Millennium over 104 in gray, Yellow at 103; General Cable soars 8.625 points from par

By Ronda Fears

Nashville, Nov. 19 - New issues kept streaming into the convertible market as issuers rushed to get deals stamped in advance of next week when the Thanksgiving holiday will shorten the number of business days and many players will be away for the entire week.

Buyers were bidding up the new paper, too, ignoring credit downgrades amid raging demand created by the dearth of new deals since July.

New deals pricing after the close from Yellow Corp. and Millennium Chemicals Inc. - which were both downgraded on Wednesday by at least one of the credit rating agencies - were both bid up in the gray market by nearly 4 points, or more, on both accounts.

Amerada Hess Corp., the New York-based oil firm, also was at bat after the closing bell with a $500 million mandatory convertible that was heard 2 points over par on the bid side in the gray market. The stock was higher ahead of pricing, too, ending the day up 47 cents, or 0.98%, to $48.55.

Land America Financial Group Inc., a small cap property and casualty insurance firm based in Richmond, Va., threw another deal into the ring, as well. The $100 million of 30-year converts, non-callable for seven years, were talked to yield 3.0% to 3.5% with a 30% to 35% initial conversion premium.

General Cable Corp.'s small perpetual preferred was printed with a 5.75% dividend, up 22% - at the aggressive end of the guidance range, which had been tightened on the yield side - and also traded higher, gaining 8.625 points from par, in the immediate aftermarket.

"Relatively speaking, the past three months have been very dry [in terms of convertible issuance]," said a convertible fund manager in New York.

"That's why everybody is chasing these deals so fast and furiously."

Through the end of October, the average monthly volume in convertible issuance was $8.36 billion, according to Prospect News data. In October, there were $3.60 billion of new deals, preceded by $3.31 billion in September and $4.10 billion in August. While hefty for the convertible market historically, those figures are a drastic drop from $11.22 billion in July, which was more typical in the first half of this year.

Thus far in November, there have been 12 convertible deals totaling $3.89 billion, counting Yellow and Millennium. With the Land America deal, the month's total so far would be $3.99 billion.

So, the new deals hitting the Street this week have been met rather warmly, even those with terms that buyers grumbled about being too tight.

For example, the seemingly unpopular American Express Co. jumbo 30-year cash-to-zero convertibles - which priced at 1.85%, up 58% - continued to gain ground, closing up 0.375 point to 101.25 on Wednesday as the stock rose 40 cents, or 0.9%, to $44.88.

American Express was one of the few deals recently that was sold at the cheap end of price talk, although sellside analysts said it priced right around fair value, which is considerably richer than Lehman Brothers' calculation of 3% average cheapness for new deal terms in the past three months.

While Yellow's convertible was slightly larger at $130 million, Millennium's $125 million offering seemed to monopolize market buzz Wednesday.

Moody's downgraded Millennium's senior implied rating, but Standard & Poor's upped Millennium's bank paper, subject to the chemicals producer selling at least $110 million of long-term notes, so the rating cut was shrugged off.

There was a bid as high as 6 points over issue price at one point, according to a convertible trader.

That was for the Millennium convertible at the original price talk of 4.25% to 4.75%, up 35% to 40%.

Less than an hour before the market close, however, buyside sources said, guidance on the $125 million of 20-year convertibles, non-callable for seven years, was tightened to 4%, up 40% to 42%.

It came in several points after the talk was amended, but still traded well above par, ending at 4.4375 points over par on the bid side with an offer of 4.9375 points over.

Late in the day, Millennium said its deal priced at 4% up 42%, the rich end of tightened talk.

Virtually all the cheapness was squeezed out of the Millennium convert, however, by the accounts of sellside analysts.

At the middle of original price talk, Lehman Brothers analysts put the Millennium convert 4.5% cheap, using a credit spread of 575 basis points over Treasuries and a 30% stock volatility.

Using the same assumptions, at the middle of the revised talk, Lehman modeled it just 0.54% cheap.

Merrill Lynch analysts modeled it 4.74% cheap, at the midpoint of original guidance, using a "conservative" credit spread of 640 basis points over the five-year Treasury and a 30% stock volatility.

Deutsche Bank Securities analysts put the Millennium convert 5.61% cheap, at the middle of original price talk, using a credit spread of 500 basis points over Libor and a 30% stock volatility.

While there were plenty of buyers elbowing into the Millennium deal, several more wanted to get involved but were scared off by the credit.

"I really wanted to get in this one, but [the firm's analyst] put the kibosh on it," said a hedge fund trader in New Jersey.

"The credit is just too dicey."

Moody's lowered Millennium's senior implied rating to Ba3 from Ba2 and assigned a B1 rating to the proposed convertible, with a negative outlook.

The downgrade, Moody's said, reflects challenging operating conditions within Millennium's titanium dioxide business, a significant deterioration in 2003 cash flow performance and the expectation that a protracted recovery in the titanium dioxide business will limit its ability to de-lever anytime soon.

Pro forma for the new convertible, Moody's estimated Millennium's debt to EBITDA at 7.2 times for the 12 months ended Sept. 30.

Standard & Poor's assigned a BB- rating to Millennium's proposed convertible and raised the ratings on the existing $150 million revolving credit facility to BB from BB-, subject to the sale of at least $110 million of long-term notes.

S&P said completion of the financing plan and amendment to bank facilities will substantially reduce concerns related to restrictive financial covenants and should preserve access to the primary bank facility.

Yellow's return trip through the convertible market was colorful, as well, though.

The Overland Park, Kan.-based trucking firm hauled out a drive-by $130 million of 20-year convertibles, non-callable for nine years, that sold at par to yield 3.375% with a 50.7% initial conversion premium - pricing aggressively.

The Rule 144A deal was launched before the open with price talk that put it at 3.375% to 3.875%, up 45% to 50%.

Yellow's new convert was last seen at a bid for 3 points over issue price and an offer at 5 points over. But buyside traders said there was less action in the new Yellow than Millennium, indicated by the wide bid-ask spread. Early in the session, a buyside trader said the bid was as high as 4 points over.

Lehman analysts put the new Yellow convert 3.37% cheap, at the midpoint of guidance, using a credit spread of 325 basis points over Treasuries and a 30% stock volatility.

Yellow's existing convert, issued less that three months ago, saw more activity, buyside traders said. First it was pressured by the stock decline related to the new convert, then bounced back with the stock to close higher, but traders noted offers emerged as the price was lifted.

Just three and a half months ago, on Aug. 5, the Kansas-based trucking outfit sold the upsized $250 million (including the greenshoe) of 20-year convertible notes, non-callable for seven years, at 5%, up 53% - at the middle of guidance for 4.75% to 5.25%, up 50% to 55%.

The Yellow 5s were closed at 121 bid, 121.5 offered. The stock ended up 38 cents, or 1.26%, to $30.60.

Yellow plans to use proceeds from the new convertible to fund part of its pending acquisition of Roadway Corp. and, if not completed, for general corporate purposes. Proceeds from the convertible deal in August also were earmarked for the Roadway acquisition, along with funds from a new $675 million bank facility.

On July 8, Yellow announced the merger agreement with Roadway, estimating the price tag at $966 million, or $48 per share on a fixed exchange ratio and a 60-day average share price of $24.95 for Yellow stock, in a 50% cash, 50% stock transaction. The deal included the assumption of $140 million of Roadway debt.

Yellow said on Tuesday the waiting period required under the antitrust law has expired and it is on track to complete the merger as early as Dec. 11, following shareholders votes at both companies in special meetings set for Dec. 9.

Standard & Poor's assigned a BBB rating to the new Yellow convertible, but placed the rating on negative watch along with its other ratings that were put on negative watch in July following the Roadway acquisition announcement.

Also, S&P said that after the merger is completed, it anticipates rating the combined company's senior unsecured debt, including the convertibles, at BB+, one notch below the corporate credit rating - and in junk territory - due to the significant amount of secured debt relative to assets.

Moody's also downgraded Yellow's senior unsecured rating to Ba2, and assigned a preliminary Ba1 rating to the new convertible, but put the outlook at stable.

The ratings reflect Moody's view of the different claims of the debtholders and expected recovery levels. According to Moody's, the company's new bank facilities will have a security interest in the tangible assets of both Yellow and Roadway.

Nonetheless, in Moody's opinion, the liquidation value of the pledged assets would be sufficient to satisfy principal secured claims as well as unsecured creditors.

General Cable's deal also was a rave.

The manufacturer of copper, aluminum and fiber optic cable sold an upsized $90 million of perpetual convertible preferreds at par of 50 to yield 5.75% with a 22% initial conversion premium.

The General Cable deal was boosted from $75 million and sold at the aggressive end of revised price talk. When the deal was launched Nov. 5, it was talked to yield 6.5% to 7.0%, up 18% to 22%. That was revised to a yield of 5.75% to 6.25%, but the premium was unchanged.

In the gray market before pricing, the new General Cable convert was bid 3 points over issue price.

Joint bookrunner Merrill Lynch closed the new General Cable convert at 58.625 bid, 58.875 offered on Wednesday. The underlying stock closed up 40 cents, or 4.88%, to $8.60.

Outside of new deal activity, dealers said trading volume was still decent, just without anything very sexy happening.

"There's a steady flow," said a sellside convertibles trader.

"There's just nothing moving much, not like the 3 or 4 point shifts we've seen in the past."

Dealers did mention activity in Andrews Corp., Placer Dome Inc. and a move in Grey Global Group.

The Grey Global was a move on some buying, which one trader characterized as a situation where the buyer "had to pay up to get it," because there isn't an offer to sell the Grey Global converts very often.

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