Yahoo! overnighter meets few cheers; AES plan lifts power group; warning crushes Affymetrix

By Ronda Fears

Nashville, April 4 - Investors panned Yahoo! Inc.'s overnighter instead of cheering the $750 million chunk of new paper. The five-year zeroes were issued at par with a whopping 68% conversion premium, but were beaten down straight out of the gate.

The new Yahoo convert changed hands for as little as 95.25, traders said. It was closed at 96 bid, 97 asked while the stock ended off 29c, or 1.2%, to $24.05.

"There wasn't any yodeling going on except to make fun of this," said a convert trader at a hedge fund in New York, referring to the Yahoo trademark yodel in its advertisements.

"It was more like something that would make you want to howl in pain. There's free money, and then there's free-er money, I guess. I mean, what they did effectively was sell stock at $41 versus the stock [trading] at $24. They won't have to make [interest] payments, but can count it at tax time for five years.

"But there must some people who really like this story and are willing to step up."

Derivatives traders noted some activity in five-year Yahoo credit default swaps, which one described as unusual for the name and likely tied to hedgers playing the new convert. The credit default swaps were said to have tightened from about 275/310 over Libor early Friday to around 200/225 by around midday.

"Zeros, up 68%, sold at par, noncall 5 - sweet. Now that's a deal I want more of. The good thing is it carries well...oops. Sorry, forgot it was a zero," quipped Steve Jones, head of U.S. convertible research at Wachovia Securities, Inc. in a report Friday.

"I do not get it. No cheap volatility, no cash flow advantage versus the stock, but risk to the downside given the current record-low interest rate environment. Why own it?"

Wachovia convertible analyst Kimberlee Brody put the deal 3.25% rich, using a credit spread of 175 basis points over Treasuries and a 45% stock volatility.

Other sellside analysts put it anywhere from 3% to 5.7% rich.

Merrill Lynch & Co. put the deal 2% rich, using a spread of 365 bps over Treasuries and 60% volatility. Using the actual 90-day volatility of 46% for Yahoo shares, Merrill convertible analysts noted the deal was 9.5% rich.

Bear Stearns & Co. convertible analyst Matt Hempel said it was probably "the most aggressive we've seen" but would begin to look attractive in the low 90s. He put it 5.7% rich using a spread of 275 bps over Treasuries and 50% volatility.

Deutsche Bank Securities put the deal 3% rich using a spread of 200 bps over Libor and 50% volatility.

"Our credit guy thinks the company is in good shape. This is their first piece of debt, they are generating income," said Merrill convertible analyst Tatyana Hube.

"But the convert does look overpriced. It's a huge bet on increase in volatility."

Indeed, Yahoo's deal piqued considerable interest and speculation as to what the Internet firm might be planning to do with the money.

Yahoo spokeswoman Joanna Stevens said officially the use of proceeds is defined as general corporate purposes, including possible acquisitions.

"There is no specific description other than that at this time," Stevens said.

Most observers seemed to think it was just "opportunistic capital-raising," on Yahoo's part.

"With this deal, Yahoo will have this big war chest to make acquisitions, something north of $2 billion, and they could probably pick up assets right now at bargain-basement prices, or it seems like a good time to be a buyer rather than seller," said a hedge fund trader based in New Jersey.

"Regardless, I don't have a huge problem with this name or the credit. So it might be a good bet."

Elsewhere, earnings - or the lack thereof - were the source of problems.

Affemetrix Inc. got crushed after its warning late Thursday, along with peer Invitrogen Corp.

The Affymetrix 5% convertible due 2006 dropped 5 points to 92.5 bid, 93.5 asked and the 4.75% due 2007 fell by about 1.5 points to 88 bid, 89 asked. The stock plunged $9.67, or 34.5%, to $18.33.

"After posting record revenues for fiscal year 2002, our rate of growth has been affected by global economic weakness and cautious capital spending," said Greg Schiffman, Affymetrix chief financial officer, in a company statement late Thursday.

"While academic array revenue growth remained strong, capital spending in the academic and biotech sectors has slowed."

Affymetrix now expects product revenue for first quarter to be in the range of $60 million to $62 million, compared to its previous guidance of $71 million to $73 million. The company is scheduled to release first quarter results after market close April 23.

Analysts said that among Affymetrix's peers in the biotech tools segment, Invitrogen has the greatest chance to miss first quarter guidance because of its high exposure in academia, which was a weak spot mentioned by Affymetrix in its warning. One analyst said Invitrogen's impact should be limited because its product mix is more diversified than Affymetrix's.

Still, Invitrogen was punished alongside Affymetrix.

The Invitrogen 5.5% due 2007 dropped 1-2 points to 94.75 bid, 95.5 asked and the 2.25% due 2006 lost about 1 point to 87 bid, 87.5 asked. The stock fell $2.16, or 7%, to $28.62.

Power names also remained very active, with a new frenzy sparked by AES Corp.'s plans to sell $1 billion of priority senior secured notes to pay off the $475 million outstanding on its senior bank facility and take out other debt with the remainder.

The company launched a tender for its 8% and 8.75% senior notes due 2008, 9.5% senior notes due 2009, 9.375% senior notes due 2010, 8.875% senior notes due 2011, 10.25% senior subordinated notes due 2006, 8.375% senior subordinated notes due 2007, 8.50% senior subordinated notes due 2007 and 8.875% senior subordinated notes due 2027.

While the AES converts are not part of the tender, there was still some optimism gleaned from the development, along with recent refinancing activity recently from the likes of Dynegy Holdings Inc. and Reliant Resources Inc.

"The overhang of bankruptcy got lifted from the entire independent power group so all those bonds are now being valued on a going-concern basis," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

Attention in convertibles was focused somewhat Friday on the credit markets - tighter spreads, the credit default swap market, distressed paper, etc. - as stocks took a break.

Recent News Corp. and Liberty Media Corp. convert issuance has created technical opportunities in both names in the credit default market, said Merrill Lynch credit analyst Stuart Rossmiller, who noted he has a overweight recommendation on both credits.

Beyond a few isolated converts that respond to a strong rally in stocks, most of the convertible market performance stems from the credit side of the story anyway.

"The credit markets are tightening and that's where the performance [in convertibles] has come from," Seidel said.

"All the juice may be squeezed out, though. How much tighter can spreads go? It's all technical anyway, from all the balance sheet work, not fundamentals."

Jeffrey Rosenberg, head of the credit strategy team at Banc of America Securities, said in a report Friday that the credit spread rally continued this week, "capping off a rock-solid first quarter of very strong excess and total returns."

"Continuing into April, high-grade spreads are grinding tighter on the back of positive war news, improving equity markets and relatively low equity volatility," he said in the report. "The high-yield market continued to strengthen this past week, with advancing sectors outnumbering declining ones 25 to 2."

Recovery is the main theme in improvements as the best performers were credits in sectors that were most severely beaten up last year, he said, with weakness noted in consumer products and transportation as economic pressures collided with war concerns.

In high-grade, top performers was dominated by telecom credits with AT&T Wireless and Deutsche Telekom making noteworthy contributions. In high-yield, the biggest gains were posted by cable (Charter Communications Inc.), wireless phones (Nextel Communications Inc.) and utilities (Dynegy Holdings Inc., CMS Energy Corp. and Calpine Corp.).

On the weak side in high-grade, food and beverage took the biggest punch with the Kraft Food unit of Altria Group (Phillip Morris) being the main culprit. Weakness in high-yield was dominated by transportation due to troubles among the airlines, but non-cyclical consumer products was also hurt as Fleming Cos. Inc. filed bankruptcy.

Convertible players were also watching for detail on the junk deal from Allied Waste Industries Inc. unit Allied Waste North America Inc.

Allied Waste North America sold an upsized $450 million of 10-year senior notes at par to yield 7.875%, or at a spread of 396 basis points over Treasuries. It was upsized from $300 million.

The Allied Waste 6.25% mandatory, which priced Thursday, was quoted unchanged at 50 (par) bid, 50.125 asked. The underlying stock closed down 39c, or 4.6%, to $8.01.

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