EchoStar gets ditched, sell-off takes 2.75 points on pressured outlook; 3 new deals emerge

By Ronda Fears

Nashville, Nov. 11 - Three new deals emerged after the closing bell on Veteran's Day, totaling $425 million, as issuers ignored the slide in stocks amid a thin trading session.

Convertible trading was slim, too, but traders mentioned a couple of interesting situations, like EchoStar Communications Corp. falling sharply on weak subscriber additions compounded by product shipping delays that will shut it out of the upcoming Christmas season.

Calpine Corp.'s new convert also weakened, losing 2.5 points on the day.

"The bond market was closed [for Veteran's Day] so that cut down on flow a lot," one dealer said.

"What we're seeing in general is a spike in yield-seekers because spreads keep on tightening [especially with regard to junk bonds], and because volatility is so low there's been some converts for sale."

Volatility has been a drain on convertible returns, particularly for hedge funds, as the VIX plunged from 23.8 to 17.3 during October and some think it's not going to get much better anytime soon.

Yaw Debrah, head of U.S. convertible research at Merrill Lynch & Co., said in a report Tuesday that the firm's VIX regression model continues to project lower volatility in the medium to long term as the economic recovery picks up speed.

Declining money supply growth and tighter high yield spreads are the major factors that could drag volatility down even more, he said.

"Further moderation of the money supply growth measure in particular will lead to a continued decline in our expectation for the level of the VIX," Debrah said.

"As the economy continues to pick up and the Fed starts to curtail liquidity to the economy, we would expect the money supply growth number to continue to drop.

"However, such a drop might be offset to some extent by an increase in other factors, such as the Fed Funds rate and the CPI [consumer price index] year-over-year acceleration," which would be expected in an improving economy.

Better economic signs aside, EchoStar reported earnings that were pleasing but subscription additions were a disappointment. Moreover, the big kicker for the satellite television provider was news that it will essentially miss the Christmas shopping season due to shipment delays in its high definition television products.

"We clearly missed all of September and I think for the most part we're going to miss the holiday season," said EchoStar chief executive Charlie Ergen during a conference call with analysts, willingly accepting the blame for the snafu.

"I don't think we're going to get too much bang there," even if shipments begin at once, Ergen said, noting that a major distraction for the company was its failed efforts last month to buy bankrupt satellite maker and operator Loral Space & Communications Ltd.

EchoStar's results weren't bad, but the company posted slower-than-expected subscriber growth at its Dish Network service. The company is facing increased pressure from new services at cable companies and archrival DirecTV, and the row is getting tougher to plow.

"EchoStar could have a very difficult 2004 ahead of it," Ergen said.

"For many of the cable companies, the worst is behind it. AT&T Broadband is now being managed by Comcast, one of the best operators in the business. Charter is starting to get its act together. Adelphia is under new management. That's going to make it more difficult for EchoStar to steal subscribers."

For third quarter, EchoStar reported a 19% rise in revenues to $1.45 billion, with net income of $35 million, or 7c a share, compared to a net loss of $168 million, or 35c a share, a year prior.

The company added 285,000 subscribers for a total of 9.1 million at Sept. 30, but analysts were expecting more like an addition of 300,000 subscribers.

Ergen pointed out that was the first quarter in which DirecTV, owned by Hughes Electronics Corp., beat Dish Network's subscriber additions since first quarter 2002. But he also conceded that with News Corp.'s anticipated takeover of Hughes, DirecTV could flex even more muscle.

EchoStar shares plunged $4.75, or 12.91%, to $32.05 and on a dollar-neutral basis the 5.75% convertible due 2008 dropped 2.75 points to 104 bid, 104.5 offered.

In fact, traders were at a loss to find many risers during Tuesday's session.

It was very thin trading, however.

Many buyside traders went home early, so they missed the sprinkling of new deals that hit the tape after the close.

Casual Male Retail Group Inc. launched $75 million of 20-year convertible notes, non-callable for three years, to be sold on swap. The deal was talked at 5.0% to 5.5% yield, up 28% to 32%, with pricing expected after the close Thursday.

Casual Male shares ended down 16c, or 1.89%, to $8.29.

AmeriCredit Corp. plans to sell $200 million of 20-year convertible notes - non-callable for five years - talked to yield 1.25% to 1.57% with a 32.5% to 37.5% initial conversion premium, with pricing after the close Wednesday.

AmeriCredit shares closed down 43c, or 2.97%, to $14.07.

Also, Chesapeake Energy Corp. is returning to tap the convertible market.

Chesapeake this time is offering $150 million of convertible cumulative preferreds, non-callable for three years, with price talk that puts the yield at 5.0% to 5.5% and initial conversion premium between 32.5% and 37.5%.

The new Chesapeake convert also is slated to price after Wednesday's close.

Chesapeake also is selling $200 million of senior notes due 2016, non-callable for five years, in the high yield Rule 144A market sometime Wednesday afternoon.

Chesapeake shares ended off 15c, or 1.22%, to $12.15 and its existing 6% perpetual convertible preferreds were quoted up 0.5 point on the day to 69.62

Calpine's new convertible was seen giving up some ground amid thin volume. The 4.75% convert due 2023 dropped 2.5 points to 97 bid, 97.25 offered while the stock closed down 12c, or 2.55%, to $4.58.

New paper from Actuant Corp. and Navigant International Inc. was lower too, but to a smaller extent. Both converts were off by less than 1 point.

Another energy name was seen considerably lower, however.

Reliant Resources Inc. lost ground primarily due to the sharp run-up over the past week, a trader said, noting the Reliant 5% convertible due 2010 had added more than 8 points in the last week or so before Tuesday's slip.

The Reliant 5s were quoted down 1.5 points to 94 bid, 94.5 offered, pretty much in line with the stock decline of 18c, or 3.07%, to $5.68.

Reliant's earnings were on the tape, but showed no big surprises, the trader added.

Reliant reported a third quarter loss of $916 million, or $3.11 a share, versus a profit of $50.4 million, or 17c a share, in third quarter 2002. Revenue fell to $3.78 billion from $5.18 billion.

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