Sunterra, Freeport McMoRan deals emerge in down market; airline paper poised to take off

By Ronda Fears

Nashville, March 22 - Convertibles uniformly and universally sank in tandem with stocks Monday as terrorist fears pressured the broader market. Meanwhile, the primary arena was undaunted by the negative tone as Freeport McMoRan Copper & Gold Inc. and Sunterra Corp. launched deals during the session.

The downdraft in stocks aside, dealers said there was some buying interest in areas thought to be oversold, such as airlines and a few specific names like Lucent Technologies Inc. and Nortel Networks Corp.

"I almost said virtually the entire convertible slate was in the negative today, but it really was literally the entire convertible universe," said a senior convertible trader at one of the major investment banks.

Stocks sank on heightened terrorist concerns after the outbreak of violence in the Middle East as Israeli forces assassinated Sheikh Ahmed Yassin, a co-founder of the group Hamas, bringing threats of retaliatory attacks from Arab leaders.

Several dealers commented that the sell-off in stocks and corresponding credit spread widening in some areas, particularly airlines, sparked some buying interest.

"It looks like a couple of the airlines, Northwest and Delta, maybe American, too, have been oversold and we're about to see buyers step up," one trader said, noting the stocks of those airlines were higher in after-hours trading.

There was not a lot of activity even in the new convertibles in circulation, traders said, but most of the new paper was described as steady against the decline in their respective underlying stocks.

Freeport bid at issue in gray

Freeport McMoRan's latest convert - a $1 billion perpetual convertible preferred talked to yield 5.0% to 5.5% with a 40% to 45% initial conversion premium - was active in the gray market although it isn't slated to price until after Wednesday's close.

Around midday, the new Freeport convert was seen bid 0.5 point over issue price, which is $1,000, with an offer at 2.5 points over, but within a half-hour the bid dropped to at issue and hovered there for the remainder of the session, a buyside trader said.

"There are geopolitical concerns and that can affect commodities like gold and the dollar severely," said a buyside source. "Although right now gold prices are holding onto a hot rally, the producers are having to contend with the decline in the value of the dollar."

The April contract for gold was higher Monday at well over $415 an ounce while the dollar fell against foreign currencies in the wake of the Arab-Israeli conflict.

Several market sources anticipate that the price talk on the Freeport deal will be revised before it prices to the benefit of potential buyers because it is modeling out too expensive.

Analysts put it from about 1% cheap to as much as 2% rich.

Lehman Brother analysts put the new Freeport McMoRan convert 1.2% cheap at the midpoint of guidance, using a credit spread of 500 basis points over Treasuries and 40% volatility.

Deutsche Bank Securities analysts put it 1% rich at the middle of price talk, using a credit spread of 450 bps over Libor and 38% volatility.

Another market source put it about 2% rich at the midpoint of indicative terms, using a credit spread of 400 bps over Libor and 37% volatility.

In February 2003, Freeport sold $500 million of 7%, up 70% convertible senior notes. The 7s dropped about 4.5 points outright on the news, as it sent the underlying stock down $1.81, or 4.31%, to $40.14.

The New Orleans-based mining company also has an 8.25% convertible note due 2006 and has been actively buying back that issue with stock; when the 8.25% convertible becomes callable this coming July 31, the company intends to exercise the call for the $67 million remaining notes.

Sunterra, out of Chapter 11, on tap

Sunterra Corp. launched $75 million of 20-year convertible notes talked to yield 3.5% to 4.0% with a 23.5% to 27.5% initial conversion premium, after just last year erasing an old convertible issue by virtue of its reorganization via bankruptcy.

The Las Vegas based club-affiliated resort owner's is collateralizing the first three years of interest payments with Treasuries, but buyside sources said anyone who invested in the old issue is not likely to tap into this one.

"I used to own the old Sunterra converts and got out just before they went belly up," said a buyside convertible trader.

"So I'll pass on this one, thank you."

The new issue was not seen in the gray market, according to buyside sources, which is not unusual for smaller issues like the Sunterra deal.

Sunterra shares on Monday fell $1.58, or 11.13%, to close at $12.62.

Airline paper ready to fly

All the airline paper continued to descend Monday alongside their respective stocks, but dealers said there was some buying interest developing as the day wore on.

"There were a few equity reports on the [airline] stocks being oversold and besides that some technical triggers were getting hit," said a sellside trader.

Impetus for the decline in airline stocks Monday came from several fronts. In addition to the terrorist concerns, which could put a damper on airline traffic, measures of recent airline travel were not as robust as market analysts expected.

The Air Transport Association reported late Friday that revenue per available seat mile industry-wide grew 2.8% in February but some analysts were looking for as much as 5% growth.

Northwest Airlines Corp. seemed to be a top pick for buying interest, mainly from high-yield accounts, one dealer said. That is due to some widening in the credit spread, he added.

Delta Air Lines Inc. and the new AMR Corp. convertible also are finding renewed interest, he added.

Arbs bail out of New Century

New Century Financial continues to attract buyers, but a source in the convertible market noted Monday that the interest is almost exclusively outright accounts.

In fact, the arbitrageurs are bailing out, he said, on fear that the volatility in the name will get crushed if the mortgage company transforms into a real estate investment trust.

"The arb guys have got beaten up," the source said.

The New Century Financial 3.5% convertible due 2008 was quoted down 2 points outright to 152 bid, 153 offered, while the stock closed down $1.24, or 2.49%, to $48.62.

Lucent, Nortel find support

Telecom equipment makers Lucent and Nortel on Monday lost ground with the rest of the market, despite news about each getting big new deals with Verizon Wireless on the tape.

Verizon Wireless - a joint venture between Verizon Communications Inc. and Vodafone Group plc - announced that it had awarded contracts worth at least $692 million for new high-speed wireless Internet service equipment.

In January, Verizon Wireless announced it would spend $1 billion on upgrading its networks over the next two years, including a high-speed wireless Internet data network for major U.S. cities this year.

Lucent has a three-year deal worth more than $525 million while Nortel has a two-year deal worth $167 million.

Both of those names are among the most liquid in the convertible market, but have been heading south for almost four weeks, alongside their stocks, a dealer noted. Now, there is a bit more value in the converts, he said, and buyers are showing up again.

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