Charter falters on earnings; XM Satellite up as volatility play; Ford, GM lower but Chrysler up

By Ronda Fears

Nashville, March 1 - With credits holding onto a tightening bias amid some wide swings in stock prices, convertible market onlookers said players are making more volatility plays.

"Credits are holding up. The move has been in vol," said a desk analyst at one of the busier convertible trading platforms. "The broad trend on the credit side is to move tighter [but] not by much; it's a pretty blah story there. There have been some big spikes in vol, though."

XM Satellite Radio Holdings Inc. was specifically mentioned Tuesday.

Elsewhere in the broadcasting and cable sector, Charter Communications Inc.'s convertibles retreated following its earnings report, after gaining about 1 to 1.5 points on Monday ahead of the St. Louis-based cable company's results.

Although the credit side of convertibles was faring better than the stock side in a larger sense, it was the reverse with regard to General Motors Corp. and Ford Motor Co. On Tuesday, Ford and GM both reported lower U.S. vehicle sales for February, but the stocks eked out gains as both also announced further production cuts.

DaimlerChrysler AG, on the other hand, posted a gain in U.S. sales for February, and the UBS AG euro-denominated convertible linked to DaimlerChrysler rose with the stock.

The European front also produced a new issue, with French oil concern Maurel & Prom SA launching a €270 million convertible bond in the Oceane structure.

United States-based oil stocks came under pressure with the slide in crude oil prices, but a few names were steady or slightly higher with sturdy credit support.

Charter charts downward path

Charter's convertibles came in on its financial figures, with market sources saying the EBITDA looked "OK" but the loss of subscribers was more than anyone expected and the outlook for subscriber growth "is probably slim" as competition from DirecTV and other satellite broadcasters intensifies.

The Charter convertibles lost about a half-point to the 95 area Tuesday while the junk bonds were seen lower by about 1.5 points in the 85 context, according to market sources. The stock ended Tuesday off by 11 cents, or 6% on the day, to close at $1.72 but was seen lower by another 4 cents, or 2.33%, in after-hours trading.

Charter reported a fourth-quarter loss of $339 million, or $1.12 per share, compared with a loss of $58 million, or 20 cents a share, last year. The loss also missed the First Call analyst consensus for a loss of 93 cents a share. Revenue rose to $1.28 billion from $1.22 billion, and adjusted EBITDA rose to $512 million from $484 million.

For 2004, Charter posted a net loss of $4.34 billion, or $14.47 a share, compared with the 2003 net loss of $242 million, or 82 cents a share. Revenues rose to $4.98 billion from $4.82 billion while adjusted EBITDA was flat at $1.93 billion.

The clincher for Charter investors, though, was that the company lost basic cable subscribers in fourth quarter, as well as digital customers. Another area of worry focused on the company saying it would "opportunistically" look for ways to improve its balance sheet without specifying how.

Takeover risk still a concern

Aside from operating results, which were a disappointment, and concerns about the debt-laden balance sheet, Charter holders also remain concerned about the ongoing exodus of leadership at the cable company - mainly because it appears to leave the company vulnerable to a hostile takeover.

"With all the top talent gone, it seems to me that there is a lot more takeover risk involved with Charter," said a convertible fund manager in Minneapolis. "The new convert has takeover protection language but that doesn't necessarily mean you are totally protected. If it was an all-stock deal, then you're basically screwed."

The 5.8785% convertible, an $862.5 million issue sold last November, provides holders with additional shares if Charter is acquired in a deal with a minimum of 10% cash.

Capping off a string of executive departures at Charter, interim co-CFO Derek Chang is leaving April 15, but the company said a permanent replacement should be in place by the end of March. In January, chief executive Carl Vogel resigned. Mike Huseby quit as chief financial officer last August to take a similar position at Cablevision Systems Inc., followed in September by the resignation of the chief operating officer.

Meanwhile, interim CEO Robert May said during the conference call that Charter's largest investor, Microsoft Corp. co-founder Paul Allen, "is not only committed to the business, he is also very passionate about the business."

But the Charter convertible holder was not comforted, saying, "If Allen saw a good business deal, for himself, he'd take it. Besides, if he was going to bail Charter out in a big way, he would've already done that."

Drug, oil plays resist pressure

Several so-called story names exploded Monday in the stock market, but a sellside convertible market source said Tuesday that most of the credits held up fairly well against the slide.

"Outside of some of the obvious credit blowups like Elan, most of the generics did pretty well. Biogen, in particular, held up relatively well," he said.

Willbros Group Inc., an oil and gas construction firm, was a standout oil and gas play bucking the lower trend in the sector. Willbros held a special conference call Tuesday to discuss restating financial reports from 2002 onward, plus its 2005 earnings outlook which was far below Wall Street estimates. Those matters sent the stock reeling, dropping 7% by day's end, but market sources said the credit was "actually tighter" by a smidgen so the 2.75% convertibles were holding up.

Schlumberger Ltd., Amerada Hess Corp. and the old Devon Energy (now ChevronTexaco Corp.) issues were whacked as oil prices plunged Tuesday, but traders said flow in those issues was very small.

XM Satellite up as vol play

Credits in general were trending slightly tighter, but convertible market sources said the most notable moves of late have been on volatility spikes, such as with XM Satellite.

XM Satellite's convertible bonds were better by about a point on a spike in volatility from the 30% area last week to around 40% now "if you're aggressive," said one sellside source.

"The credit is looking better, too," he added.

XM Satellite's 1.75% convertible was quoted at 96.25 bid, 96.75 offered with the stock up 31 cents on the day, or 0.94%, at $33.27.

On Monday, XM Satellite was cheered after announcing it would raise its monthly subscription prices to $12.95 on April 2 from the current $9.95 rate - essentially matching rival Sirius Satellite Radio Inc.'s prices.

Sirius was higher Tuesday as well, with its stock gaining 32 cents, or 5.75%, to close at $5.89 and its three convertibles adding "a point or two."

DaimlerChrysler euro issue up

DaimlerChrysler reported the only gain among what are referred to as the Big Three automakers based in the United States, with an overall gain of 5% for U.S. sales and the Chrysler division alone rising by 8%. Conversely, GM sales dropped 12% and Ford's were down by 3%, with both damaged by a sharp drop-off in sales of sport utility vehicles amid higher gasoline prices.

In mid-January, UBS AG sold the €702.25 million of mandatory bonds that convert into DaimlerChrysler shares, and the issue has been very active although with little price change, according to a convertible trader in London.

The 4.35% convert gained a half-point on Tuesday, the trader said. It closed at 100.5 bid, 100.625 offered versus DaimlerChrysler shares ending up €0.05, or 0.14%, to €35.04 on the XETRA. In the United States, DaimlerChrysler shares gained 27 cents, or 0.59%, to close at $46.37.

Maurel & Prom euro deal out

Maurel & Prom launched €270 million of roughly five-year convertible bonds in the Oceane structure with guidance for a 3.5% to 4.0% coupon and 27% to 32% initial conversion premium. Pricing is scheduled for Tuesday or Wednesday.

When the French oil concern announced plans to issue a convertible in early February, the company indicated proceeds would be used for acquisitions. The company itself, however, also has been the target for acquisitions, such as the $1 billion unsolicited bid from Indian Oil Corp. Ltd. that was rejected by Maurel & Prom last week.

Barclays Capital Markets convertible analysts Luke Olsen and Haidje Rustau said the new deal looks fairly valued at the worst end of the price talk and in a report Tuesday recommended it "to investors who are comfortable with the name and who have a strong risk appetite, especially if it prices anywhere better than worst."

Maurel & Prom models nicely

On worst indicated terms the Barclays analysts put the new Maurel & Prom convertible 0.2% rich at the tightest end of price talk to 3% cheap at the widest, using a credit spread of 500 basis points over Libor and 40% volatility plus modeling in a 4% stock borrow cost.

The analysts also noted that they modeled the issue including a credit-equity relationship with a decay parameter that implies 2.5 basis points of spread tightening per 1% rise in the stock price, holding all else equal, "which is in our experience commensurate with other names with reasonably strong credit-equity relationships."

For the credit spread, they noted that before the convertible Maurel & Prom had very low debt levels and no publicly traded bonds from which to glean a credit spread.

"Given our expectation that the company is raising cash to finance an acquisition, it is difficult to predict what its credit quality post an acquisition would be," the Barclays analysts said. "We think that the company's currently producing assets - although largely in the Congo - place it somewhere in the single-B range. Diversification of assets could potentially improve credit quality, albeit in the medium-to-longer term."

As for volatility, there are several drivers for short-term spikes, including M&A news - with Maurel & Prom as both predator and prey - in addition to drilling successes, political developments and oil price swings.

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