Airline paper flies; energy issues power up after Mirant scare; Schlumberger resold under par

By Ronda Fears

Nashville, June 4 - Energy issues rebounded Wednesday after getting rocked off their upward course by Mirant Corp.'s bankruptcy scare, traders said, with Calpine Corp. and The Williams Cos Inc. leading the pack.

Airline issues also were flying high, and Continental Airlines Inc. revisited the convertible market with a deal that was upsized 50% with orders booked and terms finalized some 15 minutes after it was launched.

Meanwhile, the primary market was alive and well.

Tongue-in-cheek, F. Barry Nelson, portfolio manager at Advent Capital Management, commented: "The new issue market dried up yesterday [Tuesday], as no deals were announced between 8:30 a.m. and 6:30 p.m. - the longest mid-week dry spell since April."

Deals continued to stream in Wednesday with raving success for the Continental Airlines convert, although Schlumberger Ltd.'s $1.3 billion two-part issue was reoffered below par by lead banks Citigroup and Goldman Sachs & Co. and both tranches floundered in the immediate aftermarket.

There was some discrepancy about the valuation on the Continental deal among sellside analysts, but the buyside snapped at the chance to write an order ticket for it.

Within 15 minutes of launching the new Continental Airlines 20-year convertible senior notes, the books were filled and closed and it was upsized to $150 million from $100 million.

Because of the scramble to get a piece of the new airline paper, it also priced at the aggressive end of talk for a 5.0% to 5.25% coupon and 42.25% initial conversion premium.

Deutsche Bank Securities put the new Continental convert 1.63% to 0.7% rich, using a credit spread of 1,500 basis points over Libor and a 65% stock volatility.

Another sellside shop put it 6.5% cheap, using a credit spread of 1,260 over Treasuries and a 50% stock volatility. That analyst was somewhat shocked at the cheapness, though.

"My valuation at final terms [puts it] 6.5% cheap, using 50% vol and T5+1260bps vs. $14.06. Granted it's an overnight at the opening stock price this valuation will look less cheap, but still," the anlayst said.

"Am I missing something? Why is it so cheap?"

The buyside was seeing it cheap, too, though, and a trader said he saw it bid at 104 in the gray market.

Earlier in the week, there had been buzz about a possible convertible offering from American Airlines Inc., or parent AMR Corp., on the heels of Delta Air Lines Inc.'s recent deal so the market was primed for an airline offering.

Airlines issues all around were higher, in part due to a JPMorgan upgrade to AMR on Wednesday.

Continental shares rose 95c, or 7.25%, to $14.06. Its existing 4.5% convert due 2007 added about 1 point to 71 bid, 74 offer and one dealer noted the issue has regained some 20 points over the last couple of months after so many airlines suffered from United's bankruptcy fallout and woeful economic times.

Continental reported Monday a drop in its May air traffic of 6.3%.

Delta shares climbed $1.23, or 8.87%, to $15.10 and its new 8% convert due 2023 soared 3.125 points to 100 bid, 101 offer.

Delta was benefiting from news of its own as it reported Wednesday that its May air traffic fell 9.4%, but also unveiled a plan to reduce non-fuel costs by 15%, on top of its plan from late last year to cut costs and boost revenues by some $2.5 billion by 2005.

Alaska Airlines Inc. also gained ground Wednesday, as it posted an 11.2% gain in its May air traffic. The convertible floater due 2023 added 1.75 to 2 points on the day to 107.625 bid, 108.125 offer while the stock closed up 70c, or 3.68%, to $19.70.

Schlumberger's $1.3 billion deal did not do as well, however.

No buyside sources were found who bought into the New York-based oilfield services deal, but several said they heard both tranches were reoffered at 98 or 97.

"That sounds way too pessimistic," though, one market source said.

"At their final terms, I had the As at fair value, literally, and the Bs 0.9% rich. That didn't seem outrageous after everything else that gets placed. I didn't expect lower reoffers."

Tranche A, for $850 million, sold at par to yield 1.5% with a 51% initial conversion premium - at the cheap end of guidance for a 1.0% to 1.5% coupon and 51% to 56% initial conversion premium.

Tranche B, for $450 million, sold at par to yield 2.125% with a 67% intial conversion premium - at the cheap end of guidance for a 1.625% to 2.125% coupon and 67% to 72% initial conversion premium.

Citigroup closed the Tranche A at 97.75 bid, 98 offer and Tranche B at 97 bid, 97.25 offer.

Schlumberger shares lost 74c on the day, or 1.54%, to $47.16.

Again, there was a fairly wide discrepancy in the valuations on the Schlumberger deal, though, which is not so very unusual these days with credit spreads in gyration.

Deutsche Bank Securities put Tranche A at 0.51% rich and Tranche B at 2% rich, using a credit spread of 45 basis points over Libor and a 25% stock volatility.

Lehman Brothers put Tranche A at 1.1% cheap and Tranche B at 0.33% cheap, using a credit spread of 40 bps over Libor and a 26% stock volatility.

Venu Krishna, head of U.S. convertible research at Lehman, said he favored Tranche A over Tranche B, due to its more defensive risk/reward profile as well as being cheaper. But he said with a higher delta and relatively higher coupon, arbitrage accounts are likely to favor the Bs.

Also, Omnicare Inc. launched $250 million of convertible trust preferreds in the Piers, or preferred income equity redeemable securities, structure for pricing Monday after the close. Price talk puts the yield at 4.0% to 4.5% with a 30% to 35% initial conversion premium.

Merrill Lynch puts the new Omnicare convert 3% cheap, at the midpoint of guidance with the stock at $26.88, using a credit srpead of 460 bps over Treasuries and a 29.4% stock volatility. The valuation also considers the 0.33% yield on the common.

Omnicare said the convertible proceeds, along with funds from a stock offering, will be used in part to redeem its 5% convertible subordinated debentures due 2007. In addition to the stock offering of 5.625 million shares, Omnicare is selling $250 million of 10-year senior subordinated notes.

The Omnicare 5% convert gained 1.25 points on the news to 102.25 bid, 103.25 offer.

Omnicare shares closed up 25c, or 0.94%, to $26.94.

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