Tower Automotive preferreds off on deferred payment; OMI higher; Cray dips; Delta mixed

By Ronda Fears

Nashville, Dec. 3 - Shoppers for fresh paper in the convertible market kept new issues active and mostly higher, but volume slowed considerably for a Friday. With the surge in Treasuries, traders said yields in junkier paper widened a tad and that intensified some buying interest in several technology issues.

Tower Automotive Inc., however, already facing a possible Moody's downgrade further into junk territory, deferred the dividend payment on its 6.75% convertible preferred, and Standard & Poor's cut that issue to default.

Delta Air Lines Inc., rebounding still from steep declines as the airline faced the specter of bankruptcy, posted a strong November traffic report, and convertible traders noted hedge funds were beginning to cover short positions in the 2.875% issue.

OMI regains 1.375 points

Oil prices continued on a downward slope Friday, ending the week 14% lower to settle at $42.54 a barrel, but crude oil tanker OMI Corp.'s new convertible traded up past the par level.

The Stamford, Conn.-based crude oil tanker company's 2.875% issue had been dropping since it broke to trade after pricing Tuesday because of pressure from oil prices, although it had traded as high as 104 in the gray market before pricing.

On Friday, the OMI convertible regained 1.375 points to end at 100.625 bid, 101.125 offered, with the stock up 44 cents, or 2.29%, to $19.65.

Computer hardware maker Cray Inc.'s 3% convertible remained fairly active despite its smaller size, $65 million, but the issue was easier by about 2 points to 106.5 bid, 107.5 offered as the stock dropped 14 cents, or 3.54%, to end at $3.82.

Cray seemed to be traveling against the tide, though, traders said, as new issues at least from ASM International NV, Scientific Games Inc. and American Equity Investment Life Holding Co. were seen higher.

Delta convertibles play on traffic

Delta Air Lines Inc. posted a gain in its air traffic on Friday, although the stock still ended the day off a bit. Convertible traders said hedged players began covering short positions in the 2.875% convertible while adding the 8% converts.

As a result, the 2.875s closed up about 1.25 points to 71.5 and the 8s lost about 1.75 points to 65, a sellside trader said. Delta shares ended off 4 cents on the day, or 0.51%, to close at $7.84, but the trader noted that the stock was last seen in after-hours trading up 4 cents, recouping the day's decline.

During the slide in Delta's securities over the past year or so, hedged players had been shorting the 2.875s and were long the 8s. Now they are covering those short positions, since the troubled Atlanta-based airline has been on the rebound - due to some debt deferrals and a $1 billion wage concession package from union pilots, for a total of $2.5 billion in cost savings this year.

For November, Delta reported Friday that its system wide traffic rose 9.7% from a year ago on a capacity increase of 6.1%. That pushed the system load factor up 2.4 percentage points to 73.4% from November 2003.

Tower 6.75s drop to 10.25

Tower Automotive announced Friday that it would defer the dividend payment on its 6.75% convertible preferreds due 2018, and that sparked a sell-off in the issue plus a downgrade to the issue.

The 6.75s dropped 0.65 points to 10.25 in heavy over-the-counter trading with 348,233 units changing hands versus the three-month running average of 46,576.

Tower's newer 5.75% convertible bond due 2024, which had suffered severely on the threat of the company missing its first coupon payment, was not so active, a trader said. The issue was last seen Friday with a bid of 63, and a buyside trader pegged the offer at 65.5 or thereabouts. Tower made the interest payment on the 5.75s, which was due Nov. 15, but credit analysts still see the company's cash position strained to cover all its interest costs.

Tower shares dropped 6 cents on the day, or 2.75%, to close at $2.12, also with heavy volume - about twice the daily average.

"If Tower manages to avert their liquidity crisis by performing an out-of-court debt restructuring, then debt-for-equity swaps will reduce the common to the value of toilet paper, used toilet paper," so most convertible players will suffer, said a buyside market source.

Tower holders like 5.75s best

But a sellside trader said "Chapter 11 [bankruptcy] isn't an issue, for now anyway," so there is still a lot of interest in owning Tower Automotive, though the 5.75% bonds are "preferred" over the 6.75% preferreds.

"On the preferred, the company had an option to defer payments. This dividend will accrue and still be payable, but in the future, thus a very attractive source of financing for TWR," the trader said.

"If they did not pay the interest on the 5.75% convertible bonds, that would have been a real default and started a chain reaction of cross-defaults with the other creditors.

"So basically, they paid the piper/convert holders to buy time (smart) and are taking a 6.75% loan from the preferred holders (also smart from the company's perspective)."

S&P, however, cut its rating on the 6.75% convertibles to D from CCC+ following the company's announcement that it deferred the dividend payment due on Dec. 31, which it views tantamount to a default even though the indenture on the issue allows dividends to be deferred for up to 20 consecutive quarters.

And last week, Moody's put all Tower ratings on review for possible downgrade, citing rising leverage and insufficient cash from operating earnings to adequately cover interest expenses.

Yellow offer faces bumpy road

Yellow Roadway Corp.'s convertibles have been a popular issue in the market, with both the 5% issue and 3.375% issue deep in the money. But the trucking firm stirred perhaps the equivalent of road rage among its convertible holders with its exchange offer to eliminate contingent conversion features from both issues.

"We are one of the largest holders of YELL bonds, and we will not tender for such a small concession," said a portfolio manager of a $3.8 billion multi-strategy investment firm. "We would be sacrificing something valuable by accepting net cash settlement instead of full conversion into shares -while management is gaining potentially great value by avoiding diluting earnings by 11%."

The offer, filed earlier this week, didn't sideswipe any holders as the company alerted the market Oct. 19 that it planned to make the tender offer before year-end.

And, Yellow is not alone insofar as holders of several other CoCo issues are balking at the lack of incentives to participate with the tenders.

Yellow is offering change-of-control protection for holders who exchange the old $150 million of 3.375% convertibles and $250 million of 5% convertibles for identical new ones - except the contingent conversion features on both issues would be replaced with a net share settlement. The offer, filed Tuesday, will expire at 12:01 a.m. ET on Dec. 29, unless extended.

New Century holders upset, too

A score or more CoCo exchange offers have swamped the convert market since the Financial Accounting Standards Board adopted the new rule Sept. 30 that issuers of these type convertibles must report diluted earnings per share as if the issues were converted.

Getty Images Inc. also is facing heavy opposition to their offers. In fact, Getty Images has made at least four amendments to its offer so far, still to no avail.

Getty Images again amended its exchange offer for its 0.5% convertible due 2023 and extended it to Dec. 14 after a paltry $1.7 million of the $265 million issue was tendered by the previous deadline on Thursday. The company is now offering a provisional call with a 125% hurdle through 2009, which switches to a hard call after that, in addition to the $125 cash payment previously offered.

The revised offer was made after zero response to its previous offers.

In a slightly differet transaction, New Century is attempting to have all its 3.5% convertibles due 2008 converted.

The company is offering 28.7366 shares of stock plus an additional $110 payable in shares of stock and accrued and unpaid interest from July 3, 2004 in cash.

"We are representing half of the outstanding NEW [New Century converts], and telling management it's not happening unless they raise [their cash payment incentive] to 12.5 points," from the 11 offered, said a sellside market source.

Some arbs speculate on CoCos

While many of the CoCo offers may not be palatable, players figure the exchanges are inevitable, so many convert arbs are taking positions in preparation of that. Some have worked out, others not.

Moreover, as a new issue more or less, the convertible exchanged for the old ones should trade very actively, another fund manager explained. Too, he added that in some cases not the entire old CoCo convert will be tendered, thus leaving a potentially discounted issue as a buy opportunity.

"Other than taking a spec on CoCo exchanges, it's been very tough" to play the convert market, said the portfolio manager of a capital structure fund in New York.

"It's not really a question of liking some [the exchange offers] or not. Some hedge funds played that game, trying to buy a basket of them hoping for a free lunch."

The Countrywide Financial Corp. CoCo exchange worked out to holders' favor because of a quirky conversion feature in the new converts, another buyside market sources said, but that was "apparently an oversight of the [exchange] manager, so you can't really bet on that happening again."

Others have not paid off, though, or not much.

"Think of it like when bonds trade after a put date has passed, and some people have put and some haven't," the capital structure fund manager said. "Since most people are going to exchange [the CoCo converts], most of the bonds will only trade down by any cash incentive that may have been paid, which in most cases is very small."

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