Airline paper tumbles; metals soar; floaters still finding bids; Shuffle Master goes to 103.75

By Ronda Fears

Nashville, April 16 - Convertible players remained cautionary, and a flight to safety was reflected in buying of metals paper and floating-rate issues. In counter movement, airline paper was weaker on the heels of the Delta Air Lines Inc. headlines this week combined with a host of concerns in the group.

"It was probably a wash - the market today - [and] a little better than earlier this week," said a sellside trader at one of the bulge bracket firms. "A lot of what the hedge guys were selling, outrights were putting on."

Floating-rate convertibles were still finding firm bids. In that area, some of the names mentioned included Mandalay Resort Group, SLM Corp. - or Sallie Mae - and Caesars Entertainment Corp.

In addition to metals as a safe haven, a couple of traders mentioned some buying in the oil and gas area as tight supplies, the potential for a disruption of supplies from Saudi Arabia and terrorist threats throughout the Middle East pushed oil up to nearly $38 a barrel. Pride International Ltd. was mentioned in that group.

Lots of outright participation in the fresh supply of paper this week was noted by one sellside trader.

Shuffle Master Inc. bumped up its deal, like Walter Industries Inc. earlier, amid an obviously healthy book of orders as the final terms were printed at the aggressive end of talk.

Shuffle Master at tight end

Shuffle Master sold an upsized $125 million, from $100 million, of convertibles with a 1.25% coupon and a 37% initial conversion premium. The issue priced at the tight end of price talk for a 1.25% to 1.75% yield, up 33% to 37%. Analysts had put it about 2.3 points cheap at the middle of the talk.

But it shot up right out of the gate with the first bid at 101.25 and an offer at 102, according to a buyside trader.

The Las Vegas-based company, which supplies automatic card shufflers and special gaming tables to casinos, used $57.5 million of proceeds to buy back stock sold short by convertible buyers.

Part of the frenzy to get in on the Shuffle Master deal, a buyside source from the outright camps said, was to play the stock.

"This [Shuffle Master stock] has been a screamer. They are at about the 52-week high and are doing a 3-for-2 stock split," the fund manager said.

"You just wish you could transport back into time and buy this a year ago when it was at $20 or whatever."

On Friday, Shuffle Master was distributing a 3-for-2 stock split, to holders of record April 5. The stock closed Friday up $1.80, or 3.91%, to $47.83. The 52-week range is $20.55 to $48.69.

Deutsche Banc Securities - which has brought several issues from the hot gaming sector to the market in recent weeks - ran the deal and closed it at 103.375 bid, 103.875 offered.

Metals shine

As market dynamics shifted into safe-haven plays to cushion any inflation that might be triggered by higher interest rates, investors were looking to sit on rocks, or precious metals.

Inco Ltd., Apex Silver Mines Ltd., Coeur d'Alene Mines Corp. and Freeport-McMoRan Copper & Gold Inc. convertibles all caught a bid as a result.

Earlier in the week these issues were getting sold off, but most recouped most of the lost ground.

Taking Inco as an example, the nickel producer "was a weak dollar play, so when the dollar rallied, they came off sharp," said a buyside source. "Now, it's an inflation play."

Raw metals prices and precious metals were higher Friday after having a seesaw week as well. Gold, for instance, closed the week back over the $400 mark.

Inco was one of the strongest climbers among the group, with its 0% convertible soaring 3 points to 96.25 bid, 96.5 offered, its 1s were up 3.375 points to 127.75 bid, 128 offered and the 3.5s added 4.5 points to 147 bid, 147.5 offered. The stock closed Friday up $1.31, or 3.96%, at $34.36.

Freeport-McMoRan's 7% convertible gained about 1.5 points Friday to settle the day at 152 bid, 152.5 offered. The underlying stock closed up 60 cents, or 1.7%, to close at $35.89.

Apex Silver's new 2.875% convertible rose similarly, adding 1.625 points to 95.5 bid, 96 offered. The stock ended the day up 49 cents, or 2.58%, to $19.51.

Coeur d'Alene's 1.25% convert was up 1.25 points to 102.75 bid, 103 offered. The stock ended up a dime, or 1.73%, to $5.89.

Airline paper wafts lower

Airline paper on Friday was getting hit because of a multitude of investor concerns - massive debtloads, weak operations, lack of profitability, terrorist fears, high fuel costs, rising interest rates - and the pressure culminated in a metaphorical skydive out of those positions, a sellside trader said.

"Everyone was bailing out," the trader said.

Delta was readily a catalyst, after taking a nosedive Thursday when its chief financial officer resigned, effective at the end of this month. The departure added fuel to concerns raised by the airline's earnings on Wednesday, which, while showing a narrower net loss, alarmed many investors because of the lack of progress in balance sheet improvement. Delta executives, including the CFO, said in the earnings call that continued losses are indefensible and focused on Delta's expensive cost structure - pilot costs being a particular sore spot.

"Delta, the latest news, was just the straw that broke the camel's back," said a buyside trader in Chicago.

"The whole airline group is in trouble; that's nothing new. What the real catalyst is, I think, is that we've definitely moved into a climate of higher interest rates. Suddenly, the fact that they haven't made much progress in cutting costs, debtloads, all that, is a blaring siren.

"When the alarms start going off, people bail. All that [airline] paper will drop another 15 points, I think, unless something extraordinary happens."

Still, Delta was the hardest hit.

Delta's newer 2.875% convertible lost another 4 points to 67 bid, and the 8% issue gave up 3 more points to 68 bid. Many hedge fund players are shorting the 2.875s with a long position in the 8s, one buyside source noted.

Northwest Airlines Corp.'s two convertibles were each off about 1.5 points with the 6.625s at 106 bid and the 7.625s at 90 bid, a sellside trader said.

There are at least 15 airline convertibles and all weakened Friday, however a sellside trader noted that the decline was negligible in the convertible floaters of Alaska Air Group Inc.

Sprint/PCS at risk of early call

In the wake of what one buyside source referred to as the "SolectBomb" - Solectron Corp.'s early tender for its mandatory to avoid the remarketing event, which took the market by surprise - there has been considerable speculation about other mandatories that might fall into the same fate.

More than a dozen mandatory convertibles maturing in the remainder of 2004 are similar to Solectron.

There is market buzz circulating on one particular issue with plans along the same lines - Sprint Corp.'s 7.125% issue that converts into the Sprint PCS Group, according to the buyside source.

The Sprint/PCS mandatory was weaker Friday, along with the handful of other convertibles linked to the PCS story, as the stock softened on pressure in the telecom sector.

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