Credit markets, new deals stir players out of shadows

By Ronda Fears

Nashville, Feb. 25 - The credit markets came to life Tuesday, including convertibles, and convert traders got busy.

Three small convertible deals were launched by Chesapeake Energy Corp., Sierra Health Services Inc. and Axcan Pharma Inc.

The offerings, which together total just $400 million, were nevertheless oversubscribed already, banking sources said, and traders said the paper was getting bid up in the gray market.

Straight debt activity by J.C. Penney and units of El Paso Corp. and Dominion Resources also sparked some activity in those converts, traders said.

El Paso also was boosted by a $530 million asset sale to Chesapeake, which prompted latter's the convertible sale along with a junk deal and common stock offering.

Sierra Health was at bat first, after Tuesday's close, on the heels of getting a new, smaller bank facility.

The $100 million of 20-year convertible senior notes were talked to price at a yield of 2.0% to 2.5% and an initial conversion premium between 45% and 50%.

The Sierra Health convert was last quoted 0.625 point over par on the bid side.

Sierra Health shares closed down 96c to $12.40.

Wachovia Securities put the deal 1.48% cheap and Deutsche Bank Securities put it 4% cheap.

But Bear Stearns convertible analyst Matt Hempel modeled it 1% rich, at the midpoint of guidance, using a credit spread of 600 basis points over Treasuries and 45% volatility in the stock.

"This deal looks aggressive and ... is compounded by the uncertainty surrounding the borrow on the common shares," Hempel said.

"Although the deal is bidding up in the gray market as arb investors have shown a strong propensity to pay up for new paper over the past few months, we would be cautious."

Both Axcan Pharma and Chesapeake's deals are slated to price after Thursday's close.

Axcan Pharma is pitching $100 million five-year convertible notes talked to price to yield 4.25% to 4.75% with a 24% to 30% initial conversion premium.

The deal was bid 2 points over par in the gray market.

Shares of the Canadian drug firm closed in the U.S. down $1.23 to $10.55.

Deutsche Bank Securities convertible analysts put the Axcan deal 6.6% cheap while Wachovia Securities put it 5.12% cheap.

Bear Stearns put it 4.2% cheap, using a spread of 750 bps over Treasuries and 40% volatility.

"The attractive cheapness imbedded in [the Axcan terms] should compensate for a tight borrow and lousy trading volume as outright accounts will probably be targeted," whereas hedge funds appear to be the targeted buyers for Sierra Health, Hempel said.

Borrow would a problem for hedge funds to participate in the Axcan deal, he said, which leads to the conclusion that it will be targeted mainly to outright accounts with an attractive coupon and moderate conversion premium.

Sierra Health also will be a tough stock borrow, he said, but more doable. Still, Hempel said, "This is not comforting as the price talk for this deal is much more targeted to arb accounts, due to the small coupon and substantial conversion premium."

Chesapeake Energy is marketing $200 million convertible perpetual preferreds alongside a $300 million junk bond deal. Chesapeake shares ended down 41c to $8.09.

The convert is talked to price to yield 6.25% to 6.75% with a 23% to 27% initial conversion premium.

In the convertible market, the whispered yield on the junk bond deal was 700 to 750 basis points but that was not confirmed by any high yield market sources.

Deutsche Bank Securities convertible analysts put the deal 6.65% cheap, using a credit spread of 700 basis points over Libor and 40% stock volatility.

Wachovia Securities put the deal 4.36% cheap, using a spread of 900 bps over Treasuries and 37.5% volatility

All proceeds are earmarked to pay for its $530 million acquisition of mid-continent natural gas assets from El Paso, which the markets perceived as a positive event for both companies.

Standard & Poor's put Chesapeake's ratings on positive watch and Fitch Ratings changed Chesapeake's outlook to positive while affirming its BB- senior unsecured notes and B convertible preferred ratings.

S&P rates Chesapeake senior debt at B+ and preferred at CCC+.

Based on the cash flow characteristics of the acquired properties, S&P said Chesapeake effectively will be adding the El Paso properties at a debt to EBITDA ratio of about 1.0x.

But, S&P also noted that Chesapeake still has a heavy debtload" and intends to continue growing aggressively through acquisitions."

El Paso was given the nod on news of the deal, along with boosting its plans for assets sales this year to $3.6 billion from $2.9 billion.

Traders said the market also liked plans to raise $700 million through bond sales by El Paso units Southern Natural Gas Co. and ANR Pipeline Co. this week.

"People are beginning to feel like they [El Paso] are on more solid footing," a buyside trader said.

Both El Paso convertible issues gained 1.5 points.

The 0% due 2021 were at 34 bid, 35 asked and the 9% mandatory at 24.875 bid, 25.125 asked.

El Paso shares ended up 45c to $5.

Convertible investors also were heartened by the sale of a $600 million bond, upped from $350 million, by a J.C. Penney unit.

J.C. Penney sold the 8% seven-year notes at 99.342 to yield 8.125%, or a spread of 483 bps.

The J.C. Penney 5% convert due 2008 gained 1.625 points to 102.5 bid, 103.5 asked. The stock closed up 67c to $20.06.

Fleming Cos. Inc., however, was the big explosion of the session on news that the SEC investigation on it has become a formal probe. The company also announced that it will cut 15% of its workforce, which will cause a pretax charge of about $290 million.

The Fleming 5.25% due 2009 dropped 2.5 points to 25.875 bid, 27.375 asked. The stock ended lost $1.12 to close at $1.85.

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