US Airways' convertible deal eyed; Nektar extends gains; but selling weighs on overall market

By Rebecca Melvin

Princeton, N.J., Sept. 27 - Like a gold band on wedding day, US Airways gained a ticker symbol after its marriage to America West Airlines Holdings Corp. on Tuesday and ahead of pricing of its $125 million convertible bond deal seen late Tuesday, according to a syndicate source.

The airline's ticker, LCC, stands for "low cost carrier."

Meanwhile, selling created a drag on the overall convertibles market, with some energy names down after a big run up in the last month, traders said. But liquidity was down, they said.

"There's been a big bid on energy volatility, and now I think there's just some profit taking," a New York-based sellside trader said, adding that in addition to energy, retail and auto credits were also weaker.

A few sizable transactions were seen in names like Amgen Inc., Medtronic Inc., Micron Technology Inc. and Nektar Therapeutics Inc.

Nektar's 3.25% issue, which first traded Friday, extended its gains for a third consecutive day, closing at 106 bid, 106.5 offered.

"There were some big chunks of bonds for sale, and that was pushing the market down," another New York-based sellside trader said, adding that redemptions were a part of the market doldrums.

Among retail names, Lowe's Cos. Inc. convertibles were down about a point, in line with their underlying shares, despite the home-improvement retail chain reiterating previous guidance of 4% to 6% growth in comparable-store sales and earnings of $0.76 to $0.78 per share for the third quarter.

Lowe's also said that debt reduction is a significant part of its financial plan during its annual analyst and investor conference (see related story.)

In autos, trading of the convertible bonds of General Motors Corp. was extremely light after Fitch Ratings lowered its ratings on the No. 1 automaker by one notch to BB and kept its negative outlook, and ahead of a deadline that the carmaker has for hammering out a contract with its Canadian Auto Workers.

Fitch lowered is GM ratings citing lack of progress in cost structure cutting, continued over reliance on sales of large trucks at a time of escalating fuel costs, and ongoing risk related to the Delphi Corp. restructuring talks.

U.S. Airways still looks rich

Convertibles players still saw US Airways Group Inc.'s $125 million of 15-year convertible notes as "not cheap" on Tuesday, ahead of pricing that was seen a day earlier than initially expected. Last week the pricing was expected to be on Wednesday.

The convertibles are being offered concurrently with an offering of up to 9.78 million common shares for a proposed maximum aggregate of $172.5 million for that offering.

Price talk for the Rule 144A convertible deal remained at 6.75% to 7.25% for the coupon and at 25% to 30% for the initial conversion premium, according to a syndicate source.

Merrill Lynch & Co. is bookrunner for the deal, and Citigroup is co-manager.

With finalization of the merger, buyers lifted the stock early in the session, but by the close at $19.30, it was $1.75, or 8.3% lower compared to the open.

According to a syndicate source, since the deal was announced the stock has "popped" 6%. It had been $18.20, he said.

"The company is clearly a new company coming out of restructuring. It views the convertibles market as attractive and that's how they plan to finance their GE obligation," the syndicate source said.

Proceeds of the convertible offering are expected to pay off an obligation to General Electric Co.

After Arlington, Va.-based US Airways exited bankruptcy - for the second time in three years - it became the fifth-biggest U.S. carrier.

Although the airlines can now operate as one carrier, passengers will continue to book with each airline directly, and reservation systems, flight crews, maintenance and safety procedures for each airline will remain separate for the time being.

The deal will be funded by $1.5 billion in new capital from a variety of investors, including the European aircraft maker Airbus, according to an Associated Press news report.

The convertible notes are non-callable for five years and then callable in years six through 10, with a provisional 115% trigger. There are puts in years five and 10.

Also on Tuesday after the merger, S&P assigned US Airways Group and operating subsidiary US Airways Inc. its B- corporate credit rating like America West.

Both ratings were placed on CreditWatch with negative implications, pending completion of America West's CreditWatch review. The CreditWatch status of US Airways Inc.'s noninsured enhanced equipment trust certificates was revised to positive from developing.

The combined entity will face significant hurdles, particularly integration of its labor forces. However, the company will benefit from stronger liquidity following new equity investments and loans, and a more extensive route network, S&P said.

Medtronic adds, but Micron loses

The convertibles of Medtronic traded higher by about 1.5 points with its 1.25% convertible at 102.50 on Tuesday, compared to levels at about 101 on Monday.

Shares of the Minneapolis-based medical equipment maker edged higher during the session but closed slightly lower on the New York Stock Exchange at $54.91, down 19 cents, or 0.34%.

But Micron Technology saw its 2.50% convertibles down by about 1 point at 108, compared to an early trade at 109. Shares of the Boise, Idaho-based semiconductor ticked up early and the session but then sunk nearly 3% to close at $11.74.

Lowe's slips after guidance

Lowe's 0.861% convertibles slipped about a point, in line with its underlying shares, after a marathon analyst and investor conference on Tuesday.

Net cash provided by operations for the first half for Lowe's rose almost 30% to $2.24 billion from $1.72 billion in the first half of 2004, Robert F. Hull Jr., executive vice president and chief executive, said during the conference, which was titled, "Execution."

The annual conference was geared to show that Lowe's is "well positioned to leverage [its] asset base to continue our profitable growth," said Hull.

The company said that it has total long-term debt of $2.81 billion for the first half of 2005, or 18% of total capital, compared to total long-term debt that was 26% of total capital, at the same point a year earlier.

On Tuesday, Lowe's 0.861% convertible traded at 112.50 bid, to 113 offered, down by about 1.5 points compared to Monday. Its 0% convertibles appeared unchanged at 105.5.

The two bonds are well in the money. The 0.861% convertible has a delta of 88 and a yield to put of negative 24%, according to a New York-based sellside desk analyst. The 0% convertible has a 100 delta and a negative four yield to put.

Lowe's shares closed down 77 cents, or 1.2%, at $64.50.

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