Concord up on buyout, Computer Associates steady; Nuveen issues slip in trade; GM gains, Ford falls

By Ronda Fears

Nashville, April 7 - Computer Associates International Inc.'s announcement Thursday of its intention to buy Concord Communications Inc. at a hefty premium sent Concord shares soaring and boosted outright convertible holders and arbitrageurs, except those heavily hedged. Computer Associates' convertible, meanwhile, was little changed.

In other secondary action, traders noted that General Motors Corp.'s convertibles and the stock were seeing buying on the recent weakness along with Ford Motor Co. stock, although Ford's convert continued to get sold off. The rise in the automakers' shares countered downgrades in both stocks by Smith Barney.

Airline paper was "surprisingly quiet" despite a sharp drop in crude oil prices, which fell $1.74 to settle at $54.11 a barrel, a sellside trader commented, but he added that most of the airline convertibles were marked higher with the underlying stocks. Delta Air Lines Inc.'s 8% convertibles were pegged at 40.5 bid, 41.5 offered and the 2.875% issue at 40.5 bid, 41 offered. JetBlue Airways Corp.'s new 3.75% convertible was at 99 bid, 100 offered and its old 3.5% convert at 85.5 bid, 86.5 offered.

As for any new buzz about a new deal from Delta, one sellside market source said talk about that had dwindled to "zilch. All you hear about DAL is bankruptcy talk and people buying secured paper, shorting the unsecured [bonds]."

Cray Inc.'s convertibles were improving a little Thursday, gaining about a half-point to the mid-80s area, "maybe a little lower," according to a sellside market source. He said that the issue was better "after finding a floor" that ended the freefall sparked by the delay in filing its financial reports with the Securities and Exchange Commission last month.

Cal Dive International Inc.'s new 3.25% convertible was off 0.875 point to 103.5 bid, 104 offered on the drop in oil prices, however, as the stock lost 64 cents on the day, or 1.34%, to close at $47.12. The Houston-based deepwater drilling firm on Thursday announced it was the so-called stalking horse bidder for the purchase of Torch Offshore Inc.'s vessels and related assets for $92 million in Torch's bankruptcy.

On the new issue front, El Paso Corp. was at bat after the close with a new $750 million perpetual convertible preferred. Meanwhile, the Nuveen Investments Inc.-linked issues sold by Morgan Stanley & Co. and Merrill Lynch & Co., which were both downsized to $275 million from $350 million, both traded slightly under par in the immediate aftermarket.

Concord up on lighter hedge

Initially, some players in the Concord convertibles set up on hedge thought the issue was "murdered" as the stock soared on Computer Associates' acquisition for $330 million cash, plus the assumption of debt. But that turned out only to apply to those who set it up on a heavy hedge, 50% or more, a sellside trader said.

"I can't imagine hedging it at 50%," he said. "Most were at about 30% and they were up 3 to 5 points."

Concord's 3% converts were pegged at 98.75 bid, 99.375 offered at the close, up from 89 on Wednesday. The stock shot up 68%, gaining $6.76 on the day to close Thursday at $16.70.

Computer Associates' 1.625% convertible was described as steady to slightly better at around 7 points over parity, with the underlying stock up 42 cents, or 1.53%, to end at $27.86.

The corporate software giant said it would pay $17 cash for each share of Concord, which is a 71% premium over the closing price for Concord shares on Wednesday. Computer Associates expects the deal will be neutral to fiscal 2006 earnings.

"With CA's acquisition of Concord, we can provide our mutual customers with the broadest and deepest enterprise systems management offerings in the industry," said Computer Associates chief executive John Swainson.

Concord also on Thursday warned that first-quarter results would fall short of analysts' expectations, with the company projecting a net loss of 11 cents to 15 cents a share on revenue of $28.5 million to $29.5 million.

GM issues lifted on weakness

Despite a downgrade to GM stock, traders noticed buying in its 6.25% convertibles and 4.5% convertibles, suggesting both hedged and outright players were involved. The stock gained in the face of the downgrade, too.

Behind the scenes, buzz in the junk bond market early in the day focused on rumors that GM planned to make a debt offering of some sort. First that appeared to be in the form of five-year and two-year straight bonds at 8.40% and 6.40%, respectively. Later in the afternoon, the buzz changed to hearing that GM was planning 1.9-year and 2.9-year offerings in the asset-backed securities market.

One sellside market source quipped, "Is that a one week late April fool's joke?"

"It's a sign of the times that you're hearing that through high-yield guys," another sellside market source remarked.

Since warning of a first-quarter net loss last month and sharply lower 2005 earnings than previously forecast, GM securities have been tumbling. The 6.25s were up Thursday by 0.375 point to 21.5 and the 4.5s added 0.125 point to 23.625, a dealer said. The 5.25% convertibles ended on the New York Stock Exchange up 0.01 point at 18.91.

GM is on the verge of junk territory, and GimmeCredit bond analyst Craig Hutson said in a report Thursday that he believes at least one of the rating agencies will downgrade GM debt to junk before year-end.

"Based on GM's revised earnings guidance and a 12% drop in North American production in the first quarter, we expect reported quarterly numbers to be very weak when released on April 19. GM could suffer a larger automotive cash flow deficit in the period than it has forecast for the entire year...and we expect GMAC to retain access to various funding sources even if it is downgraded to high yield," Hutson said.

"The road will continue to be bumpy throughout 2005. The shorter-dated issues offer good value for investors who are not ratings sensitive. The longer-dated bonds require a long-term investment horizon."

GM shares rose, too, even after Smith Barney equity analyst Jon Rogers on Thursday cut his rating on the stock to sell and lowered his price target to $24 from $32. GM shares closed up 67 cents, or 2.24%, at $30.53.

"To remedy the situation, GM would need to enact more sweeping and radical changes than have been detailed thus far," Rogers said in his report. "As such, we see things getting worse before they get better."

Ford 6.5% convertible sold off

Smith Barney's Rogers also cut his rating on Ford stock, but similar to the reaction with GM, however, Ford shares rose Thursday. Yet, Ford's convertible was heavily sold off, traders said.

Ford's 6.5% convertible trust preferred dropped about 0.125 point to 44 on heavy volume, one dealer said, while the stock gained 19 cents on the day, or 1.71%, to close at $11.30.

Rogers had also cut his rating on Ford shares, to hold from buy, with a reduced price target of $12 versus the previous $16.

"While [Ford] management is taking the right steps from a product and capacity standpoint, we believe it will be difficult to avoid the ripple effects of GM's woes on volume and pricing," Rogers said in the report.

El Paso deal pivots on outrights

El Paso was at bat after the close pitching $750 million of convertible perpetual preferred stock talked to price with a 4.375% to 4.875% dividend and 25% to 30% initial conversion premium, but there still were no bids emerging for the issue, market sources said. An offer hung in the air for 1 point over issue price, though.

"We're a little worried about the EP deal," said one convertible analyst, who works away from joint bookrunners Banc of America Securities LLC and Deutsche Bank Securities. "Hopefully, there are lots of outrights interested in this, because the arb community is not interested at all."

The Houston-based power company plans to use proceeds, plus cash on hand if needed, to redeem the $300 million of 8.25% cumulative preferred stock of subsidiary El Paso Tennessee Pipeline Co. and to prepay the estimated $442 million Western Energy settlement obligations.

Nuveen issues end lower

Morgan and Merrill trimmed the exchangeables linked to Nuveen, but a source close to both deals said it was simply a matter of shuffling amounts in order to accommodate the secondary stock offering by The St. Paul Travelers Cos. Inc. He said demand for the convertible was strong, with the books oversubscribed, but demand for the stock was stronger.

Merrill issued 2.5-year notes at par of 34 with a 6.75% coupon and a conversion premium capped at 20%, pricing at the cheap end of price talk for a 6.25% to 6.75% coupon. That issue closed Thursday at 33.55 bid, 34.05 offered.

Morgan issued 3.5-year notes at par of 34 with a 5.875% coupon and a conversion premium capped at 20%, pricing at the more aggressive end of price talk for a 5.75% to 6.25% coupon. That issue closed Thursday at 33.35 bid, 33.85 offered.

Nuveen shares ended Thursday off a penny at $34.00.

The transactions were part of St. Paul's divestiture of its 78% equity stake in the money manager, Nuveen. In addition to the exchangeable, made possible by virtue of forward stock sale agreements with Merrill and Morgan, St. Paul sold 39.3 million of Nuveen shares at $34.00 in a public secondary offering and Nuveen repurchased $600 million of stock at a discounted price from St. Paul.

As a result, Nuveen will be an independent company.

Fugro prices

Amsterdam-based oilfield services firm Fugro NV on Thursday sold €110 million of convertibles with a 2.375% handle and 33% initial conversion premium - at the aggressive end of price talk for a coupon of 2.375% to 2.875% and a conversion premium of 28% to 33%.

"We think that the new issue is not attractive for hedged investors but could be of interest to outright investors who are looking for exposure to the underlying equity and the credit," said Barclays Capital Markets convertible analysts Luke Olsen and Haidje Rustau in a report.

"Given that the shares underlying the convertible would account for approximately 40 days of traded share volume, strike pinning could be a major risk for this issue. Additionally, due to its small issue size, we expect little trading activity in the convertible post pricing."

Barclays analysts thought the new Fugro convertible looked expensive given the common stock dividend of 2.5%, using a credit spread of 100 basis points over Libor, with an implied volatility of 23.6% on the worst terms or 18.2% on the best terms.

Deutsche Bank Securities analysts put it 3.5% rich using a credit spread of 70 bps over Libor and a volatility of 15.5%.

Fugro also arranged a €100 million revolving credit line and said proceeds would be used to finance internal and external growth.

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