Level 3 emerges; FuelCell hovers at par; Nortel dumped for Lucent; Delta gains ground

By Ronda Fears

Nashville, Nov. 12 - Level 3 Communications Inc. was in the market Friday prepping a new deal for next week. Convertible players welcomed a lengthy road show, which these days are rare, as the internet access provider's credit may be a tough sell.

"I have no interest because of the credit," one convertible hedge fund manager said, noting that Level 3's new deal is expected to be rated Caa2 by Moody's and CC by Standard & Poor's.

Another fund manager, focused on fixed income, indicated a willingness at least to listen to the pitch. "This deal is targeted to outright investors or funds looking at shorting other debt against it. [It's] potentially quite interesting," he said. We "will have to see how it shapes up closer to issue date."

Others involved in both arbitrage and outright strategies suggested Level 3 stock might be interesting on the financing news. Level 3 shares on Friday added a nickel, or 1.55%, to close at $3.28.

The $200 million deal, talked at 5.0% to 5.5% with a 17.5% to 22.5% initial conversion premium, is not scheduled to price until Wednesday or Thursday. On Monday, Level 3 is expected to launch a $450 million term loan, with proceeds from both deals to be used to take out the $200 million of 8% notes the company had tendered for.

A sellside desk analyst said there was speculation that Level 3 would be looking to use some of the new capital for acquisitions, which was not a popular proposition. Surprisingly, perhaps, he added that Level 3's existing 6% converts, which are usually active issues, were not busy at all Friday. Its 2.875% convertible, sold in July 2003, was quoted off about a half-point.

FuelCell upsizes

Meanwhile, FuelCell Energy Inc. upsized its deal to $100 million from $75 million and it priced with a 5.0% dividend and 16.2% initial conversion premium, at the cheap end of talk for a 4.5% to 5.0% dividend and in the midrange of premium guidance of 15% to 20%.

Out of the gate the FuelCell convertible was bid at issue but then briefly dipped about a quarter-point before ending the session right at par. FuelCell shares on Friday lost 8 cents, or 0.79%, to $10.03.

Fresh paper has been fairly active, a sellside trader said, even though most of the deals lately have been small. He said the new issues are mixed, but he saw no drastic moves in any direction.

Powerwave Technologies Inc.'s new issue was off about a half-point. AudioCodes Ltd. and Option Care Inc. convertibles were higher, though, by about a half-point to 1 point.

Nortel dumped for Lucent

With Nortel Networks Corp. credit spreads blowing out on yet another delay in its financial reports, traders said the convertibles were getting dumped with that capital deployed to Lucent Technologies Inc.

"Nortel's credit has been widening out," so selling stepped up Friday, a sellside desk analyst said. "I've been a fan of Lucent over Nortel for a while, actually. That [Lucent] credit has been tightening, but has a lot less hair on it."

Nortel's 42.5% convertible due 2008 slipped about 0.375 point on Friday to 95.5 bid, 95.75 offered, while the stock lost 34 cents, or 10%, to $3.03.

Lucent's 2.75% convertible due 2023 added 2.25 points to 142.75 bid, 143 offered, and the 2.75% convert due 2025 gained 2.75 points to 150.5 bid, 150.75 offered. Lucent shares rose 7 cents, or 1.83%, to $3.90.

On Thursday, Nortel said it would yet again delay filing its financial restatement, missing the mid-November date it aimed to issue the restated results. Nortel said it overstated revenues by a total of $3.1 billion in 1999 and 2000, and its accounting problems have sparked criminal and regulatory investigations.

Now, Nortel is aiming to complete the new bookkeeping matters in the next 30 to 60 days.

Delta securities fly

In an amazing two-week run, Delta Air Lines Inc.'s convertibles have risen from the 35 area to the neighborhood of 60 while the stock has about doubled to nearly $7 a share. Traders said it appeared that so far holders have resisted the temptation to sell on the run-up, even though some skeptics still see Delta landing in bankruptcy.

"It's too funny. I love it," said a Delta convertible holder. When asked if he were tempted to sell into the strength, he said, no. "I can afford to be a swinger."

A sellside trader said there hasn't been a rush of selling in the Delta convertibles, though nice two-way action. "Not everyone believes that these things are the salvation of Delta," he said. "This all may turn out to be nothing more than stop-gap measures."

One of the biggest concerns among skeptics, he said, is fuel prices, as crude oil prices have remained at elevated levels for several weeks, while Delta has not maintained any price hedge on fuel costs since February.

Skeptics see Delta short

Late Thursday, Delta announced its pilots had overwhelmingly ratified the $1 billion pay cut agreement with the pilots union. That followed a short string of developments, including deferring some debt maturities beyond 2005.

On the news, Lehman Brothers equity analysts on Friday revised their 2005 loss estimate for Delta to $4.50 a share from $15.10 and raised the 12-month target on the stock to $9.50 from $5.

Delta shares on Friday gained 55 cents, or 8.74%, to close at $6.84. While well above the 52-week low of $2.75, it is still far short of the 52-week high of $15.20.

"Delta has to cut costs by $5 or $6 billion and they are just at the half-way mark, around $2.3 billion, for this year, so I don't think everyone is entirely ready to say that the storm has passed," the sellside trader said.

Biotechs lure bargain hunters

There were several biotech convertibles active Friday, traders said, as players search for bargains or reach for yield. In addition, one said that there were a few issues getting picked up for delta exposure, but those are becoming scarce.

"I think LGND is a no-brainer for the outright guys," said a market source. "If you own the common, why not just swap into the bonds? At 4s, up 11%, it sounds pretty good."

Traders also mentioned Protein Design Labs Inc., CV Therapeutics Inc., ViroPharma Inc., Durect Corp. and Corixa Corp.

Tower Automotive climbs

Ahead of the coupon payment due Monday from Tower Automotive Inc. on its new 5.75% convertible, the issue made yet another spike upward.

"There was an over-reaction, over-correction to the earnings and the warnings from the company," one dealer said. "Then they [Tower Automotive] started talking about the secured account receivable funding, and that really sort of blew it more out of proportion. They will make the coupon."

Tower is looking to lenders to boost is accounts receivables securitization program to $200 million from $50 million.

On Wednesday, James Mallak, chief financial officer of the auto parts and components maker, said the company has $145 million in cash, which the trader noted is way more than enough to cover the interest payment on the $125 million issue of 5.75% convertibles. Kathleen Ligocki, Tower's chief executive, acknowledged the company's overall liquidity challenges but said that even with credit facility restrictions of $150 million to $175 million on capital expenditures for 2005, the company would still be able to pay down debt.

The 5.75s on Friday were up about 1.5 points to the 65 area, the trader said. Tower Automotive stock gained 22 cents, or 10.78%, to $2.26.

Advanced Micro higher

As new chatter that Dell Corp. would be offering new business to Advanced Micro Devices Inc., AMD's convertibles led the pack of chip issues higher on Friday. Its 4.75% converts gained 2 points or more to 108.5 bid, 109 offered, and the stock climbed by $2.43, or 13%, to end at $21.02.

Over the past week alone, Advanced Micro Devices shares have soared 17% as noise about the company's outlook filtered through the market ahead of its annual analyst conference Friday. PC giant Dell has suggested in recent media reports that it is looking at Advanced Micro's silicon chips, a trader said, but nothing seems definite. Similar buzz around the ends of the March and June quarters also boosted Advanced Midro, he added.

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