Rite Aid launches deal for Tuesday; Tower Auto bids bounce; Brocade news apt to boost bonds

By Ronda Fears

Nashville, Jan.24 - After a handful of new deals last week that buyside convertible market sources said were less than compelling, drugstore chain Rite Aid Corp. was passing out indicative term sheets for what one fund manager presaged would choke up players, because of the 50% conversion premium, and not in a sentimental way as Rite Aid is not a newbie to the convertible market.

"I think we all choked when we saw it [proposed Rite Aid terms]," said the manager. "It was a shocker. I mean, a 50% premium is reminiscent of terms seen more like a year ago! It will be interesting to see how this goes."

The Camp Hill, Pa.-based drugstore chain launched $115 million of mandatory convertible preferreds after the market close Monday with guidance for a 6.5% to 7.0% dividend and 50% initial conversion.

Deals from last week - from Celanese Corp., Alexion Pharmaceuticals Inc. and Antigenics Inc. - were all still described as hovering right at or below par. The Assurant Inc.-linked issue was lower Monday with the stock, buyside traders said.

Most of the secondary market was lower Monday, taking a cue from the broader markets.

For the most part, there is a "serious case of nerves about earnings," one sellside trader said. He specifically mentioned chipmaker Stats ChipPAC Ltd.'s 2.5% convertible due 2008 was a couple of points lower ahead of announcing earnings Wednesday.

Tower Automotive Inc., however, saw a bounce, too, Monday amid contradictory speculation about its ability to continue as a going concern, or whether it would file bankruptcy.

Brocade Communications Systems Inc. also looked to be ready for a pop, traders said, after announcing Monday after the bell that it has completed its internal audit and named a new chief executive.

Rite Aid 4.75s seen around par

Rite Aid said proceeds from the $115 million mandatory convertible preferreds - talked with a 6.5% to 7.0% dividend and 50% initial conversion - would be used to take out its $103 million of convertible payment-in-kind preferreds, but traders said the old 4.75% convertible bonds were still hovering around par on conjecture that the issue would soon be redeemed.

The stock closed Monday off 7 cents, or 1.87%, to $3.67, and in after-hours trading, news of the new convertible pushed the stock down another 7 cents, or 1.91%.

Price talk for the new deal, at least on a knee-jerk basis, evoked some resistance to swallow the terms.

"Check out the premium!" one buyside analyst said. "Either (i) it's a typo, (ii) there is some funky provision on exchange/conversion, or (iii) JP Morgan [bookrunner] is smoking some funny stuff that should only be used in cancer patients for medicinal purposes!"

Another buyside market source noted that the yield on the new Rite Aid convertible "looked pretty decent until I found out they sold a $200 million junk bond a couple of weeks ago with a 7.5% handle." Last month, Rite Aid also warned that 2005 results would likely come in below analysts' expectations and earlier this month posted lower same-store sales, he added.

Rite Aid also has noted that it has been slashing debt levels and interest costs, however. The company said in a conference call in December that it had cut debt by $605 million as of Sept. 30. Debt buybacks, which have been ongoing by Rite Aid for almost a year, have kept the older 4.75% convertibles propped up.

Tower fans holding steady

Tower Automotive may be teetering on the brink of bankruptcy, but believers or the hopefuls that that is not the case bid up the convertible bonds Monday by 4 to 5 points while the junk bonds dropped by around that much.

The 5.75% convertible bonds rebounded to 24 bid, 27 offered from a bid of 19.25 on Friday, although the 6.75% preferreds were basically unchanged at 4.25 bid, 4.5 offered. Meanwhile, the R.J. Tower Corp. 12% junk bonds due 2013 dropped 4 to 5 points to 56 bid area.

Tower Automotive shares bounced back sharply Monday, gaining 19 cents on the day, or 25.33%, to close at 94 cents.

Last week, the Novi, Mich.-based auto parts maker provided the latest of a string of woebegone liquidity levels, and that was a blow that sent its convertibles trading virtually in bankruptcy territory at 19 and some change for the bonds and 4 or so for the preferreds.

While the path is dark for the company, several current holders in the convertibles say it doesn't seem as it the company is about to file bankruptcy, or at least they are hopeful.

"Looking at Tower Automotive, I don't think they file," said one buyside source at a hedge fund. "But so far, I'm long and wrong."

Basically, the hedge fund source said it seems that some pretty big guns like General Electric Co. have rallied behind Tower Automotive in order to keep it afloat.

"I can't see why GE Capital would have put in a puny $50 million line to a company that is about to file since if the company was going to file GE would have made a lot more fees doing a larger DIP line," the buyside source said. "And, if the company was imminently going to file, why did they put out that press release the other day rather than just file?"

Another source, on the sellside, added that Tower Automotive's contracts with General Motors Corp. and Ford Motor Co. would be collateral enough to pick up more working capital if needed.

Bankruptcy specialists waiting

Time will tell how the Tower Automotive situation plays out, but another sellside trader pointed out that, so far, there is not a flood of special situation investors - the bankruptcy specialists - involved in the bonds. He attributed the lift in the 5.75% convertibles to a gamble that the distressed funds would get involved, and they haven't - yet.

"There have been some inquiries" about Tower bond prices from the bankruptcy professionals, he said.

"The hedgies tried to trade them for a bounce; it didn't work. Value bankruptcy guys think [the] company is a garbage can and needs to be much lower before they find any value."

Some of the faithful Tower Automotive holders, though, suggested they truly believe the company will survive without bankruptcy reorganization, so they are looking to pick up the paper at bankruptcy prices.

"I hope the sellside broker ... is incorrect about the garbage can - or else my position will be part of the permanent trash!" one holder said.

Brocade poised to pop: Trader

Brocade announced Monday after the market close that it has completed the internal review of its books from 2002 through 2004 and there will be some adjustments to results, but getting the matter behind it was a boost to its stock, and convertible traders said that should also give the convertibles some lift.

The Brocade 2% convertible due 2007 was quoted at 95 bid, 95.5 offered. Brocade shares had closed Monday down by 26 cents, or 4.03%, at $6.14 but in after-hours trading were seen up a dime, or 1.63%.

"Just having this over and done is a plus," a dealer said.

The net loss for 2004 will be restated to $32 million versus the net loss of $2 million previously reported. The restated loss for 2003 is $147 million versus $136 million reported previously. And, net income for 2002 was restated to $126 million compared with $60 million.

Brocade said the revisions have to do with additional stock-based compensation charges, which are non-cash, as well as a valuation allowance associated with deferred tax assets related to the previously recorded stock option tax benefits.

The networking firm also announced a new CEO on Monday.

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