Central European lower as shares tank; Health Care REIT prices; Altra quiet in the gray

By Rebecca Melvin

New York, March 1 - Central European Distribution Corp.'s convertibles fell 2 or 3 points outright to the low 90s Tuesday as the underlying shares collapsed after the Vodka producer and distributor posted a wider fourth-quarter loss, an unexpectedly weak 2011 outlook and said its lenders have agreed to waive a breach of debt covenants.

The Central European's bonds could have been held on a light, 28% delta hedge, which would have eased the day's pain, a New York-based sellside trader said. But it's not really hedgeable and looks "a little perilous on the downside from here."

Salesforce.com was lower again, this time by about 0.5 point dollar neutral, as outright players that rode momentum upward in the name are apparently now pocketing profits amid questions about the San Francisco-based cloud computing company's accounting policies, real profitability and as other cloud companies step up competition, a sellside trader said.

On Monday, Salesforce.com was lower by 5 points or more outright.

In the primary arena, Health Care REIT Inc.'s $625 million offering of perpetual preferred shares was mostly quiet in the gray market ahead of final pricing, which came after the market close.

The deal came at the tight end of talk for a 6.5% dividend and a 20% premium. But talked pricing was viewed as fair, a New York-based sellside trader said.

"There was a 101.25 bid, small. That was it," a sellsider said of Health Care's gray market.

Health Care's existing 4.75% convertibles due 2027 traded at 111.5, according to Trace data.

Altra Holdings Inc.'s planned $75 million 20-year convertible offering was also quiet in the gray market, with sellsiders saying that its small deal size contributed to it not being a market focus Tuesday.

The spread on the Altra deal was seen at about 600 basis points over Treasuries, according to a New York-based buysider.

Both deals were expected to price after the market close Tuesday.

Also after the market close, MetLife Inc. launched a $3 billion offering of mandatory convertible equity units and two concurrent common stock offerings for $6.75 billion, including one primary and one secondary offering.

Overall, the convertibles market was called quiet as equities fell amid jitters over the rising price of oil and the dampening that high oil prices would likely have on economic recovery.

Central European off outright

Central European's 3% convertibles due 2013, which originally priced in March 2008, were seen trading right around 93, which was down from about 95 previously, sources said.

The convertibles trade mostly outright.

The company dumped a load of bad news on the market Tuesday, including word that it will have to agree to the new debt terms by June 30 or else lenders will have the right to demand payment on the facility, and that for 2011, the company expects to earn a less-than-expected $1.05 per share to $1.25 per share on sales of $880 million to $1.08 billion.

Analysts were expecting the company to earn $1.88 a share on sales of $946.8 million.

Shares of the Polish company, with U.S. headquarters in Pennsylvania, cascaded down $8.64, or 38%, to $14.20.

The shares were down 30% early Tuesday when many convertible trades occurred.

"At 93, the [Central European] bond is sitting on top of its bond floor to the extent you think the bond's spread should be 585 [bps]. While the company obviously faces operational difficulties in its core markets, the company does have time before it is faced with debt obligations. Its first real obligation is the $310 million of 2013 convert. So while the company is pretty levered, the company has time," a New York-based sellside analyst commented.

"With that said, it remains to be seen whether the market takes the bonds down further or will the stock rebound somewhat due to the possibility of an over reaction."

The company has a significant market cap relative to its debt, a Connecticut-based sellside analyst said.

"The convertibles, which are pretty busted, and wouldn't move that much with the stock, were down a couple of points," he said.

In fact, the bonds have a 180% conversion premium.

The company's president and chief executive, William Carey, explained in a news release that the company believes it has to continue to spend on marketing to bolster market share in the current year even though the company is facing financial pressures in other areas.

"....we believe that strong top line growth will require increased investments behind our core brands, which have been factored into our 2011 guidance," Carey said.

"We realize that this added investment has an effect on our overall profit margin percentage in the short term, but believe that long term brand equity and top line growth is paramount to our overall business model. Our business model is built on strong production and sales assets that have ample capacity to generate more volume through a fixed cost infrastructure, thereby adding substantial operating leverage."

The company had a net loss from continuing operations on a U.S. GAAP basis for the fourth quarter of $103.2 million, or $1.46 per fully diluted share, as compared to net loss of $95.3 million, or $1.51 per fully diluted share, for the same period in 2009.

On a comparable basis, Central European announced net income of $12.2 million, or $0.17 per fully diluted share, for the fourth-quarter 2010, as compared to $70.6 million, or $1.12 per fully diluted share, for the same period in 2009.

Salesforce.com weaker

The Salesforce 0.75% convertibles were offered at 163 versus a share price of 128.25 on Tuesday, compared to 164.25 bid, 164.75 offered versus a share price of $130.00 on Monday, a New York-based sellside trader said.

"...that seemed about half a point lower than yesterday dollar neutral. I'm guessing that outright accounts that rode the momentum wave are blowing these things out now. Given the questions about the company's accounting policies and real profitability, and the fact that very deep-pocketed competitors are getting more aggressive, I suspect the outright sellers are making the right move," the sellsider said.

Shares of the cloud computing company ended lower by $4.10, or 3%, at $128.21.

"CRM seemed a little heavy," the sellsider said.

The trader said that there were analysts that put the stock worth at most a third of where it is currently trading.

"So this could end up being a home run for arbs," he said. "The bonds don't look especially cheap...but if the stock gets knocked down to what these guys think it's worth, now that the momentum is broken, the trade could work really well," he said.

Health Care REIT seen as fair

Health Care REIT's $625 million convertible perpetual preferred shares were bid plus 0.25 point in the gray market ahead of pricing anticipated after the market close.

The $50-per-share deal was talked to yield 6.5% to 7% with an initial conversion premium of 15% to 20%. Those terms were viewed as fair, a sellsider said.

There is a $93.75 million greenshoe, and Health Care REIT also planned to price $1.3 billion of common stock.

The Toledo, Ohio-based real estate investment trust's existing common stock was down a little more than a dollar at about $51 per share in active trade on the New York Stock Exchange Tuesday.

The planned perpetual shares are non-callable for seven years and then provisionally callable if shares exceed 130% of the conversion price. There are no puts.

Proceeds from both registered, off-the-shelf offerings are earmarked to finance a portion of the purchase price of its previously announced acquisition of Genesis HealthCare Corp. for $2.4 billion.

Altra quiet

Altra planned $75 million of 20-year convertibles that were talked to yield 2.75% to 3.25% with an initial conversion premium of 30% to 35%.

Shares of the Braintree, Mass.-based maker of automotive clutch and transmission components dropped sharply in trade Tuesday but pared losses for a 4% loss to about $20.75.

The Rule 144A offering is being sold via bookrunners JPMorgan and Jefferies and has a $10 million greenshoe.

The bonds are non-callable for four years and then are provisionally callable for three years if shares exceed 130% of the conversion price. There are puts in years seven, 10 and 15.

Proceeds will be used for the acquisition of Danfoss Bauer GmbH if and when the acquisition closes and for general corporate purposes.

Elsewhere in the autosphere, GM's 4.75% convertible mandatory preferred stock had traded down about 1.5% to $50.10.

Mentioned in this article:

Altra Holdings Inc. Nasdaq: AIMC

Central European Distribution Corp. Nasdaq: CEDC

Health Care REIT Inc. NYSE: HCN

MetLife Inc. NYSE: MET

Salesforce.com NYSE: CRM

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