Convertibles market mostly quiet; Six Flags edges up, Calpine slips, Albertsons flat

By Rebecca Melvin

Princeton, N.J., Dec. 19 - Company-specific news sparked some trading in the convertibles market on Monday, but overall it was quiet with a mixed move in the broader stock markets providing little impetus ahead of year-end and holiday vacations, traders and market sources said.

Many market sources said that they planned to take off Friday ahead of Christmas even though the stock market was expected to be open for a full session. Stock markets will be closed on Monday in observance of Christmas.

The bond markets were expected to run an abbreviated pre-holiday session on Friday and remain closed on Monday.

Last week, the tail end of a two-week flurry of new issuance propped up convertibles trading activity. But on Monday it was "not too busy," a New York-based sellside desk analyst said, adding that his firm had traded mostly new issues, some Six Flags Inc. and Nabors Industries Ltd.

Of issues trading Monday, Six Flags Inc.'s 4.5% paper was up a little in the aftermath of news last week that Washington Redskins owner Dan Snyder was taking over the company after a long struggle, and Calpine Corp.'s 4.75% notes were down 0.5 point on news that the Delaware Supreme Court upheld a ruling against the company, traders said.

The convertible preferred shares of Albertson's Inc. traded mostly sideways in heavy volume after Lehman Brothers upgraded the grocery chain's shares to "equal weight" from "underweight," and in the absence of news that an agreement had been struck in a leveraged buyout that was chattered about on Friday.

Albertsons is said to be considering a $9.6 billion, or $26-a-share, bid from an investment group that includes Cerberus Capital, Kimco Realty and Supervalu, according to reports on Friday.

The company's board was expected to have weighed this bid and any others submitted during the weekend.

Also on Monday, XOMA Ltd., a Berkeley, Calif., biotechnology concern, said that it has filed a proposed exchange offer on its 6.5% convertibles with the Securities and Exchange Commission.

XOMA would offer up to $60 million new 6.5% convertible SNAPs in exchange for the outstanding $60 million of 6.5% convertible senior notes due 2012 that it issued earlier this year.

The 6.5s weren't seen in trade but were recently seen at 107.50 bid, 108.50 offered.

Six Flags edges up

The 4.5% convertibles of Six Flags edged up as its shares gained 1.2% on Monday as more details filtered through relating to the Oklahoma City-based amusement park company's change of directors.

The company said it paid severance of $7 million and a $2.33 million bonus to departing chief executive, president and chief operating officer Kieran Burke. Chief financial officer James Dannhauser will remain in his post until at least April.

The board appointed ESPN executive Mark Shapiro as the new president and chief executive, and he will be paid a base salary of $1.05 million a year.

The board also named former politician Jack Kemp, Hollywood producer Harvey Weinstein and advertising executive Michael Kassan to the board.

In the initial announcement Wednesday regarding the changes, Snyder said that the company's focus will now turn to "implementing new operational strategies," recognizing the company's significant debt load and the effect that such debt has on any transactions the directors look to bring.

Calpine edges down

The 4.75% convertibles of Calpine traded at 19 bid, 19.50 offered, down about 0.5 point following news that the Delaware Supreme Court on Friday refused to throw out a ruling ordering the struggling independent power producer to restore $312 million to an account that was frozen at the request of its creditors.

The three-judge panel said the San Jose, Calif.-based company improperly used proceeds from the sale of its natural gas assets to buy stored natural gas to operate power plants.

The case was sent back to the Delaware Chancery Court, however, for new conditions to safeguard the rights of Calpine's second-lien debt holders. The justices said the lower court had failed to recognize contractual rights of Calpine's top-priority debt holders.

The company has until Jan. 22 to restore the funds in question to the escrow account. It also must make a tender offer to second-lien debt holders by Jan. 3, as spelled out in Calpine's indenture agreements, the court ruled.

The move in Calpine's 4.75% convertibles wasn't matched by Calpine's 6% convertibles, which weren't seen in trade on Monday, a Connecticut-based sellside trader said.

Frontier moves lower

The new 5% convertibles of Frontier Airlines Inc. traded lower by 1 or 2 points to 101.5, versus a stock price of $8.625, which was mostly flat on Friday. Airline convertibles and shares had moved up last week amid lower oil prices.

Frontier priced $80 million of the 5% 20-year convertibles on Dec. 2. Denver-based Frontier is a low-cost regional carrier.

XOMA stock plunges on exchange

XOMA saw its stock drop nearly 8% Monday to $1.67 on short selling in the face of an announcement from the company that it planned to propose an exchange offer for its currently outstanding 6.50% convertible senior notes due 2012, plus issue $10 million more of the exchange notes.

"They need the money. Raptiva [its Psoriasis treatment] sales are probably not very good," said a trader on the sellside of the market.

"Aside from the short sellers involved in the convertible deal, it turned off everyone else because the company had indicated it would not be needing any more capital until 2008 and now they are back in the cash markets," the trader said.

In the proposed exchange offer, XOMA said it would issue $60 million of new 6.5% convertible SNAPs due 2012 for up to all of the $60 million of its currently outstanding 6.5% convertible senior notes due 2012 plus offer another $10 million of the new convertible SNAPs.

XOMA offer a snap

While the sellsider said it was difficult to gauge the reception of XOMA's offer, it seemed that the reaction in the stock suggested holders were going to participate in a big way.

"Looks to me like the primary difference between the existing and new notes are the more flexible options that XOMA has to convert the notes to shares on the basis of stock price appreciation, and, of course, the additional $10 million just to tide them over," the sellsider said. "I've not read it closely but I think the price for the convertible is about 6 or 7 points above Friday's close."

The trader said he personally was bullish on the XOMA story as a potential takeover target if nothing else, in light of the Amgen, Inc. buyout of Abgenix, Inc. last week for $2.2 billion plus the assumption of debt.

"Well, it's another $10 million worth of stock likely to be issued and the arbitrage for the notes affecting the stock price," he said. "It's not a matter of gun-shy stockholders selling off. It's just the way that this sort of financing is likely to affect stock price."

The buysider who has exited the XOMA story, however, argued that "if current bond holders take the bait the lowest XOMA gives shares up is $1.87 no matter what the share price. So, there's no way to play this baby. Whoever made this SNAP is a genius. XOMA had to pay interest till 2008 anyway if there was no voluntary conversion. Four years of interest is a good chunk of cheese."

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