Chiron goes to 101, Advanced Medical to 103.5; Kellwood to 101.5; Delta reverses, heads up

By Ronda Fears

Nashville, June 17 - There still wasn't a whole lot of passion in convertible trading Thursday, but new paper was briskly active and there were a few bids on speculative takeover situations or ahead of possible buybacks in an otherwise lackluster session.

The new deals this week stirred up the most action in convertibles, and market sources said next week may match or beat the respectable $1.125 billion of new paper that came to market this week.

"It slowed down a bit, but everyone has stuff backed up in the pipeline," said a syndicate source. "It has been an adjustment for issuers. Not only are rates going up all the time, then there was the uproar about dividend protection, takeover protection, all that jazz."

Moody's said in a report late Wednesday that higher interest rates have slowed bond issuance overall for short- and long-dated paper, particularly for refinancing, but is showing an uptick in new bond issuance for mergers and acquisitions.

In the current quarter-to-date, Moody's Investors Service said short-term debt refinancing has only played a role in 36% of new issues - the lowest measure since Moody's began tracking issuance drivers. Long-term debt refinancing has eased, too, Moody's said, from first quarter when proceeds from 60% of the bonds were earmarked for long-term debt reduction to 44% in second quarter thus far.

Mandalay at parity plus 6 pts

On the heels of Mandalay Resort Group's consent to the wooing from MGM Mirage, at $71 a share or $7.9 billion, activity is beginning to die out in the convertible issue, with it settling at about the cash it will get in the deal.

The Mandalay convertible floater on Thursday was trading around parity plus 6 points, a buyside trader said, which he said works out to right around the same amount of cash the bond will be convertible into when the deal gets done at $71.

"It [the Mandalay convertible] had been active the last few days or so I but didn't see much today," the trader said.

Hedge fund players took a 17-point clip on the convertible when the all-cash takeover bid was launched by MGM three weeks ago, and outright holders got snipped by at least 1 point.

"All the money was lost and is gone on that one," said a sellside trader, noting there are lots of convert arb guys hoarding the stock in hopes of making back some of the lost money.

Mandalay shares closed Thursday up 47 cents, or 0.68%, to $68.27.

There has been a suggestion by some credit analysts, too, that investors put on the straight paper of Mandalay on recent weakness.

New paper higher in secondary

The Mandalay situation was singularly responsible for the outcry from convertible buyers for takeover protection in all new deals. And outside of the emerging norm of takeover protection, buyside sources thought the week's new paper "looked just sort of okay."

"I played small in Four Seasons, Advanced Medical Optics and Chiron - all names in sectors a shade less sensitive to interest rates than others," one fund manager involved in both outright and hedged strategies said.

First thing on Thursday, final terms were set on the overnighter from Chiron Corp. with the $350 million 30-year convertible printed with a 2.75% coupon and 49.4% initial conversion premium - at the cheap end of yield talk for 2.25% to 2.75% and in the mid area of premium guidance for 48% to 52%.

Deutsche Bank Securities Inc. analysts put the new Chiron convertible 2.79% cheap, using a credit spread of 45 basis points over Libor and a 26% stock volatility.

The market didn't give it that much, however. A buyside trader said toward the end of the day that the issue was at around 100.75 bid, 101 offered. Chiron's existing converts were marked lower with the stock, which dropped $1.63, or 3.64%, to $43.21 on the heels of the overnight transaction.

Advanced Medical Optics Inc.'s new 2.5% convertible ended the day at about 103.5 bid, with the stock closing up $1.62, or 4.32%, to $39.11. A buyside trader said the issue strengthened steadily throughout the session after opening with a par bid.

Actions topical on M&A buzz

Including takeover protection for bondholders is particularly relevant, market sources point out, because of the increase in merger and acquisition activity. Moody's said, in the report referenced earlier, that M&A activity has been erratic over the past few quarters but looks to be on the rise again with some portion of proceeds from 29% of bond issues in second quarter slated for M&A activity.

There were several names from the convertible universe mentioned Thursday as takeover targets and/or suitors.

Computer Network Technology was very quiet but the "rumor is BRCD [Brocade Communications Systems Inc.] might buy them."

The Computer Network's 3% convertibles were flat at 83 bid, 84 offered while the stock on Thursday dropped 11 cents, or 1.84%, to close at $5.87. Brocade's 2% convertible was quoted "off a tad" at 90 bid, 91 offered as the underlying stock lost a dime, or 1.77%, to end at $5.56.

Penn Treaty American Corp. also was mentioned as a takeover target with one market source noting that while the 6.25% convertible bonds due 2008 have been bought up by three or four large outright holders, the bonds are scarce to buy. The issue was bid up 3 points.

Penn Treaty's name came up following remarks by New York Life Insurance Co. chief financial officer Michael Sproule at a Standard & Poor's insurance seminar on Thursday. He said New York Life will eventually consider acquisitions in long-term-care insurance but is not in a particular rush to do deals.

In February, Penn Treaty issued an add-on $14 million of the 6.25% convertible issue, and a market source said Thursday there is now about $82 million of the issue outstanding.

The Allentown, Pa., accident and health insurance firm said the money raised in February would help meet debt servicing needs through October 2005. At that point the issue will mandatorily convert into stock at $1.75 if the stock is above $1.93. Penn Treaty shares closed Thursday off by 2 pennies, or 0.98%, at $2.03.

Delta boosted by junk buyers

Virtually from the time the market opened, Delta Air Lines Inc.'s convertibles were on higher ground with bids coming from the junk bond or distressed regions of the market, traders said. Some holders were happy to jump ship, feeling panicky about the price levels vis-à-vis probably recovery levels in the event the Atlanta-based carrier files bankruptcy.

After losing altitude on remarks Wednesday from Delta chief executive Gerald Grinstein, the Delta converts opened Thursday regaining more than half of the previous day's losses.

"Buyers are betting that the company doesn't file [bankruptcy], that this is a negotiating tactic [of the company] in the pilot talks," said a sellside trader. "These [buyers] are junk, distressed guys."

Delta's 8% convertible was the most popular, opening at 50 - better by about 2 points on swap from Wednesday. The 8s closed out the day not much ahead of that level, at 50.25 bid, 51.25 offered. Delta's 2.875% convert added about 0.5 point on swap to 54.25 bid, 55.25 offered.

While distressed pros may feel comfortable with the Delta situation, a trader at a traditional convertible fund said he would be leery of buying the paper for any more than 35.

"I like the number 35 for these," the buyside trader said, admittedly with a heavy coating of sarcasm. "Ha, you probably would get laughed at for posting a bid like that. But if they indeed head for the [bankruptcy] courthouse steps, then you'll see these go lower than 35."

Source sees Amgen sweetener

Risk related to puts and calls have caused a good amount of anxiety in the convertible market, as well, and a market source on the West Coast on Thursday said he is looking for a sweetener to come from Amgen Inc. regarding the March 2005 put on its $2.8 billion zero-coupon convertible, although it may not come for several months.

"They better start thinking of adding a sweetener. I am sure they want to keep the cash on hand," he said. "I doubt they could raise cheaper money, so adding 1% would still be cheap. They have time but; if I were them I would think about it."

The bonds are trading slightly below the put price of 73.868 and probably won't budge from there without a catalyst such as an offer from the company. The bonds were virtually unchanged at 73.375 bid, 73.5 offered on Thursday while the stock lost 43 cents, or 0.79%, to $53.97.

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