Nabi trades lower; Chesapeake up; GM, Ford ditched; AMD spreads blown out

By Ronda Fears

Nashville, April 14 - Several explosions in high profile convertible names such as General Motors Corp. and Advanced Micro Devices Inc. didn't help matters Thursday as "for sale" placards continued to blanket the market.

AMD's announcement that Spansion, the flash memory joint venture with Fujitsu that is 60% controlled by AMD, intends to go public and the uncertainty surrounding that event compounded with AMD's earnings, which missed some analysts' projections.

The AMD convertibles were sharply lower Thursday with the 4.75% due 2022 losing 2 points to 97.75 bid, 98.25 offered and the 4.5% due 2007 dropping 11 points to 227 bid, 228 offered. AMD shares on Thursday fell 80 cents, or 4.69%, to close at $16.26. In addition, a buyside market source said AMD's credit default swaps were seen wider by 50 basis points and with the earnings miss by International Business Machines Corp. those spreads could probably go wider.

As for how plans by Spansion to go public will ultimately affect the AMD convertibles, Merrill Lynch convertible analyst Tatyana Hube suggested three scenarios Thursday (See full report elsewhere in this edition.)

Amid the negative tone in the market, Nabi Biopharma's new issue was downsized. Although it was priced at par, it then sank out of the gate, closing underwater. Chesapeake Energy Corp.'s new deal was "the one convert today that traded up," one buyside market source said, exaggerating the softness of the market somewhat.

Chesapeake's new 5% convert rose 1.25 points to 101.25 bid, 101.75 offered on Thursday, while its new 6.625% junk bonds dropped as low as 97.75 bid, 98.5 offered from the 99.069 issue price. Chesapeake shares on Thursday added 21 cents, or 1.06%, to close at $20.03.

Nabi trimmed, dips to 99.5

Nabi Biopharma said it "elected to limit the transaction based on current market conditions for convertible debt." A buyside source familiar with the deal said it appeared orders for the deal were "decent" but probably not very enthusiastic, because the terms priced it out of the market.

"With the overall market cheapening up so much lately, this pricing needed to be reworked," the fund manager said. "But most of it got placed, so I guess it's technically considered a success."

Sellside analysts had put the issue about 1.0% cheap at the middle of price talk, but Nabi Biopharma printed the downsized convertible with a 2.875% coupon and 30% initial conversion premium - at the cheap end of guidance for a 2.375% to 2.875% coupon and 30% to 35% initial conversion premium. It was cut to $100 million from $125 million.

Bookrunner Lehman Brothers Inc. took the issue out at 99.5 bid, 100 offered, while Nabi Biopharma shares closed at $10.82, off 20 cents, or 1.77%.

Terms swinging to buyside

Convertible terms are really nowhere near where they were in perhaps the 'glory days,' as defined by convertible returns, but sellside market sources see a cheapening trend among new issues.

"New issue terms are clearly moderating right now," said a sellside convertible analyst at one of the busiest convertible underwriting shops.

Through the end of March, he said, average terms for new convertibles are about 4.25% up 32% with the 12-month rolling weighted average new issue terms standing at approximately 4% up 31.5%.

That is the first time in two years that the trailing 12 months new issue yield averaged over 4%, he said. It is the same for premiums, he said, in that it is the first time in about two years they have dropped below 32%.

"I'm thinking that we might see 4.5% up 25% for an average deal pretty soon," he said.

That would be partway toward new deal terms in the late 1990s, just before funds began to flock to convertibles and the market saw issuance take off, culminating in a record $112 billion of new deals in 2001. In 1998, he said average new deal terms were 6% up 23.7%, although issuance was a paltry (by recent standards) $34.1 billion.

Airline converts in freefall

While traffic in airline convertibles was not meaningful Thursday, the straight bonds of virtually all the airlines took a dive on heavy selling and a sellside convert trader predicted the airline converts are "soon to follow."

Virtually every convert in the sector was marked sharply lower Thursday alongside the stocks, but there was not a great deal of that paper trading. A big sell-off, though, is expected before the parade of earnings for the group begins next week. Many traders anticipate a great deal of the airline converts will be shed on Friday ahead of the weekend.

Delta Air Lines Inc. and Northwest Airline Corp. could set the curve for the decline, one market sources said, as the most beleaguered legacy carriers. Among regional and low-fare carriers, one trader pointed to JetBlue Airways Corp., particularly concerned about its new convertible issue skewing leverage upward.

High fuel costs is among the top worries, though, and a recent Merrill Lynch report estimated the nine largest air carriers would amass losses totaling $2 billion in first quarter, compared with $1.5 billion in losses for the group a year ago.

Air France floats tight deal

Yet, in Europe, Air France-KLM on Thursday priced a new deal at the upper end of its size range and at aggressive terms to the pre-market price talk. To boot, traders in London said the issue rose about a quarter-point from par in the immediate aftermarket.

Air France sold €450 million of 15-year convertibles to yield 2.75% with a 50.8% initial conversion premium - at the aggressive end of yield talk for a coupon of 2.75% to 3.25% and in the mid-range of premium guidance for 48% to 53%.

At the final terms, Deutsche Bank Securities analysts put the new Air France convert just 0.821% cheap, using a credit spread of 90 basis points over Libor and a 23% volatility, also accounting for a 2.471% common stock dividend yield.

Paris based Air France said proceeds will be used to finance its investment program, mainly in ground equipment and new planes.

GM, Ford see big sell-offs

Oil prices impacted lots of sectors, particularly transportation, but General Motors Corp. and Ford Motor Co. were suffering from concerns about the credits as profits slip on lower auto sales, which dovetail back to oil prices.

Yet, on Thursday, convertible traders said the big sell-off in GM and Ford issues was a matter of hedge funds selling out.

Factors in the sell-off in GM also took into account news that the United Auto Workers officials were not willing to reopen a labor contract to negotiate lower health care costs and the SEC probe into accounting matters related to GM's spin-off of parts supplier Delphi Corp. in 1999.

GM's 6.25s and 5.25s are heavily played by hedge funds, and both lost about a half-point while the 4.5% convert, more of an outright play, dropped about 0.125 point. GM shares fell $1.67, or 5.89%, to $26.66.

Ford's 6.5% convert plummeted 1 point to 38.125 in the "one of the heaviest selling days I've seen for it," as one sellside trader put it. The stock lost 30 cents on the day, or 2.99%, at $9.75.

Power issues suffer oil's surge

Power issues also suffered greatly by the spike in oil prices Thursday, including El Paso Corp.'s new issue along with Calpine Corp. and Mirant Corp. Ending a seven-day string of losses, crude oil futures on Thursday added back 91 cents to settle at $51.13 a barrel.

El Paso Corp.'s new 4.99% perpetual convertible preferred, which was reoffered by underwriters at 97.5, dropped 2.75 points on Thursday to 94.25 bid, 94.5 offered. El Paso shares lost 39 cents, or 3.75% to close at $9.96.

Calpine's issues didn't trade in a big way, nor were they off to the degree of El Paso's, but one sellside trader said the Calpine converts are "for sale in a huge way." The 4.75s dropped about 0.5 point Thursday to 66 bid, 67 offered while the 6s were quoted down by 1.5 points to 80 bid, 81 offered. Calpine shares ended at $2.65, losing 11 cents, or 3.99%, on the day.

Meanwhile, Mirant's 2.5% converts came in about 1.5 points to 76.5 bid, 77.5 offered on brewing trouble in its bankruptcy case. In addition to creditors like Deutsche Bank Securities Inc. planning to block Mirant's proposed plan of reorganization, shareholders have complained about the proposed reorganization plan.

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