Mirant 5.75s fall 12-15 points on bankruptcy buzz; six new deals afloat in primary

By Ronda Fears

Nashville, June 3 - The threat of a prepackaged bankruptcy filing by Mirant Corp. sent its 5.75% convertibles tumbling 12-15 points while the 2.5% converts - the subject of an exchange offer - were said to be holding on to a "status quo" level.

Meanwhile, there were six new deals in the works - five of which totaling at least $1.67 billion were finalized by Tuesday's close and a $1.3 billion two-parter from Schlumberger Ltd. set to price before the open Wednesday.

Outside of the new deals, Mirant was the focal point of the market as its dilemma posed a new threat to energy issues that had been richening in recent months as the result of several favorable bank negotiations for the likes of AES Corp. and several others.

Distressed traders said there were plenty of buyers for Mirant converts, however.

"I think the majority line of thinking is that Mirant will not file bankruptcy but they are using that as leverage to negotiate with the banks," one distressed trader said.

Still, Mirant's 5.75% converts due 2007 lost ground swiftly during the session, with one trader pegging the issue at 63 bid, 65 offered at the close.

The Mirant 2.5% converts due 2021, which are putable in June 2004 at par, are part of the company's offer to exchange $1.5 billion of existing debt for $950 million of new 7.5% senior secured notes due 2008. A distressed trader said the issue closed at 72 bid, 74 offered.

Mirant shares ended down 84c, or 24.71%, to $2.56.

Mirant said in a Securities and Exchange Commission filing that it was not confident about refinancing its $1.125 billion bank facility that matures July 15 and is asking bondholders to approve a prepackaged bankruptcy restructuring plan, although it does not believe a filing will be necessary.

The company also is negotiating with a bank consortium to refinance $3.45 billion in unsecured debt and the bond exchange is contingent on bondholder approval and refinancing the bank debt.

Citibank and Credit Suisse First Boston have expressed opposition to the company's plan to restructure its bank facilities because of sharing first priority liens with bondholders, the company noted in the SEC filing.

The company added that the bank negotiations require 100% of approval from all its banks for a new bank facility and the exchange offer would need 85% of bondholders - the 2.5% converts and 7.4% senior notes due 2004 - to effect an exchange. By comparison, the company pointed out that a prepackaged bankruptcy plan would only need approval from two-thirds of creditors by amount and one-half by number.

"It's like the company disclosed this snag [in the bank negotiations] so that the bondholders would maybe pressure the banks into agreement," the distressed trader said.

Most onlookers don't really expect a bankruptcy filing, he said.

"The banks are trying to block them but it's not in their best interest" to force a bankruptcy filing, said another market source, from the buyside.

Thus, traders said there was good two-way action in Mirant - with sellers exiting on the threat of a bankruptcy, heightened by a rating downgrade, and buyers gambling that Mirant's negotiating tactics will succeed.

In reaction to Mirant's request for a bondholder vote on a prepackaged bankruptcy plan, Standard & Poor's lowered the senior unsecured debt ratings of Mirant Corp. and subsidiaries to CCC from B and is keeping the ratings on watch, but revised the implications to developing from negative.

Elsewhere in the secondary market, several existing converts moved in response to refinancing plans with proceeds from new issues. Specifically, those of Getty Images Inc., Nabors Industries Ltd. and Omnicom Group Inc.

While the call threat in recent months has trimmed much of the overhang from many convertible issues, the Getty Images 5% convertible shed about 2.5 points with the news that the company would call it with the proceeds of a new issue.

Getty Images sold an upsized $240 million of 20-year convertible subordinated notes, with warrants, at par to yield 0.5% with a 60.06% initial conversion premium - at the tight end of guidance, putting the new conversion price exactly at the same conversion price on the existing 5% convertible notes.

Getty Images is using proceeds to redeem the 5% convertible due 2007, which became callable March 20 at 102.857.

"It caught the market off guard, I guess you'd say, which is surprising given the massive amount of price corrections we've seen recently because of this sort of thing," one dealer said.

Getty Images' 5% convertible dropped around 2.5 points to 102.5 bid, 103 offered - near the call price. The stock closed down $1.92, or 4.79%, to $38.16.

Nabors sold $700 million of 20-year convertible senior notes at par to yield 0% with a 57% initial conversion premium, but the issue was reoffered by lead manager Citigroup at 98.

Citigroup closed the new Nabors convert at 97.75 bid, 98.25 offered. Nabors shares lost $1.15, or 2.58%, to $43.50.

Venu Krishna, head of U.S. convertible research at Lehman Brothers, described the new Nabors deal as "yet another unattractive par-zero overnight bought deal" and "one of the richest issues in recent months."

The risk of a potential common dividend by Nabors following recent dividend tax changes could add yet another element of risk to an already negative financing trade, highlighting the incremental cash drag risk, Krishna said.

Lehman put the new Nabors convertible 4.7% rich, using a credit spread of 40 basis points over Libor and a 31% stock volatility.

Deutsche Bank Securities put the new Nabors convertible 3.15% rich, using a credit spread of 40 basis points over Libor and a 32% stock volatility.

Nabors plans to use a portion of proceeds to redeem on June 20 the rest of its 0% convertible senior debentures due 2020 at 65.55 per note, for a total cash outlay of about $494.9 million. With remaining proceeds, Nabors plans to redeem its 6.8% senior notes due April 2004, estimated at about $295.2 million.

The Nabors 0% due 2020 dropped about 0.5 point to the 65.5 call price level, traders said.

Omnicom served up for breakfast a deal before the market open. The ad agency sold $550 million of 30-year convertible senior notes at par to yield 0% with a 43.5% initial conversion premium - at the cheaper end of guidance - with proceeds earmarked to retire debt and general corporate purposes.

Many suspect Omnicom will look at buying back its 0% convert due 2032, which is putable on July 31 at par, and the 0% convert due 2031, which is putable in February at par, one dealer said. Both dropped about 0.5 point to 100.75 bid, 101 offered.

The new Omnicom convert was closed by lead manager JPMorgan at 100.125 bid, 100.375 offered.

Omnicom shares dropped $2.05, or 2.86%, to $69.70 in reaction to the convert offering.

Lehman's Krishna said the dividend pass through feature on Omnicom's new convert adds to its attractiveness in light of recent dividend tax changes, but the current 1.14% common dividend on Omnicom shares versus 0% yield on the convert results in a negative financing trade.

Moreover, he said, that while terms on the new convert are attractive versus the other two outstanding Omnicom converts, the existing issues are more defensive given near term puts.

Lehman put the new Omnicom convert 1.5% cheap, using a credit spread of 70 basis points over Libor and a 32% stock volatility.

Deutsche Bank Securities put the new Omnicom convert 0.54% cheap, using a credit spread of 80 basis points over Libor and a 28% stock volatility.

Sepracor Inc. also caught the market off guard with a call on its 7% convertible due 2005, with about $112 million outstanding, at 103 because the issue has been callable for some time, one trader said.

The Sepracor 7s gained about 6-7 points to the 103 call price level. The stock closed up 73c, or 3.24%, to $23.31.

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