Quicksilver reoffered at 98.5, Armor Holdings flat at 99; Option Care, Isolagen at bat

By Ronda Fears

Nashville, Oct. 27 - New deal activity in the convertibles market picked up, but the paper was not getting any lift in the secondary market. Armor Holdings Inc. remained underwater, and there were signs of buyers balking at what they see as very aggressive terms; Quicksilver Resources Inc. remained underwater as well, even after it was reoffered below par.

Meanwhile, Option Care Inc. was on tap to price a small $75 million deal - talked at 1.75% to 2.25%, up 35% to 40% - after the close Wednesday, and another $75 million deal from Isolagen Inc. - talked at 3.25% to 3.75%, up 35% to 40% - was in the shadows waiting to price after Thursday's close.

Back to secondary market action, Quicksilver followed several peers in the oil and gas sector lower as crude oil futures plunged $2.71 on Wednesday to $52.46 a barrel. Bucking that trend, however, Halliburton Co. gained a couple of points as its earnings, actually a net loss versus profits a year ago, were viewed as showing asbestos risk becoming more manageable and the oilfield services company's KBR unit on track with its restructuring.

Sirius Satellite Radio Holdings Inc. also reported a loss but it was wider than anticipated and revenues fell short of analysts' expectations. Convertible traders said there was considerable short selling in Sirius shares but there was some buying on the resulting weakness in its new 3.25% and older 2.5% convertibles, which were 1 to 2 points lower.

Delta Air Lines Inc. took off for higher ground again Wednesday, but traders said activity in the convertibles seemed to level off. In fact, one buyside analyst said his firm was selling out, as he sees Delta and its believers "on a fantasy flight." Sellside analysts also were skeptical of the recent headlines on Delta that paint a rosy horizon for the airline that has teetered on the brink of bankruptcy for most of a year.

Quicksilver gains to 99.5 bid

Quicksilver's $130 million issue - priced at par to yield 1.875% with a 42.5% initial conversion premium - was reoffered at 98.5 by sole bookrunner Banc of America Securities LLC, according to market sources, but then gained out of the chute.

Still, a buyside trader said the issue closed underwater at 99.5 bid, 100 offered. The stock ended off 6 cents, or 0.19%, to $32.11.

The issue sold at the cheap end of price talk for a 1.375% to 1.875% coupon and 42.5% to 47.5% initial conversion premium, but a buyside source said those terms, while "not the best," were not the real problem for the issue.

"Really the drawback to this deal was the premium, because the stock is viewed as being grossly, grossly overpriced," said a fund manager in New York. "The P/E is ridiculous - 64! Insane when peers in the independent oil and gas industry, like CHK [Chesapeake Energy Corp.] and that a hot name, are like 12!

"By nearly every comparative financial and operating ratio with its peers make Quicksilver look way overpriced."

Delta convertibles rise to mid-40s

Delta's convertible paper took off again Wednesday as oil prices plunged and hopes continued to run high that the airline might find a way to skirt bankruptcy.

"I hope the pilots can come through because I think I have the next big move in oil pretty sniffed out - and it could really power DAL on the upside in the next few weeks in association with short covering," said one buyside trader.

But no pilot deal and firm news on how the debt exchange is going lead to some holders selling out on the recent run-up, despite the American Express funding and other positive headlines for Delta.

"The big snag I think is still with the debt exchange. If they had enough, or even if it [holders tendering] was above 50%, wouldn't Delta announce that, putting more pressure on the pilots? They have announced everything else," said a buyside analyst, who was selling out.

"Another thing, there was no ALPA [Air Line Pilots Association] morning post Wednesday. They have been posting updates with great frequency as negotiations with Delta management were heating up. That could be good, say because they are literally drawing up a deal, or it could be bad. I'd just as soon take what I can now."

Delta's 8% convertible was up about 2.25 points to 44.375 bid, 44.875 offered and the 2.875% convert up 1.25 points to 45.5 bid, 46.25 offered. Delta shares rose another 31 cents, or 6.7%, to $4.94.

Delta on fantasy flight: analyst

The buyside analyst, at a hedge fund in Chicago, said he rather thinks the market's swift about-face regarding Delta is based on a "fantasy flight if they think they are not going to file bankruptcy." He also pointed to a report out Wednesday by an independent research firm on the Delta situation, referring to "financing gone wild."

CreditSights analysts Roger King and Glenn Reynolds said in the report that American Express' investment in Delta highlights how important affinity card programs are to issuer revenue streams, but added, "Delta needs more restructuring and less financing [as] pushing out the day of reckoning will not solve core issues."

American Express' assistance to Delta is based on the high value of the credit card franchises that the issuers need to protect. Bank One was active in the United debtor-in-possession financing, in part because the UAL affiliated card generated 10% of its credit card loan portfolio, the credit analysts said. At American Express, that number is 15% for the Delta SkyMiles card.

"The $600 million package has a lot of strings attached, but it provided a huge confidence boost for the credit. That should help all the codependent restructuring initiatives of Delta get off the dime. The downside is this is another example of enabling an airline to defer reality," the analysts said.

"It does not address Delta's competitive position or its pension overhang. The industry is notorious for capital infusions that delay the day of reckoning. Finally the ATSB pulled the plug and forced UAL and its constituents to go cold turkey.

"The same is necessary at Delta so the strength in the restructuring negotiations transfers to Delta from the pilots, bondholders, and vendors. The sooner Delta pulls the plug and starts mandating terms, the better off the operating entity will be in terms of its ability to compete in the new competitive landscape."

Sirius picked up on softness

Sirius Satellite Radio on Wednesday posted a wider third quarter loss and missed analysts' expectations, but its subscriber base quadrupled. Traders said there was some buying on the weakness in the convertibles on pressure from the drop in the underlying stock.

"The moods swing wide on this name," a sellside trader commented. "The news on the tape sent it off, the earnings, then Howard Stern was mentioned by CNBC this afternoon and that's free publicity. Late in the day we saw some buyers come in."

The New York-based broadcaster posted a third-quarter net loss of $169.4 million, or 14 cents per diluted share, compared with a net loss of $106.7 million, or 11 cents per diluted share, a year before. Revenues gained, though, to $19.1 million from $4.3 million as Sirius added 181,948 subscribers in the quarter, pushing total subscribers past 700,000.

It expects to hit 1 million subscribers by the end of this year.

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