Huntsman climbs out of the chute; Level 3, Charter higher on buying; Primus Tel drops, Saks cheapens

By Ronda Fears

Nashville, Feb. 11 - Bids were definitely getting hit in the convertibles market Friday as "things finally start to crack," as one trader put it, with several beaten down issues like those of Level 3 Communications Inc. and Charter Communications Inc. getting chased.

Yet, overall, traders described the market as weaker, with comments like, "The good thing is we don't have to mark down our book tomorrow [Saturday]" and "I keep hearing lower credit names are under pressure. UGLY!"

In particular, Primus Telecommunications Group Inc. took a sharp drop, although most of the telecom sector ended the week higher. Primus Telecom's 3.75% due 2010 fell about 2.25 points to 64.5 bid, 65 offered while the stock plunged 15.83%, or 38 cents, to $2.02. Traders said the weakness seemed to be purely related to following the stock sell-off, as there was no news in the name Friday.

Calpine Corp. was another that has been weakening late in the week, and traders said the 6% convertibles were beginning to look attractive as they descend close to par. The issue dropped 3 points outright on Friday to 101.25 bid, 102.25 offered; the underlying stock was down 11 cents, or 3.17%, at $3.36.

Saks Inc. converts also cheapened on skepticism regarding the company's desire to split off its upscale stores from its mid-priced department stores.

Airline paper "will start to get hit, hard" over the next couple of weeks as weak post-holiday air traffic reports continue, one convertible trader predicted. Thus, if you are a buyer, then the entry point may be a week or two off; if you are a seller, you should get out as soon as possible. In that space, FLYi Inc. said in a filing at the Securities and Exchange Commission that one of its aircraft lenders has sued it for failure to pay.

Huntsman goes to 50.375 bid

Huntsman Corp.'s convertible pricing went pretty much as expected - pricing aggressively amid very strong demand - but its initial public offering went better than some Wall Street analysts expected.

The Salt Lake City chemical concern sold the $250 million three-year mandatory with a 5.0% dividend and 23% initial conversion premium - at the tight end of yield talk for a 5.0% to 5.5% dividend and aggressively outside premium guidance of 18% to 22%.

Joint bookrunner Citigroup Global Markets Inc. closed out the convert at 50.375 bid, 50.5 offered.

Some equity analysts had predicted the stock would be discounted to the area of $19 a share, versus a pre-market range of $21 to $23. The stock priced at $23 and then shot up 7% in its first day of trading, gaining $1.51 to close Friday at $24.51.

The IPO priced at $23 a share, at the aggressive end of an estimated range of $21 to $23.

Huntsman said $40 million of proceeds from the convertible offering would be used to buy U.S. Treasuries as dividend collateral and the remainder to repay debt.

Standard & Poor's upgraded Huntsman's ratings, with a stable outlook, following the transactions, noting they improved the capital structure. S&P also cited good prospects for further strengthening of Huntsman's financial profile as the chemicals cycle improves.

Level 3 chased, gains 2-3 points

Level 3's convertibles, at least the 5.25% issue, continued to see heavy buying activity on Friday, but traders said it was still interest from crossover high-yield players making a capital structure trade.

For most of the week Level 3 paper - convertibles and straight junk bonds - had been slipping along with the stock in the wake of the Broomfield, Colo., internet access provider's earnings and a narrowed outlook.

After losing about 10 points by Thursday, crossover players were spotted making a move for the convertibles, but buying really "took off" on Friday. There was some shorting, some covering, some buyers setting it up on hedge - 100% - at 15 to 16 points over parity, a sellside trader said. He said interest in the old 6% converts has dwindled to nil, as recovery for those bonds is considered zero.

But Level 3 convertible buyers are not figuring a bankruptcy filing is imminent, he said. Rather, it is the opposite.

"They are playing it for a bounce," the trader said. "Warren Buffett saved this company once. Anyway, they have enough cash for two years [of operations]."

Charter up on bond buyback

Charter's news was "positive for all the bonds" but mostly its junk paper, a convert trader said. Still, the new Charter 5.875% convert added about a point Friday as the San Jose, Calif.-based independent power producer announced a couple of steps that amount to following through with conditions of its last new credit facility.

Charter said that, based on its calculated leverage ratio in preliminary fourth quarter results, it anticipates giving more collateral to lenders in the restated credit agreement as well as holders of its 8% second-lien bonds due 2012 and 8.375% senior second-lien bonds due 2014.

Also, as required in the new credit facility, Charter said its CC V Holdings unit will redeem all $113 million of its 11.875% senior discount notes due 2008 at 103.958 plus accrued and unpaid interest on March 14.

"It's a debt reduction, which is good," a buyside trader said. "As for the additional collateral to second-lien bondholders, that's not good news on the face of it, but the implication of a better leverage ratio is."

Saks off on uncertain break-up

While initial reactions to Saks' breaking up was positive, as upscale sales figures have maybe been a drag on overall results, by Friday there was considerable skepticism about the probability of finding willing buyers at attractive prices and on which balance sheet the convertibles would land.

"In the last couple of days the SKS 2s have been active with them cheapening by 1-plus points," a sellside source said.

A holder said that with so many mergers and acquisition deals thus far in 2005, and lately an elevated level of deals and deal noise in the retail sector, there is some doubt that Saks could draw interest from potential buyers, particularly for the upscale Saks Fifth Avenue stores.

"After the Sears-Kmart deal, it may get tougher to do a deal in retail group," he said. "And, I think it's tougher in apparel than any other section of retail, because apparel sales have hit the wall. Saks is a department store, but heavily weighted to apparel. There's not only that, but what apparel retailers, especially upscale apparel names, have the means or interest to buy a Saks?"

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.