AIG drop weighs on insurers, new issues continue to slip, U.S. Steel advances, tightens

By Ronda Fears

Nashville, Feb. 4 - New issues were the focus of the convertible sector Tuesday, while the broad convertible market was down slightly as stocks took a dive and insurance issues plunged on a huge surprise charge by American International Group Inc.

United States Steel Corp.'s new mandatory was at bat, pricing a day early, and upsized to $250 million from $200 million amid strong interest.

Also, not unexpectedly, guidance was tightened to a 7% dividend with a 20% to 22% initial conversion premium, versus original guidance for a dividend of 7.25% to 7.75% with a 18% to 22% initial conversion premium.

While the revised talk squeezed about 2 points of cheapness out of the deal, traders said the issue was last seen in the gray market bid 0.5 point over par and offered at 0.75 point over.

U.S. Steel shares ended the day down $1.18 to $13.05.

Orders were running high, but sources said the U.S. Steel mandatory was not getting a lot of buy-and-hold interest.

"This will be flipped so fast it will give you whiplash," said a convertible fund manager at a hedge fund in Bermuda.

"The appetite for paper like this [and McData Corp.] is pretty amazing. At the end of the day, though, it is good to see some issuance and hopefully it will eventually break up the locked-up market."

McData's deal, to the surprise of few, if any, gained from par but lost 2 to 2.75 points from gray market levels, after pricing at the aggressive end of guidance that had been tightened twice before pricing the quick-sale deal.

The McData 2.25% due 2010 closed at 102 bid, 102.5 asked. The underlying stock ended off 23c to $7.31.

Other recent new paper from Micron Technology Inc., Advanced Micro Devices Inc. and International Game Technology were also lower, as was Tyco International Ltd.'s two tranches.

AIG was the big surprise, traders said, "shocking as many convert holders as equity holders."

AIG, the world's largest insurer, announced late Monday that it would take a $1.8 billion charge to pay for claims that have built up over the past few years in its U.S. group.

The news sent AIG securities plunging and prompted some rating agency activity, and several other casualty insurers followed suit.

AIG's 0% convertible due 2031 lost 0.75 point to 64.125bid, 64.625 asked. The stock plummeted $3.63 to $51.70.

Moody's confirmed AIG's ratings but changed the outlook to negative from stable.

Fitch put AIG's triple-A ratings on negative watch, but said the watch was not driven by the charge, per say, since the $1.8 billion charge will probably be easily absorbed from a corporate-wide perspective.

Rather, Fitch said it was concerned that over the past several years AIG's risk profile may have increased to levels inconsistent with a triple-A senior debt rating, so it wanted to take a fresh look at AIG's credit fundamentals.

Moody's said the shift to a negative outlook reflects the magnitude of the charge along with potential future charges and pressure from adverse financial developments at in the U.S. group.

Yet, Moody's noted that earnings strength and consistency, together with a solid capital position and tight controls on expenses and cash management have long-been hallmarks of AIG, and continue to support its Aaa rating.

Ace Ltd., Travelers Property Casualty Corp., Anthem Inc. and Chubb Corp. fell sharply as well.

The Ace 8.25% mandatory dropped 1.625 points to 58 bid, 58.125 asked while the stock lost $1.50 to close at $28.25. The issue closed on the New York Stock Exchange down 1.67 points to 58.

Chubb's 7% mandatory lost 1 point to 23.625 bid, 23.75 asked as the stock ended down $2.97 to $51.60. The issue closed on the NYSE down 0.81 point to 23.74.

Travelers' 4.5% convertibles dropped 0.75 point to 23.5 bid, 23.75 asked. The stock closed off 55c to $15.60. The issue closed on the NYSE down 0.75 point to 23.5.

Anthem's 6% mandatory fell 1.5 points to 73 bid, 73.25 asked while the stock ended down $1.68 to $58.07. The issue closed on the NYSE down 1.57 points to 73.42.

Fleming Cos. Inc. also dropped sharply on a Fitch downgrade prompted by the termination of Fleming's agreement with bankrupt Kmart Corp.

The Fleming 5.25% due 2009 was quoted down 6.875 points to 31.125 bid, 34.125 asked. The stock closed down $1.06 to $2.62.

FItch said the loss of the Kmart contract is likely to result in significant one-time costs, along with the loss of about $3 billion in revenues.

However, it also eliminates a significant uncertainty surrounding Fleming's ability to profitably service the low-margin Kmart business and resolves whether ties to the troubled retailer were in Fleming's best interest over the longer term, Fitch added.

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