CA falls on forecast; NRG climbs on guidance, new hedge; Medis delays deal; Six Flags higher on outlook

By Kenneth Lim

Boston, Nov. 3 - The convertible bond market had a busy session for a Friday, with CA Inc. dropping with its stock after the company cut its full-year forecast.

NRG Energy Inc. gained after the company raised its full-year guidance and announced a new fuel hedging program that led to concerns about its credit profile.

Medis Technologies Ltd.'s planned $50 million offering of perpetual convertible preferred stock failed to show up after the deal was delayed.

The convertible bond market in general was more active than usual.

"It's annoyingly busy for a Friday," a sellsider said.

Six Flags Inc.'s 4.5% convertible due 2015 gained about 2.75 points outright as the stock rose despite a poorer third quarter. The convertible traded at 113 against a stock price of $5.875 on Friday, while Six Flags stock (NYSE: SIX) rose 11.23%, or 63 cents, to close at $6.24.

"The Six Flags 4.5s, we saw a lot of trades there," the sellsider said.

New York-based Six Flags, an amusement park operator, said Thursday that third-quarter profit fell 16% to $159.3 million, or $1.08 per share, as park attendance slid 12% with bad weekend weather keeping visitors away. But visitors spent 12% more on average, and Six Flags said it expects that figure to grow.

Six Flags has also been trying to sell nine of its parks, and a decision is expected in December.

"The reason why the stock's up is that they're reporting better per capita revenue...plus they've got the potential sale of some of their parks going on," a convertible bond analyst said. "There's a possibility that their numbers will start to be better in '07."

CA drops with forecast

CA's 1.625% convertible due 2009 dropped about 9 points outright on Friday after the company cut its full-year forecast as new orders slowed down.

The convertible changed hands at 120.75 against a stock price of $25.25. CA stock (NYSE: CA) closed at $22.91, down by 9.38% or $2.37.

"The stock really took a hit; the bonds pretty much followed it down," a sellside convertible bond trader said. "The slower cash flow isn't great for the credit, although the delayed share buyback will help with liquidity. But these aren't a credit story, so it doesn't really matter that much for the converts on that basis."

Islandia, N.Y.-based CA on Thursday reported net profit of $53 million, or 9 cents per share, for its fiscal second quarter. Cash flow from operations crashed to $6 million from $299 million. For the full year, the IT management services company expects cash flow from operations between $900 million and $1 billion, down from its earlier guidance of $1.3 billion. CA said second-quarter bookings fell to $690 million from $765 million a year ago.

"CA's Q2 report clearly shows that the company continues to struggle," Credit Suisse equity analyst Jason Maynard wrote in a note. "Bookings, billings and cash flow all came in below expectations, and management announced that it was postponing the $2 [billion] share repurchase."

Maynard maintained his underperform rating on the stock, saying that CA's "execution challenges are daunting."

Maynard also lowered his cash flow estimate by $100 million, to $928 million for fiscal 2007.

NRG gains on guidance

NRG Energy's 5.75% convertible mandatory preferreds due 2009 rose about 15 points outright on Friday after the company raised its 2007 forecast and announced a new fuel hedging program.

The convertible traded at 262 against a stock price of $48.30. NRG stock (NYSE: NRG) rose 9.98% or $4.82, to close at $53.13.

Princeton, N.J.-based NRG said Friday it swung to a third-quarter profit of $422 million, or $2.65 per share, from a year-ago loss of $26.9 million, or 39 cents per share. The power plant operator maintained its 2006 adjusted EBITDA guidance of $1.5 billion but raised its 2007 forecast to $2.1 billion from $1.56 billion. The company cited a new $1.1 billion cash-and-debt fuel hedging program for the expected improvement in earnings and cash flow in 2007.

"I think they show that their capital structure can handle more...it's good for shareholders, and it's the same thing for the convert holders," a buyside convertible bond analyst said.

The analyst said that although the new hedge program increased the company's credit risk, the change was slight, and in fact highlights the strength of NRG's credit profile.

"I think they probably take a bit of an incremental credit risk by taking the debt, but I think the strength of their balance sheet and business was underappreciated before," the analyst said. "To take on a little more debt, I think this transaction shows how strong their balance sheet is."

Moody's Investors Service on Friday changed NRG's outlook to negative from stable. Although the ratings agency maintained NRG's debt ratings, it said the new outlook takes into account the $1.1 billion of permanent debt added to the capital structure at a time when share repurchases and future capital requirements have increased and are expected to stay elevated.

Fitch Ratings, meanwhile, also affirmed its B issuer default rating for NRG and kept its outlook at stable.

Medis postpones deal

Medis' planned $50 million offering of perpetual convertible preferred stock has been delayed after it failed to price as expected Thursday evening.

Market sources said the deal is now on "day-to-day timing." Syndicate sources declined to comment on the reasons for the delay, but a sellsider said that word on the Street was that the delay was over an internal issue, not due to demand.

Citigroup is the bookrunner for the Rule 144A offering.

There is a concurrent shelf offering of up to 1.5 million shares of Medis common stock.

There is an over-allotment option for a further $7.5 million, or 750 preferred shares, in the convertible deal.

Medis, a New York-based maker of fuel cell batteries used in consumer and military electronics, said the proceeds of the offering would be used for developing and commercializing products, which may include capacity expansion, and for general purposes.

A sellside convertible bond trader said the deal had been quiet in the gray market.

"I haven't seen it all week," the trader said. "It's a small deal, and it looks like the borrow isn't top rate."

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