares on Wednesday lost 14 cents, or 0.37%, to close at $37.78 but in after-hours trading were seen lower by another 58 cents, or 1.54%.

Mercury files 2Q estimates

On Monday, Mercury shares began trading over-the-counter, after the Nasdaq delisted the stock after it failed to meet a deadline to file its quarterly report with the SEC. The company has 60 days to cure the situation by filing its financials. The Mountain View, Calif.-based company indicated that it would appeal the delisting.

In the 8-K filing, Mercury also estimated results, although the company stressed that the figures "do not take in to account the highly likely restatements." Mercury put second-quarter revenues at $207 million versus $159 million in second-quarter 2004. Net income was estimated at $18.6 million, or 21 cents a share, compared with profits of $10 million, or 13 cents a share, a year previous.

At June 30, Mercury said it had $718 million in cash and equivalents, against $801 million outstanding convertible debt.

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