Level 3 bonds indifferent to unit IPO; Fannie Mae bounces then retreats; TOP Tankers afloat anew

By Ronda Fears

Nashville, May 16 - Convertible players were feeling "pretty low" Monday following the passing of the 45-day notice for withdrawing money from funds on June 30, as one observer put it.

"Everyone is watching the redemption notices [that were supposed to be submitted by Sunday, May 15], and the feeling about that today is pretty low," said a sellside desk analyst. "In light of that, and moods in general, it was a very quiet Monday. In general, though, I'm still seeing better sellers for the most part."

General Motors Corp. and Ford Motor Co. are blamed in large part for the perception of a recent surge in the number of investors cashing out of the convertible market following the top two automaker's getting cut to junk from a debt rating standpoint by Standard & Poor's in the first week of May. Both were lower going into the weekend, but on Monday the Ford 6.5% convertible preferred shot up 0.875 point to 37.125 while GM's three $25 convertible bonds all lost about 0.25 point. Both GM and Ford stocks were higher.

The pain, even by what are considered the most conservative measures, has been rather severe. On Monday, Merrill Lynch reported its convertible hedge fund index is down 7.29% year to date before hedging out interest rates and off by 6.91% afterward. The CSFB/Tremont subindex for convertible arbitrage is showing a year-to-date loss of 5.76%.

TOP Tankers deal afloat

Given the market environment, it's no wonder perhaps that new deals have found rough waters. TOP Tankers Inc., however, resuscitated its deal after scrapping it last week following persistent resistance from buyers since plans for the deal were announced April 27.

The Athens-based shipping firm's deal resurfaced Monday as a quick-sale transaction, downsized to $225 million from $300 million with another sweetening, slated to price after the closing bell via sole bookrunner Cantor Fitzgerald & Co.

Terms on the perpetual convertible preferred now offer a dividend of 6.75% plus adding an annual cash payment of 1.08% in the form of a common stock dividend pass-through. The initial conversion premium was talked at 20%. On May 10 the deal was pulled after skidding into trouble; at that time it was talked to price with a dividend of 6.50% to 6.75% and initial conversion premium of 20%. Guidance had been sweetened May 3 to 5.875% to 6.0% from original price talk of a 5.625% to 5.875% on the dividend side, and the initial conversion premium to 30% to 32% from a range of 32.5% to 37.5%.

The issue is non-callable for five years, then at 52 in cash. There is a put in year five at par of 50 in cash or stock. In addition, there now are provisional puts in years one and two if, in any quarter, EBITDA dips below $40 million, or in years two through five, if the company's debt to capitalization ratio is above 60% or if debt to the last 12 months EBITDA is over 3.5 times.

There had been discussion about adding warrants, a buyside source said, but that was nixed in favor of the soft puts. Still, he said there were not many bites for the deal, "not in this environment."

"It feels like the sellers have stopped pressing things, but there's still loads of damage done," the fund manager said, explaining his reluctance to buy into the TOP Tankers deal. More specific to the deal, he added, "The deal ... now ... has better terms. The problems are the family owns quite a bit, there's a small float [of stock available to borrow] and the prospects for shipping."

One of the biggest concerns now, another buyside source said, is that given Cantor is "not the usual underwriter" for a convertible offering, "it might get done but you probably will never see it trade." And, without support from the underwriter, buyers have to be willing to hold the paper indefinitely.

Level 3 spin-off shrugged off

The spin-off of Level 3 Communications Inc.'s information services subsidiary was basically ignored as a non-event given the small amount of the deal, a convertible trader said.

"All the Level 3 bonds were quiet today, the converts and the straights," the trader said. "It's pretty lame as a capital-raising effort."

Level 3 aims to raise up to $115 million with the spin-off of Technology Spectrum Inc. in an initial public offering. In a Securities and Exchange Commission filing on Friday, the price and number of shares were not disclosed in the document. Merrill Lynch & Co. is the sole bookrunner of the offering.

Level 3 Communications convertibles were little changed on news, coming in about a half-point across the board, the convertible trader said. The 5.25% convertibles due 2011 were in the 59 context and 2.875% convertibles due 2010 at around 27. She said recent indications in Level 3 straight bonds put the 10.75% notes due 2011 at roughly 80.5 and both the 9.125% notes due 2008 and 11.25% notes due 2010 at 77.5.

Level 3 said it would use proceeds from the IPO to fund general corporate purposes.

Fannie Mae, or may not

A Barron's article on Monday titled "Current Yield: These Convertibles Finally Look Cheap," that mentioned the Fannie Mae 5.375% perpetual issue gave the issue a nice bounce at the open. The news item posed the question, "Why buy a common stock when you can get an exotic convertible for less?"

Early on Monday, the Fannie Mae convert picked up as much as 8 or 9 points, a sellside convert trader said. But it retreated throughout the afternoon to settle the day "about where they'd been last week."

The Fannie Mae 5.375% perpetual convertible preferred closed Monday at 90.75 bid, 91.25 offered, compared with ending Friday at 89.75 bid.

Fannie Mae's shares, however, got a bigger lift from the Barron's piece, adding $1.60 on the day, or 2.98%, to close Monday at $55.25. The stock just barely came off the day's high of $55.33.

Calpine suit raises questions

Calpine Corp. continued to struggle under pressure from a number of corners of the market, but trading in the convertibles was very quiet.

Traders said the independent power producer's 4.75% convertibles were off about a half-point, and one pegged that issue at 44 bid, 46 offered. Another trader put Calpine's 6% convertible at 53 bid, 54 offered, while the underlying stock gained 10 cents on the day, or 5.785%, to close at $1.81.

CreditSights analysts watching a lawsuit initiated in Canada by Calpine bondholder Harbert Management Corp. inferred in a report Monday there may be important issues for creditors brewing in the case.

Harbert has sued to stop any transfers of Saltend asset sale proceeds from the Calpine Construction Finance Co. LP up to parent Calpine, seeking to have preferred stock proceeds repaid and/or a default declared, which could trigger cross-defaults across the Calpine capital structure.

"In Canada, a 'unique' statute and some Supreme Court of Canada dicta may give the bondholder more clout and somewhat better odds of prevailing," said CreditSights analysts Dot Matthews, Andy DeVries and Catherine Shin in the report.

"We are more concerned than we would be if the suit were brought in the U.S., but we don't know how to handicap this one. Investors should be aware that it may be easier to tie the Saltend proceeds up in court until a final ruling than it would be in the U.S."

Even yield-seekers in hiding

With the June 30 liquidation news hovering like a dark cloud over the convertible market, plus the weakness in the high-yield market, sellside sources said even yield seekers were scarce.

"Even with spreads widening over 100 basis points, no one is stepping in, not on a large scale. There's a few, just nibbling," said a desk analyst at a big convertible shop. "Even for yield stuff we're not seeing any buyers."

He specifically mentioned the Bear Stearns high-yield index, which as of last week had a yield-to-worst spread of 455 bps versus 327 bps at the end of the first full week of 2005, an expansion of 128 bps. Comparably, the Merrill Lynch high-yield index has widened 119 bps since the first of the year, from 309 bps to 428 bps. And, the Banc of America Securities high-yield index has expanded by 133 bps to 471 bps in the most recent week from 338 bps in the first week of the year.

Cephalon plugged for yield

The sellside desk analyst plugged the Cephalon Corp. as a yield play that hasn't been getting any play.

"The 2.5% converts [due June 2006] have traded down to 94ish. It's roughly one-and-a-half year paper," he said. "That seems overdone."

Cephalon shares on Monday bucked a downward trend in the biotech space, gaining 58 cents on the day, or 1.31%, to $44.71.

Last week, Cephalon announced its purchase of Salmedix Inc., an oncology drug development firm, for $160 million in cash to expand its cancer drug offerings. Cephalon, whose products include Provigil for sleep disorders, Gabitril for epilepsy and Actiq for cancer pain, will pay $40 million more as Salmedix drugs reach certain regulatory stages.

Cephalon said the acquisition, which is expected to close by the end of June, would reduce 2005 earnings by 10 to 15 cents, and the company said it will be revising its earnings guidance. It is Cephalon's fourth acquisition in five years.

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