Mesa deal appears as Delta slips to 94.625; Equinix offering emerges

By Ronda Fears

Nashville, Feb. 4 - Technology convertibles took a particularly hard knock Wednesday along with airline paper. Yet, after the closing bell, new deals emerged from both of those sectors.

Mesa Air Group Inc. tossed an overnight $100 million deal to the market on the heels of Delta Air Lines Inc.'s new convertible, which continued to lose altitude. And, Equinix Inc., which designs, builds and operates Internet business exchange (IBX) hubs, launched a $75 million convertible to price after Thursday's close.

Meanwhile, in the secondary trenches traders said sellers were prominent in convertibles as the Nasdaq plunged 2.5%. Some players also were expressing anxiety as Treasuries took a dive and corporate bond spreads widened.

In the wake of Delta's deal, which was reoffered below par, Mesa was pitching $100 million in proceeds of 20-year discount cash-to-zero convertibles - to pay a cash coupon for five years - talked to yield 3.25% to 3.75%, up 38.5% to 43.5%.

Mesa was one of only two airlines - the other being AMR Corp. - gaining ground Wednesday. The Phoenix-based airline's existing cash-to-zero convertibles, which were sold last June at 39.727 for a 6.25% yield, up 46%, were quoted at the close Wednesday up 1.5 points to 54.125 bid, 55.125 offered.

Mesa shares closed up 45 cents, or 4.57%, to $10.30. In after-hours trading, the stock was down by 71.2 cents, or 6.91%.

Delta's new convertible continued to slide, dropping another 1.125 points to 94.625 on Wednesday.

Tech stocks fell sharply on Wednesday, blamed on cautious comments about tech spending by Cisco Systems Inc.'s chief executive. Tech convertibles followed suit virtually across the board.

Still, Equinix launched its small offering of 20-year convertibles talked to yield 1.75% to 2.25%, up 28% to 32%, with pricing scheduled after Thursday's close.

Crashing the marriage party

While two deals emerged late Wednesday, they were both very small, so many convertible players remain somewhat stumped by the lack of issuance so far in 2004, even though it's just five weeks into the New Year.

"I have been surprised that the deal flow has been so slow," said a fund manager in New York.

"Even the salesmen we talk to say January was slower than they thought it would be."

For one thing, the market usually tries to begin on a very strong note, in keeping with the so-called January effect that traditionally boosts stocks.

For another, many of the top convertible underwriters were saying that merger and acquisition activity would be a specific area that would support convertible issuance, and M&A activity has been going gangbusters already in 2004.

"It will come, still, I think," said a convertible origination official. "We've just had to be patient all through January, wait on the [earnings] numbers, the right timing."

CreditSights staff pointed out in a report Wednesday that M&A volume already in 2004 "leaves no doubt that it will dominate the corporate landscape" in the coming year.

In January, M&A volume was $92 billion, the CreditSights analysts said, compared to the average monthly volume of $55 billion in 2003 and just $48 billion in 2002.

The analysts said there are numerous indications that the uptick in M&A activity will be sustained, and they mentioned several convertible names as likely buyers or takeover targets in the banking, life insurance, defense and aerospace, metals, airlines and media and entertainment sectors. (See full story elsewhere in this edition.)

Delta a big credit risk: analyst

While many market watchers think there is a big need for rationalization in the airline industry by some means, the CreditSights analysts point out that mergers have not been very successful recently in that space and that has elevated credit risk considerably. And, the analysts see Delta Air Lines Corp. as a major threat on the horizon.

They cited the failed talks between UAL and US Airways, which resulted in both filing bankruptcy, and more recently the breakdown of Mesa Air Group Inc.'s attempted takeover of Atlantic Coast Airlines.

"The novel twist on M&A risk in the airline industry is that the lack of mergers as a means to rationalization and improved competitiveness increases credit risk since the main alternative to improve cost structures and to gain leverage over suppliers is to file bankruptcy or threaten to file bankruptcy," the analysts said.

"We see the more likely acquisition risk in 2004 ... in the fact that the inability to merge and rationalize will likely prompt more coercive restructurings of debt instruments, leases and airport/maintenance facility bonds. Delta remains the primary threat in this area."

Delta's new 2.875%, up 30% convertible, reoffered at 97, dropped another 1.125 points Wednesday to close at 94.625.

Delta shares ended down 15 cents, or 1.52%, to $9.70.

Delta's existing 8% convertibles, which last May were sold at a reoffer price of 96, were quoted essentially unchanged at 86 bid, 87 offered.

Switch Fair Isaac converts

On the heels of the First Data Corp. call surprise, a sellside contact alerted attention to the old HNC Software converts, now in the Fair Isaac Corp. fold.

"No one listened" with regard to First Data, the source said.

"The guy I sit next to made this call [that the First Data converts were at risk of being called and trading above the call price] over a month ago."

Late Monday after the market close, First Data Corp. announced it would call its $542 million of 2% convertible bonds due 2008, and it took many by surprise despite the call scares that lingered throughout most of 2003. As a result, the First Data convertible lost 2 points to around par, the call price.

Now, the old HNC Software 5.25% convertibles that Fair Isaac assumed in an acquisition are in the same boat, the sellside source said.

The 5.25% convertible is callable on Sept. 5 this year at 102.62 and traded Tuesday at 117.875, he said, noting that Fair Isaac ended the last quarter with more than $500 million in cash and cash equivalents so taking out the $150 million issue would be no problem.

"These [5.25s] will leak premium. People should swap into the Fair Isaac 1.5s," the source said.

With Fair Isaac shares at $59.50, he quoted the 5.25s on Wednesday at 117 bid, 117.5 offered for a current yield of 4.48%, yield to maturity of 1.34% and 9.25% conversion premium.

With Fair Isaac shares at $59.50, he quoted the 1.5s at 113.25 bid, 113.75 offered for a current yield of 1.32%, yield to maturity of 0.75% and 25% conversion premium. That issue is callable at 100 in 2008.

Fair Isaac shares ended Wednesday bucking the overall tech slide, gaining 55 cents, or 0.92%, to $32.60.

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