Nortel continues decline; Conseco still on the table, with tighter terms; Tower Auto deal considered

By Ronda Fears

Nashville, April 29 - Nortel Networks Corp. continued to decline and weigh on the tech and telecom groups, and airline paper was notably weaker. Overall, convertible traffic was moderate Thursday, traders said, with several commenting that the market seemed to be for sale rather than attracting bids on the broad-based markdowns Wednesday.

"Investors seem a little spooked right now," one dealer said. "They are digesting earnings, [economic] data. Maybe overwhelmed is a better word for it. Anyway, there's a lot of people sitting on their hands."

Economic data was a drag on the markets, but one market source remarked that it seemed to be a paradox for the markets to decline on the weaker-than-expected gross domestic product figures - which might suggest the Federal Reserve would hold off on rate hikes - after snapping back previously when other data could be used to argue in favor of higher interest rates.

Earnings, call threats weigh

Earnings and call concerns also weighed specifically on the convertible universe.

"I'm still surprised at stock reactions following earnings. Most techs are selling off, even though numbers were okay," said a sellside analyst.

"I get the sense that equity investors don't want to be very long going into the summer."

IKON Office Solutions Inc.'s convertible dropped about 3.5 points to 105 bid, 105.25 offered on a 10% plunge in the stock. A sellside desk analyst said the company indicated it would likely call the bonds in a year if they can do it for cash, not stock. So, if the stock stays below $15, he said, the 5% issue will likely be called. IKON shares closed at $11.42.

Bunge Ltd. convertibles stood up to a two-prong hit to the stock - because of a dilutive factor due to the contingent conversion feature on the convert on top of the dilution from plans to sell 9.5 million shares. Analysts have been alerting investors to the potential impact of CoCo features on earnings, but also stress that there is no balance sheet impact.

Conseco delay perplexing

Attentions turned to the forward calendar amid the lackluster market environment, and market sources were perplexed with the delay in the Conseco Inc. deal.

"I don't know what is up with this deal," one buyside trader said. "It has seemed fine up until this morning."

Conseco's $500 mandatory still had not priced by Thursday morning. It had been due to have final terms set after Wednesday's close, and earlier in the week was heard to be considering an early pricing.

But after terms were not printed early Thursday, market sources said the price talk was tightened to a 5.5% dividend, with the premium seen at 22%.

The issue originally was talked with a 5.75% to 6.25% dividend and 18% to 22% initial conversion premium. That price talk emerged April 15.

Sellside sources involved with the deal were being cagey and would not comment on it, but a syndicate source said Wednesday that it was "well booked."

Quanex, Matria on tap

Quanex Corp. and Matria Healthcare Inc. were at bat after Thursday's close with small deals, but buyside sources did not see any gray market activity in those issues.

Quanex is returning to the convertible market pitching $100 million of convertible notes talked to yield 2.25% to 2.75% with a 35% to 40% initial conversion premium.

Matria is marketing $75 million of convertible notes talked to yield 4.625% to 5.125% with a 42.5% to 47.5% initial conversion premium with proceeds earmarked to help pay for the tender offer for its 11% senior notes.

Moody's rated the new Matria convertible Thursday at B3 and placed it and all other Matria ratings on review for possible downgrade. Moody's said the review was the result of an anticipated increase in leverage following the tender for the 11% senior notes, as well as the recent decline in operating performance.

Albertson's launches jumbo

Albertson's Inc.'s jumbo mandatory was applauded if for no other reason than for its size.

"It looks richer than the average mandatory, but will be cheap enough," said a sellside desk analyst, who is not involved in the Albertson's deal. "My guess is they'll get some good outright support."

In addition to the relative richness of the deal, another sellside analyst remarked that the low volatility in Albertson's stock also would not be a magnet for hedge funds.

For Monday's business, Albertson's launched its anticipated $1 billion three-year mandatory with indicative terms putting the dividend at 7.25% to 7.75% and initial conversion premium between 20% and 25%. The Boise, Idaho-based grocery chain also is selling $1 billion of common stock.

The financing plans have been on the forward calendar for a month, awaiting a nod on Albertson's $2.5 billion acquisition of Shaw's stores from J Sainsbury plc, which came through this week. The acquisition was announced in mid-March.

"We needed a big deal," said one fund manager, who, however, said the mandatory structure was less appealing than a bond.

"It will be fine, though. It's just good to see a nice sized deal out there."

Deutsche Bank Securities analysts put the Albertson's convertible 0.32 points cheap, or 1.29% cheap, using a credit spread of 150 basis points over Libor and a 27% to 30% volatility skew, plus accounting for the 3.26% common stock dividend yield.

Tower Auto teases with deal

For nigh on a year now, the market has been anticipating a refinancing from Tower Automotive Inc. for its $200 million 5% convertible that matures Aug. 1, 2004, and more noise was circulated by the Grand Rapids, Mich.-based components maker on Thursday. Thus, there were skeptics.

"We are pursuing a refinancing plan with financial institutions that, if consummated, would improve the company's financial flexibility by extending debt maturities and increasing available liquidity," company executives said on a conference call Thursday.

"As we currently envision it, this plan would include a new senior secured credit facility as well as a capital markets transaction, which when taken together would provide sufficient proceeds to repay our existing credit facility, refinance the company's 5% convertible subordinated notes due Aug. 1, 2004 and build additional liquidity for the company.

"While we are looking at a number of capital market options, one alternative could be a convertible security."

The latest refinancing plan is expected to close some time in the second quarter. In June 2003, the company amended its bank facility to allow some flexibility toward redeeming the convertible early, but the call was never made. Then, Tower Automotive came under pressure due to earnings weakness in the last half of 2003.

"I heard the same thing [about refinance plans for the convertible] but have a hard time understanding how a company with a $300 million market cap can do a convert of sufficient size to avoid adding to the senior secured facility," said a source at a hedge fund in New York.

"I ... suspect they will try to find new bank lenders who will take more collateral in exchange for better covenants, and some smaller private transaction of a junior convertible instrument which, in combination with cash on hand, soften the blow of paying cash for the converts which mature this year."

Nextel Partners eyes funding

Nextel Partners Inc. convertibles firmed Thursday on its refinancing news, a sellside trader said.

On Wednesday, information emerged that the company plans to bring to market a new bond and bank financing to fund the tender offer for $356.95 million of its 11% senior notes due 2010.

Morgan Stanley and J.P. Morgan will lead both parts of the financing, an informed source told Prospect News.

Size and structure of the deals, as well as timing, remain to be determined.

Nextel Partners' tender offer expires May 25.

The new 1.5% convertible due 2008 was quoted Thursday up 1.5 points at 128.5 bid, 129.25 offered, and the old 1.5% convertible due 2008 was up 3 points at 190.5 id, 191.25 offered.

Nextel Partners shares closed Thursday up 28 cents, or 2.12%, to $13.47.

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