Charter 5.75% convertibles flat, troublesome in new bank facility talks; new paper flags in trading

By Ronda Fears

Nashville, March 26 - Convertible desks quieted down severely in the afternoon Friday following a flurry of activity early on. But for all the wrangling, the $1.5 billion of new paper put into circulation didn't make much of a splash in the secondary.

"All of the new paper traded pretty active; there just wasn't a whole lot of excitement about any of it," one dealer commented.

The biggest deals, a $1 billion issue from Freeport McMoRan Copper & Gold Inc. and a $225 million issue from Chesapeake Energy Corp., only slightly moved during the session. Even the hotter small deals from Sunterra Corp. and Avatar Holdings Inc. did not move much and volume slacked off sharply.

Chesapeake's new convertible edged up about 0.625 point from par, while Freeport's slipped about 0.25 point.

Grey Wolf Inc.'s new convertible, which was repriced at 99, edged up just 0.5 point.

Convertible desks were moving some Charter Communications Inc. converts, but nothing out of the ordinary, and with little change in price. Yet, at least the Charter 5.75% convertible due 2005 was the source of a potential snag in talks the company has begun with bankers on what one source said was a new $6.5 billion credit facility.

Grey Wolf edges to 99.5

Grey Wolf sold $100 million of convertible floating-rate notes to yield the three-month Libor minus 5 basis points, or 1.06% initially, with a 60% initial conversion premium. The yield is capped at 0% on the lower end and 6% on the upper end.

Deutsche Bank Securities, sole bookrunner of the Rule 144A deal, reoffered it at 99 and closed it Friday at 99.5. Grey Wolf shares ended the day off 11 cents, or 2.7% to $3.96.

While observers suggested the deal might improve the Houston-based domestic oil and gas drilling company's credit structure, noting that proceeds were earmarked to redeem its 8 7/8% notes due 2007, the credit rating agencies were not overly impressed.

On Friday, Standard & Poor's said the refinancing has no affect on Grey Wolf's ratings (BB- senior debt) or negative outlook. Although it is favorable due to the lower debt servicing costs on the convertible notes, S&P said it had anticipated this event.

S&P said a return to a stable outlook would require further improved liquidity, likely to occur only with a sustained recovery in day rates in Grey Wolf's key drilling markets.

Tower Automotive "wacky"

A market source commented Friday that the Tower Automotive Inc. convertibles look odd, trading at about 96 with maturity coming up this August. The $200 million issue has a 5% coupon.

"The bonds, at 96, have a yield-to-maturity of around 17.5%," he said. "This looks a little wacky."

In February, S&P cut Tower's subordinated debt to B- from B and left the outlook at negative. The rating agency noted that at year-end 2003, the company had $161 million of cash and cash equivalents and $10 million of availability on its $360 million revolving credit facility with $200 million of the bank facility available for the redemption of the convertible, subject to a grant of additional collateral to the banks.

Tower continues to negotiate with its banks and is expected to conclude talks by the end of the second quarter at the latest, according to S&P.

Since last June, Tower has been trying to redeem the convertibles early. On Dec. 12, in an SEC filing, Tower Automotive said it would not complete the redemption of by the end of fourth quarter as it had previously planned, due to delays in the completion of a collateral grant to its lenders.

Charter bank talks of interest

Charter Communications Inc. is said to be putting together a new credit facility for refinancing purposes, but this time, the rumors appear to carry more weight. It was news to convertible market sources late Friday, but it piqued considerable interest as the two Charter convertibles have been looking for early redemption possibilities for some time.

"We hear lots of rumors about Charter, all the time, but hadn't heard anything lately really, not this week; we are interested, though, of course," said a convert trader at a smaller shop in New York.

"The [Charter] converts were a little weaker earlier today, nothing unusual. These have been on the refi radar screen for a while, but it's all been pure speculation so far. That's why they've had a hard time bridging the gap to get to par, there's so much risk involved with any new deal they might bring."

Sources in the bank loan community have told Prospect News that Charter bank paper has been holding steady around 99 in the secondary over the past week as a potential structure and lead banks on the new facility have been circulating.

Currently, the refinancing is being talked as a $6.5 billion credit facility, consisting of a $3 billion revolver and a $3.5 billion term loan B, according to a market source. And, JPMorgan and Bank of America are said to be leading the deal.

Charter declined to comment on the financings. In a conference call in mid-February, Charter executives said the company anticipated having enough availability and flexibility under its existing credit facilities to deal with near-term bank debt maturities, although various refinancing options were being considered.

In the talks rumored presently, bank loan market sources said there are some questions surrounding Charter's 5.75% convertibles due 2005.

"There's an unwritten rule that you don't usually lend bank debt to take out bond debt," a market professional told Prospect News. "I think this probably has to be done in consideration of a likely bond deal."

Currently the company has about $8.96 billion of total bank debt, according to an SEC filing on March 15, so a $6.5 billion credit facility would in a sense reduce banks' exposure to Charter.

The convertible trader said that if bank talks solidify, then both Charter convertibles stand to make significant gains as the 4.75% issue due 2006 "would move up in the food chain," or maturity schedule, and the 5.75s could shoot up to the current call price. The 5.75s became callable in October at 102.3.

Charter's 5.75% due 2005 was quoted at 95 bid, 96 offered and the 4.75% due 2006 at 92.75 bid, 93.25 offered; both added about 0.5 point on the day, traders said. Charter shares rose 14 cents, or 3.4%, to $4.26.

In February, Charter executives noted that the St. Louis-based cable company in 2003 exchanged some $1.87 billion of debt for $1.57 billion of debt, extending maturities at the same time. The company also sold several assets and used proceeds to reduce bank debt.

"As we've been saying most recently, we're putting together a long-term plan, holistic plan to deal with our balance sheet over time. Everyone understands that our leverage and our intermediate-term maturities are an issue and a risk for the business, but we're looking to address it," a Charter official said during the February conference call.

"If the bank market provides an opportunity, we'll look at doing whatever we can, but I'm not going to put a stake in the ground and say exactly what we'll do at this point. We've talked to a number of investment banks about other potential opportunities.

"We will continue to take the incremental disciplined approach that we took this year that improved our balance sheet arguably by $2.1 billion based on the financings that we did, and we will continue to stay focused on our operations, which improved by $1.4 billion this year. The key for us is maintaining our focus on our operations and being opportunistic as the capital markets present themselves. And we are totally focused on that this year as we were last year."

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