Fortis/Assurant settles at 102.5; Celanese ends around par; Tower Automotive bonds in a freefall

By Ronda Fears

Nashville, Jan.21 - Enthusiasm for new paper remains healthy, convertible market sources said, but terms on new deals just are not paying for the risk involved. Convertible arbitrageurs complained of difficulty in getting a hedge on deals priced during the week, while outright sources felt terms were too aggressive.

"These new deals are pricing like we've still got a bull market," said a fund manager at a huge convertible fund based in Boston. "Stocks are looking pretty bearish right now, and the convertible market is getting pretty soft, too. We're not finding the new deals so far this year very enticing."

Thus, most of the four deals from the week were languishing in the aftermarket. Celanese Corp. and the Assurant Inc.-linked issues were hot in terms of healthy orders, but without a great deal of participation from hedge funds the issues did not move much after breaking to trade Friday, buyside traders said.

Convertibles from Alexion Pharmaceuticals Inc. and Antigenics Inc. earlier in the week continued to falter, too.

"Outright, yes; hedged, no," said a convertible manager out West, when asked if he participated in any of the new deals this week. "I liked ALXN but could get no allocation in hedge. [As for] CE and AIZ, we got in on both, small."

Otherwise, the secondary market was riddled with big sell-offs in Calpine Corp. and Tower Automotive Inc. for a second day, and traders said those situations cast a widespread pall on the market.

"There's not a lot of buyers poking around," said a sellside trader at a big brokerage house.

Yet, traders at smaller shops noted some rummaging among older, smaller issues with fatter coupons, mostly still in the biotech area.

Guilford Pharmaceuticals Inc. was an issue moving on interest in the biotech area from yield-seekers. The 5% convertible due 2008 closed Friday at 107 bid, 108, versus 102.375 on Thursday.

"We traded quite a bit yesterday [Thursday]. The borrow looks like it has freed up," a sellside trader said, adding that there is still lots of juice in the convert. "Some of these smaller issues are really warming up."

Also, market sources commented that earnings coming up next week moved some paper higher, such as Cypress Semiconductor Corp.'s 1.25% convertible due 2008, which added about 1.5 points to 99.5 ahead of earnings due on Thursday. In that vein as well, Halliburton Co.'s 3.125s traded down by about 1.5 points to 127.5 in advance of earnings next Friday.

Fortis/Assurant gains steadily

Basically divesting itself entirely from Assurant, Fortis NV sold $774 million of three-year mandatory exchangeable bonds plus 27.2 million shares of stock in the New York-based insurance and financial services firm that it spun off in February 2004.

Convertible buyers reacted well to the issue prior to pricing, with it trading as much as 1.625 points over par in the gray market Thursday, and it gained steadily out of the gate to close around 102.5.

The convert priced at par of 33.66 to yield 7.75% with a 22% initial conversion premium - at the aggressive end of price talk for a yield of 7.75% to 8.25% and initial conversion premium of 18% to 22%.

"The AIZ stock valuation looks okay, a low risk (we hope!) business," said one buyer for the paper. "Looks like they acquired things badly, wrote it off and the firm is ready to repair the balance sheet and move forward. With any luck this is a good entry point."

Fortis essentially disposed of its stake in Assurant after selling about half its stake in an initial public offering in February 2004 brought in about $1.8 billion. At that time, the Belgian-Dutch financial services firm had said it planned to dispose of its remaining stake in Assurant over time.

Assurant shares closed Friday up 75 cents, or 2.45%, at $31.35.

Celanese seesaws around par

As rumored, the Celanese convertible was upsized to $240 million from $200 million, and final terms came where the market anticipated - at the mid-point of yield talk and aggressively outside premium guidance - on strong demand. Also as expected, the German chemical concern's IPO by majority stockholder Blackstone Group did not go as well as originally planned.

Celanese sold the perpetual convertible preferreds with a 4.25% dividend and 25% initial conversion premium - at the middle of yield talk for a 4.0% to 4.5% dividend and aggressively outside premium guidance of 18% to 22%.

Out of the chute, the convertible was bid 0.25 point over par, but buyside traders pegged the issue ending the day right at around par or slightly lower.

The stock sold at $16 a share, fetching $800 million, versus a range of $19 to $21 targeted in the SEC registration that would have garnered close to $1 billion. The stock traded moderately heavy, but closed unchanged at $16.

Regarding Celanese, one buyer in the convertible noted that the segment - chemicals and plastics - provided some diversification.

"There's not a load of other operations to get exposure to an industry that was [a] good performer in '04. Chemicals still look pretty good for '05 - strong demand and not too much supply coming on," the manager said. "CE's product segments are growing faster than the industry, too. Of course, [the convertible] is trading down, so what do I know."

Celanese also plans a new $1.5 billion senior credit facility.

The company was using $207 million of total proceeds to partially redeem its 10% senior discount notes, $566 million to partially redeem its 10.3675% senior subordinated notes, $611 million to repay the existing senior credit facility, $350 million to repay a floating-rate term loan and $952 million to make a dividend to series B common stock holders, or Blackstone Group.

Calpine convertible holders flee

The exodus in Calpine convertibles continued to pressure the issues Friday as holders became increasingly concerned about the independent power producer's warning of a net loss as a result of a sharp reduction in its gas reserves.

While Standard & Poor's analysts were viewing Calpine's latest liquidity-boosting strategy - the sale of $260 million of six-month junior preferreds in the loan market - as favorable to its credit quality, some bondholders were skeptical.

"There is no upgrade potential here as I see it," said a buyside convert trader. "S&P simply said that they view an extra $260 million in the trough as favorable to the company's credit rating. So what!"

The new Calpine 6% convertible bonds due 2014 dropped another 3 points to 95 bid, 96 offered, and the older 4.75% convertible bonds due 2023 dropped another 1.5 points to 72.5 bid, 73 offered on Friday.

Calpine shares fell 11 cents on the day, or 3.4%, to close at $3.12.

Tower convertibles in freefall

It was an opposite situation at Tower Automotive, which reaped a downgrade from S&P into triple-C territory where default becomes a more likely possibility in the view of credit analysts. Moreover, convertible investors were treating the securities like the company was on the brink of bankruptcy.

"TWR is toast. They have already essentially defaulted on the convertibles," said a buyside analyst, referring to the deferral of dividend payments on the 6.75% preferred in December. "They [Tower Automotive convertibles] are in a freefall now."

While the indenture for the preferreds allows deferred dividends, credit analysts have viewed it as manifest of a default. S&P had cut the preferreds to D on the development. Market sources have been fearful of coupon payments on the 5.75% bonds since they were sold in May, but the first interest payment was made in November on schedule.

On Friday, a day after Tower warned of further pressures on its liquidity, S&P cut its corporate credit rating to CCC from B and senior unsecured ratings to CC from CCC+. The preferreds remain at D.

Tower Automotive's 5.75% convertibles plunged another 29.5 points to 19.25 bid, 23.25 offered while the 6.75% preferreds plunged 3.25 points farther to 4.

The Novi, Mich.-based auto parts maker's stock lost 97 cents on the day, or 56.4%, to close at 75 cents.

"There's no way to look at TWR as anything but a bankruptcy name now," the buyside analyst said.

Tower said Thursday, however, that it is continuing to work with customers and suppliers to address the liquidity issues and is pursuing the possible sale of assets to relieve liquidity pressures.

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