AMR reoffered at 98, dives as low as 96; Charming Shoppes picked up as cheap vol play

By Ronda Fears

Nashville, Sept. 18 - AMR Corp.'s revived convertible deal "just didn't fly," as one buyside trader put it. Even at a discount (reoffered at 98), not a lot of tickets were written on the $300 million deal and it lost ground out of the gate, diving as low as 96.

The parent of American Airlines Inc. revived its new deal from early August when it was pitching a $250 million issue talked at 6.25-6.75%, up 40-45%.

This 4.25% up 32% issue was reoffered at 98 by bookrunner Citigroup, according to buyside sources, and took a dive to 96 in the immediate aftermarket. Citigroup closed the new AMR convert (CCC-/Caa2) at 97.375, while the stock ended off 22c, or 1.67%, to $12.93.

There was a wide variance in how the deal was modeled, sources said.

Deutsche Bank Securities analysts put it about 3.5% cheap at a credit spread of 1,200 basis points over Libor and a 55% stock volatility, noting that airline convertibles are trading in the L+ 900-1,200 bps range.

Straight AMR senior debt is trading at about 1,100 over Treasuries, which would give the new AMR convert an implied spread of 1,500 bps and it would look cheap, said another source. But, he added, five-year credit default swaps on AMR were being quoted at about 2,000 bps, which would make the new issue look rich.

Then there was the question of the stock float, which some hedge players thought was awfully tight. But 13.5 million shares were traded Thursday, versus the three-month running average of 6.77 million shares.

"It was very active, especially this morning, but it just didn't fly," said a convert trader at a hedge fund based in New Jersey, noting that most of the trades before noon were in the 96 to 98 neighborhood.

"People were expecting a flood of new deals that just haven't materialized. Whether this was a figment of our salesmen's imaginations or there is some phantom shadow calendar sitting out there chock full of deals waiting for the green light, I don't know," she added.

"But this [AMR] deal doesn't make us feel good about the remainder of 2003."

AMR's deal followed the revival of InVision Technologies Inc.'s tiny $100 million transaction earlier by Merrill Lynch.

The InVision issue was not reoffered below par but was sold at 3%, up 15.73% - considerably cheaper than original talk in mid-August of 2.25-2.75%, up 27.5-32.5%. It was quoted up 4.1875 points to 104.125 bid, 104.625 offered by Merrill on Thursday, while InVision shares closed off 19c, or 0.73%, to $25.80.

Without benefit of a lot of new deals, however, traders are saying the convert market is firming up.

"On a dollar-neutral basis we're seeing things richen up," one said.

"The last couple of months were rough and people are making some of that back this month. They are happy to be marking their books up."

HedgeFund.net, a website devoted to hedge funds, which make up some 75% of activity in the convertible market, and statistics compiled by Merrill Lynch seem to bear witness that returns are beginning to bounce back in convertible arbitrage.

According to HedgeFund.net, convert arb strategy returns at least stabilized in August, losing 0.6% and that was equal to the dip of 0.6% in July.

Merrill Lynch's convertible hedge fund index last week showed an uptick in returns, gaining 0.77% after a 0.5% gain the week before that followed a string of losses in August and July.

Stability in the Treasury markets, despite the volatility index flagging in the 20 area, helped hedge fund returns improve.

Those factors overall have been a factor in the convertible market firming, but there is some trepidation heading into October.

"More and more, I'm afraid of October," said one market source.

"I think a lot of people are really cautious right now, happy to let the status quo be, unless there's something they have to do. They are more reactive than proactive."

Dealers said volume in the secondary market bears out that sort of tone, with many describing activity this week as moderate, at best.

Charming Shoppes Inc. was a situation mentioned Thursday by a sellside source, noting the convert was being picked up as a cheap volatility play.

"It's a double-B-minus name with lots of cash and relatively nice cash flow," he said.

"At a 450 bps spread the implied vol is about 29%, versus actual in the mid- to high 30s. So that's cheap vol, and there's a nice carry of about 5% plus current yield."

The Charming Shoppes 4.75% due 2012 was quoted at 91.25 bid, 92.25 offered. The stock closed off 5c, or 0.87%, to $5.70.

Dealers also noted some buying in energy/utility names like CenterPoint Energy Inc. and Dynegy Inc.

CenterPoint's 3.75% due 2023 gained 2.625 points to 101.25 bid, 102.25 offered with the stock closing up 24c, or 2.75%, to $8.98.

Dynegy's 4.75% due 2023 added 2.25 points to 115.5 bid, 117.5 offered while the shares ended up 18c, or 5%, to $3.75.

There also has been considerable interest seen - albeit with only modest trading - in the new convertible preferred issued as part of Conseco Inc.'s emergence from bankruptcy, sources said. The payment-in-kind convertible preferred will pay 10.5% for two years, then bump up to 11%.

The conversion ratio, however, has not been set. It will be based on a trading average for the stock over the next six months or so. The new Conseco shares closed Thursday down 16c, or 0.83%, to $19.17.

Inco Ltd., a closely followed name in the industrial and mining sector, was higher Thursday and traders noted the company was taking out its 7.75% convert issue (see page 1 story). The new Inco 3.5% convertible due 2052 was up 4.25 points to 123.75 bid, 124.75 offered and the new 1% due 2023 gained 2.875 points to 103.5 bid, 104.5 offered. Inco shares closed up 88c, or 2.37%, to $27.80.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.