Massey at 101.25 in gray market; UnitedGlobalCom's euro convert trades down to 99; retailers routed

By Ronda Fears

Nashville, April 1 - Convertible traders weren't exactly lolling around Thursday, but traffic on the desks got pretty quiet in the afternoon as a surprisingly busy week for new deals started winding down.

Massey Energy Co. was on tap after the closing bell. Nothing else emerged, but there had been some chatter that one more deal might get squeezed in for the week. Unless it is a breakfast deal, the week will wrap up at roughly $1 billion, not counting the euro-denominated deal from UnitedGlobalCom Inc.

"I did not anticipate such a busy week, the calendar coming back like it did, because the [stock] market seems so lackluster," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

"It's going to be interesting to see if the convertible market can maintain drawing investment-grade issuers. Historically, that's not been the case. Just in the past couple of years we haven't seen any investment-grade issues to speak of."

In the trading trenches, dealers said there was not really a trend, except the fair amount of activity in new paper. A couple of traders, however, did note that lots of the retail issues saw deep markdowns on a downgrade to the sector by Merrill Lynch & Co.'s equity analysts.

By far, new paper was the busiest area of trading, though.

UnitedGlobalCom slips in deal

UnitedGlobalCom caught the convertible market by surprise Thursday with its new euro-denominated deal - in the United States as well as Europe. Early in the day in the United States, or around midday for many Europeans, sources in London on the buyside as well as sellside were unaware of the deal.

"It didn't really see much [activity] in Europe, a lot of times these overnighters take awhile to filter through to everyone," said a sellside source in the United States who was familiar with the deal.

UnitedGlobalCom - the Denver-based international cable operator controlled by Liberty Media Corp. - sold €500 million of 20-year convertible notes at par to yield 1.75% with a 41.343% initial conversion premium, at the cheap end of talk for a 1.5% to 1.75% coupon.

Bookrunner CSFB closed the new UnitedGlobalCom at 99 bid, 99.5 offered. The stock ended Thursday down 38 cents, or 4.48%, to $8.11 on heavy volume with 10.7 million shares changing hands. The three-month running average volume on the stock is 3.62 million shares.

Buyside sources in the United States were somewhat nonplussed by the deal.

"I heard it was 144A - not registered - so who could buy it? If you have a foreign currency, many U.S. domestic guys cannot buy, and if it is 144A, many Europeans cannot buy," said a convertible fund manager on the West Coast.

Another fund manager, in New York, was flat surprised.

"I can't believe they're still alive," he said, adding that the UnitedGlobalCom deal and/or situation may be akin to the "1999 euphoria."

UnitedGlobalCom, which concluded a major bankruptcy reorganization through its Europe subsidiary last fall, said proceeds would be used for working capital and other corporate purposes, including the possible repayment of subsidiary debt.

The company, controlled by Englewood, Colo.-based Liberty Media Corp. with a 75% equity stake, struck an agreement two weeks ago to buy France's largest cable operator Noos from the Suez group for an estimated €500 million to €660 million.

There have been recent reports, too, that UnitedGlobalCom and Liberty are in active talks to take a stake in the joint venture that will merge the cable assets of France Telecom SA and Canal Plus SA. Vivendi Universal SA owns Canal Plus.

Massey trade at 101.25 in gray

Massey Energy Co.'s encore convertible traded well above par in the gray market, by recent standards in the when-issued market that have equated to zilch in the way of activity. It traded at 1.25 points over issue price, a buyside trader said, and then the bid on the Street went to 1 point over with an offer at 1.5 points over.

Part of the appeal of the issue, one buyside source said, was its priced-to-sell coupon that offers considerably more than convertible buyers have seen lately, as well as the fact that being an energy name it is better insulated from gyrations related to OPEC activities like the major oil producers.

Richmond, Va.-based Massey is the fourth largest coal producer in the United States. The company is pitching $150 million of 20-year convertible notes talked to yield 2.25% to 2.75% with a 45% to 50% initial conversion premium.

On the flipside, another buyside source said the deal could sour on holders' hands if oil prices continue to plunge.

A rise in crude oil inventories last week has weighed on oil and gas prices along with all the equities of oil and gas related companies.

The May contract for crude closed at $34.27, down $4.19 on the New York Mercantile Exchange. But crude prices hit a 13-year high in mid-March, and OEPC has recently said it would curb production output.

Massey shares on Thursday added 63 cents, or 2.85%, to $22.70, which is unusual ahead of pricing a convertible as convertible arbitrage short-selling typically ends a stock plunging. There was heavy volume in the stock, too, with 3 million shares changing hands, compared with the average 821,090.

Vices can pay off, in a way

Sin and vanity in particular are often good bets, or safe bets, in the sense of gambling that regardless of the economic climate, consumers will spend money on those type items. It's not a moral judgment, exactly, but an investment strategy of sorts.

In answer to a question about interest in this week's new issues from Caesars Entertainment Inc. and Kerzner International Ltd., a portfolio manager noted that while he did not get involved in those deals he is making money in that space.

"We've got huge gains in two gaming converts - GTK [Gtech Holdings Corp.] and IGT [International Game Technology Inc.]," said Richard Russell, president of Ariston Capital Management Corp.

"They account for about 11% of our portfolios. Throw in MRX [Medicis Pharmaceutical Corp.] with their new cosmetic dermal skin filler - a 3.3% position [in the Ariston portfolios] - and the 'sin and vanity' portion of our portfolio totals 14% with good performance."

There have been several bullish reports, research, etc., on the gaming industry recently.

As an example of the gains expected, last week, online lottery operator Gtech boosted its outlook over the next four years. The company said it expects annual revenue growth of an average 12% to 15% from 2004 to 2008 and forecast earnings per share gains of 15% to 18% annually through 2008. Earlier, the company was looking for revenue growth of 7% to 8% and earnings per share gains of 10% to 12%.

Gtech's 1.75% convertible due 2021 was pegged in the 214 area. The stock closed Thursday down 81 cents, or 1.37%, to $58.33.

Video slots is another hot area, which is where International Game Tech is involved.

International Game Tech's 0% convertible due 2033 was trading at around 97.75. The stock ended Thursday up 15 cents, or 0.33%, to $45.11.

Lottery and video gaming have boosted total gaming dollars spent, the analysts say, but traditional casino traffic is still vibrant, as well. That brings us to this week's fare of fresh convertibles from Caesars and Kerzner.

Some buyside market sources thought Caesars' deal was too aggressively price for the credit, but the floater slightly gained ground Thursday. The issue, priced at the three-month Libor flat, up 70%, added 0.375 point to 100.125 bid, 100.375 offered as the stock gained 24 cents, or 1.84%, to $13.28.

Kerzner's 2.375%, up 33% convertible tacked on another 1 point to 102.25 bid, 102.625 offered as the underlying stock rose 80 cents, or 1.8%, to $45.15.

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