Citadel retraces some gains; Qwest flat but adds on hedge; MGI better; Oil States lower; Pier 1 prices

By Rebecca Melvin

Princeton, N.J., Feb. 8 - Volume in the convertibles market edged higher Wednesday compared to Monday and Tuesday, with heavy trading of Citadel Broadcasting Corp. amid uncertainty whether its transaction with the Walt Disney Co. will trigger the bonds' fundamental change of control put or not, traders said.

The Citadel 1.875% convertibles traded early in a fairly narrow range but then dropped about three to four points to about 77.5 as players' opinions wavered regarding the language of the indenture. On Tuesday, the bonds had risen about six points.

"There's a disparity of opinion. At first the bonds shot up on optimism of a change of control put at par. But then I think people were scratching their heads, and there was some flipping. If you had owned this thing for so long, you got out of it," a Connecticut-based sellside analyst said.

A Connecticut-based sellside trader added: "There was so much volume in this thing, it was like a new issue."

The Disney convertibles were also trading, traders said.

Other high volume names in the convertibles market included TJX Cos. Inc., which traded actively early in the session on no particular news, and Qwest Communications International Inc., which took over as an active name later in the session, traders said.

The Qwest convertibles were flat to lower outright, but improved on a hedged basis by about 0.375 point, according to a buyside convertibles trader.

MGI Pharma Inc. convertibles were busy late in the session and up to the closing bell, ahead of an earnings report seen after the close, traders said. The bonds were doing a little better, and seen at about 64 near the close.

Also in biotechnology, the convertibles of Nektar Therapeutics were active, traders said. Players were watching other convertible names, but not necessarily trading them, including Cell Therapeutics Inc., which saw its shares lift 11% after the Seattle-based company announced that it received fast-track designation from the Food and Drug Administration for its Xyotax cancer drug for women; and Isis Pharmaceuticals Inc., which gained more than 6% in continued upward momentum relating to its drug pipeline.

Of the Cell Therapeutics rise, a sellside analyst said, "The question I ask myself is 'are these moves breaking through more than two standard deviations?' and if they aren't, then maybe the moves aren't as significant as they sound."

In energy, meanwhile, Oil States International Inc.'s 2.375% convertibles came in a little even though the Houston-based company reported that its fourth-quarter profit rose, beating estimates.

A sellside trader suggested that Oil States was weakened by rival Grant Prideco Inc.'s lowered guidance in its Wednesday earnings report.

Overall, trading was active, a New York-based sellside trader said, noting moves in telecom, biotech and consumer issues.

There was also an active gray market for the new Pier 1 Imports Inc. deal, which priced late Wednesday after the close. The gray market was 102.5 bid, 103.5 offered.

Whether the convertibles market continues to do as well in February as it did last month remains to be seen. According to Citigroup Global Markets, January's positive 3.8% outright result was the best beginning to a year since 2001, when the outright result was positive 4.8%.

As for convertible arbitrage strategies, Citigroup suggested that the result was in the range of 2% to 2.5%, and possibly as high as 3%.

The performance was helped by a 5.6% surge in underlying stocks as well as an increase in realized volatility and a decline in high yield spreads by 24 basis points.

It was one of the best month returns for the convertible arbitrage strategy since January 2003, Citigroup said.

Pier 1 Imports up in gray

With a coupon at better than 6%, it was difficult for the Pier 1 deal not to look cheap, a Connecticut-based sellside analyst commented ahead of pricing Wednesday.

But apparently cheapness and high demand caused some rethinking by the issuer and its banks because price talk was modified during the session, with talk on the initial conversion premium upped to 37% to 40%, form the 30% to 35% released Tuesday.

The Fort Worth, Texas-based home furnishings retailer late Wednesday priced $150 million of 30-year convertibles at par with a coupon of 6.375% for the first five years, and then 6.125%, with an initial conversion premium of 40%, according to a company release.

This represented the rich end of initial talk, which was for a coupon of 6.375% to 6.875% and an initial conversion premium of 30% to 35%.

The analyst modeled out the deal using a credit spread of 450 basis points over Treasuries and a volatility of 40%.

"The fair value is going to depend on the rebate. Borrow is difficult and that factors into pricing, with shares not available for lending," he said.

Tight borrow was a problem for some players and not others, depending on the stock loan desk of the firms used for clearing, sources said.

Nevertheless, "It was hard for this one not to look cheap, even if it's not a great credit and there are borrow issues. When's the last time you saw a six and change coupon?" the sellside analyst asked.

The senior notes will be due on Feb. 15, 2036 and are non-callable for five years with puts in years five, 10, 15, 20 and 25.

After May 27, bondholders may convert the bonds if Pier 1 stock reaches 130% of the conversion price for at least 20 trading days during the last 30 trading days of the previous quarter.

Citadel retraces some gains

The Citadel 1.875% convertibles traded with renewed vigor on Wednesday after some analysts suggested potential outcomes for the bonds under the merger of Walt Disney's ABC Radio business into its rival Las Vegas-based Citadel as part of a $2.7 billion deal.

Disney said it will break off ABC's 22 radio stations and the ABC Radio Networks programming business into a separate entity, which will then be combined with Citadel to make the transaction tax-free for Disney shareholders.

One New York-based sellside analyst said that the transaction may potentially trigger the fundamental change put.

"Based on our initial reading of the notes' indenture (specifically, Section 4.04(b)(1), the first paragraph of definition of the term "Fundamental Change"), we think that the Fundamental Change Put for the CDL 1.875% convertible notes due 2011 may potentially become triggered," the analyst said.

"Although we admit the structure of the transaction from CDL shareholders' standpoint is quite vague. Since prior to the merger with Citadel Broadcasting, Disney will distribute ownership of the ABC Radio entity to Disney shareholders, the ABC Radio entity might qualify as a 'person' or 'group.' In that case, their ownership of more than 50% of the combined Citadel Communications company could trigger the fundamental change definition, and the CDL 1.875% convertible notes may become putable back to the company at par.

"Before making a final conclusion, we are waiting to see the merger agreement when it gets filed and to hear back from Citadel about their interpretation of the indenture language," the analyst said.

A separate convertibles analyst on Wall Street said, "We don't think it will be triggered. And if you read what Merrill Lynch said, they think it may be, might possibly be triggered."

On Wednesday the Citadel Broadcastings 1.875% convertible notes due 2011 were seen about 77.5 bid, 78 offered, down about four points from as high as 82.5 on Tuesday.

Citadel shares (NYSE: CDL) gained 14 cents, or 1.2%, to $11.62.

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