Kodak, Placer Dome track gray market levels out of the gate; Simon positions seen lightening

By Ronda Fears

Nashville, Oct. 8 - Aggressive pricings on the Eastman Kodak Co. and Placer Dome Inc. deals had lots of buyers nervous, particularly since they came on the heels of the controversial Bristol-Myers Squibb Co. deal.

Elsewhere in trading, dealers were anticipating positions in Simon Property Group Inc. would begin to get lightened as its unsolicited bid for Taubman Centers Inc. was officially withdrawn. Buyside traders at hedge funds that were playing the Simon convertible in addition to spinning some risk arbitrage action in the year-long ill-fated saga also were looking to unwind positions in Taubman shares.

Yahoo! Inc. pleased the market, reporting after the close earnings and revenue figures that beat analysts' expectations. Market sources noted techy names in the software sector - Manugistics Group Inc. and i2 Technologies - getting some action, moving higher.

Still, most of the market's focus was in the primary arena.

Kodak's $500 million of 30-year convertible notes sold at par to yield 3.375% with a 47% initial conversion premium - at the aggressive end of yield talk for 3.375% to 3.875% and aggressively outside premium guidance for 40% to 45%.

At the midpoint of price talk, sellside analysts had put the Kodak convert anywhere from 0.13% rich to 3.9% cheap, noting the 2.34% common dividend.

Placer Dome's $200 million of 20-year convertible notes were issued at par to yield 2.75% with a 55% initial conversion premium - at the aggressive end of price talk for a coupon of 2.75% to 3.25% and premium of 50% to 55%.

At the midpoint of price talk, sellside analysts had put the Placer Dome convert anywhere from 1.72% to 3.83% cheap, noting the 0.75% common dividend.

The pricing terms didn't stymie activity in the new paper, however, as both tracked gray market levels of 2.5 to 2.875 points over par after they freed for trading in the secondary market.

Citigroup, a joint lead on both deals, closed Kodak at 102.5 bid, 102.75 offered and Placer Dome at 102.875 bid, 103.125 offered. In the gray market Tuesday before pricing, Kodak's new issue was bid 2.25 points over issue price and Placer Dome's was bid 2.5 points over.

"They were both trading very well but we are right back where we started from," said John Siebel, head of trading at Silverado Capital Management.

"Placer Dome sets up okay, but Kodak just doesn't make sense. There's no way a hedge fund should be in this [Kodak], and all I saw this morning was outright bids.

"It's like they [sellside shops] think just because Bristol-Myers got done, then they can sell anything now. But Bristol-Myers was a very good credit. With Kodak, it's going to take years for a turnaround. It's not a slam dunk."

A market source who worked on both deals said there was some hedge fund participation in both, and noted there were mostly outright players flipping the Placer Dome issue throughout the session. He said there was mostly outright action in the Kodak issue early on, but later in the session there were hedge funds getting involved as well as flipping the new paper.

Elsewhere in the primary market it was rather quiet, even as Finisar Corp. and iDine Rewards Networks Inc. came up to bat with a couple of very small deals after the closing bell.

"We've not seen anything on either one of these [Finisar and iDine] in the gray market, they're just so small," said one buyside trader.

Finisar is returning to the convertible market with $100 million of seven-year convertible notes talked to yield 2.5% to 3.0% with a 22.5% to 27.5% initial conversion premium.

A big draw for the Finisar deal was the collateralized coupon payments for the first four years, through the end of call protection, but market sources said the new deal is likely to get a haircut due to there being such a tough borrow on the stock.

Lehman Brothers analysts put the new Finisar convert 2.6% cheap at the middle of price talk, using a credit spread of 950 bps over Treasuries and a 50% stock volatility, noting the collateralization added 1.8 points of value to the issue. Lehman analysts also noted the borrow on Finisar shares is difficult, but did not discount the new issue specifically because of that.

iDine is pitching a tiny $60 million of 20-year convertible notes talked to yield 3.25% to 3.75% with a 20% to 25% initial conversion premium.

Lehman Brothers analysts put the iDine issue 2.13% cheap, at the middle of price talk, using a credit spread of 950 bps over Treasuries and a 35% stock volatility. Lehman analysts used the new MemberWorks Inc. 5.5% convertible to take a view on the credit spread.

Traders saw no gray market activity on the pending Finisar or iDine converts.

Elsewhere, buyside traders were watching the latest installment of the Simon-Taubman shopping mall soap opera unfold. The end of Simon's attempted takeover of Taubman also will cause lots of hedge fund players to unwind their positions.

Mall owners Simon and Westfield America Trust on Wednesday officially withdrew their $1.74 billion bid for Taubman, following a new Michigan law signed into effect on Tuesday that would have blocked the hostile takeover.

The battle between the shopping mall moguls has lasted nearly a year and spurred a steady markup in the Simon $6.50 convertible preferreds, which were off 0.5 point to 116.625 on the news Wednesday.

Hedge funds involved in risk arb that also had taken a position in Taubman now will be unwinding.

One trader at a fund in such a position said most players saw the fatal blow coming, however.

"We sold extra calls [of Taubman] while buying the stock, because we didn't think it would go through after the law got passed," the trader said.

"We're not panicking; right now we're not doing anything. In the next day or two, we'll be unwinding our position."

To the contrary, players were getting wound up with elevated moods on the tech sector after Yahoo posted better-than-expected earnings after the close, plus boosted its outlook for fourth quarter and 2003.

Yahoo reported third quarter net income of $65.3 million, or 10c a share, compared with net income of $28.9 million, or 5c a share, in third quarter 2002. Revenues totaled $356.8 million, up from $248.8 million.

For the fourth quarter, Yahoo is forecasting operating income before depreciation and amortization of $130 million to $150 million and revenue excluding certain costs of $462 million to $502 million.

For the year, Yahoo raised its outlook on operating income to $428 million to $448 million - from $375 million to $400 million previously - and revenues of $1.42 billion to $1.46 billion - from $1.26 billion to $1.31 billion forecasted earlier.

Optimism, while guarded, is prevailing in the tech sector, traders said, and players are reaching for yield in many cases as well as searching for delta to get some exposure to the stocks in that sector in anticipation of a spike in many of those names.

i2 Tech and Manugistics were getting played for yield, one dealer said. He said the Manugistics converts were up about 4 points and i2 Tech converts up about 1.5 points.

CenterPoint Energy Inc. also got some mention Wednesday, as it wrapped up its restructuring package with the refinancing of its $2.85 billion bank credit facility.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.