Convertibles flat as braces for busy week ahead

By Ronda Fears

Nashville, Tenn., Jan. 25 - Convertible activity was somewhat quieter Friday, traders said, outside of the record $5 billion deal from Ford Motor Co. Activity pretty much centered around setting up for next week's line-up, which is anticipated to be very heavy although only $425 million has so far been put on the calendar. While players have been complaining about terms recently, most acutely the tightened terms on the Ford deal, terms became much more generous on the latest deals getting pitched.

"Obviously, Ford was the story of the morning, but there's not much to say about it that hasn't already been said," said a market source at one of the major investment banks.

The deal garnered interest from the full spectrum of investors - outright funds and hedge funds as well as institutional equity funds and retail accounts. While investors were disappointed with the more aggressive terms on the Ford deal, they were happy to see the deal come at the midpoint of the revised guidance. Ford's 6.5% convertible trust preferred, which sold with a 22.5% initial conversion premium, gained 1.875 points in the immediate aftermarket to 51.875 bid, 52 offered. Ford common shares added 16c on the day to $14.61.

Ford, General Motors and Daimler Chrysler have asked a federal judge to bundle some 15,000 to 20,000 asbestos cases pending as part of the bankruptcy case of auto parts maker Federal Mogul Corp. Concerns about the magnitude of asbestos claims have bludgeoned the stocks of several large firms the past few months, including Haliburton Co. and Georgia-Pacific Corp. - both with convertibles in play, along with Federal Mogul and now Ford. On growing hopes that the government may intervene to limit asbestos settlements, traders said many of those affected companies gained Friday. Among them was Georgia Pacific. The Georgia Pacific convertible preferred gained 3 to 28.5 while the underlying common stock rose $2.95 to $24.70.

Many players were getting ready for a heavy calendar next week, and in addition to the OSI Pharmaceuticals deal that emerged late Thursday, GATX Corp. announced a deal and price talk surfaced on the LaBranche mandatory.

GATX is pitching $150 million of five-year non-callable convertible senior unsecured notes with a yield of 8.0% to 8.5% and 12% to 16% initial conversion premium. Salomon Smith Barney is lead manager of the Rule 144A deal, which is scheduled to price after the close Thursday. Chicago-based GATX, a specialty finance and leasing company, said proceeds would be used to repay debt and for general corporate purposes.

The company on Tuesday posted a narrower fourth-quarter loss but warned its 2002 earnings would fall short of expectations, citing concerns over the lingering effects of the recession. The company reported a loss of $12.1 million, or 25c a share, compared with a loss of $60.6 million, or $1.27 a share, a year before. The company said its portfolio in the telecom sector and uncertainty regarding its air business in the wake of the Sept. 11 attacks affected the quarter. The company expects 2002 earnings to be in a range of $2.00 to $2.25 a share, considerably lower than the First Call analyst consensus estimate of $2.41.

At the midpoint of the GATX price talk, analysts said the deal would be about 15.5% cheap, assuming a credit spread of about 675 basis points over the comparable Treasury note and 35% volatility in the stock. Analysts speculated that part of the reason the yield is so hefty on the deal is that there is a common stock dividend of about 3.875%, but players were nonetheless surprised and a bit skeptical of such generous terms.

"We're all trying to figure out what the deal is," said a convertible trader at a hedge fund in New Jersey. "Obviously, when you get terms like that, immediately the red flags go up."

GATX shares closed Friday down $1.49 to $30.59.

Guidance was nothing out of the ordinary on the $125 million of three-year mandatory convertibles that convert into LaBranche & Co. Inc. stock. The yield is expected in a range of 6.75% to 7.25% with an 18% to 22% initial conversion premium. The issue will be non-callable in the DECS structure. LaBranche shares closed off 48c to $31.89.

OSI Pharmaceuticals also has $300 million of seven-year convertible subordinated notes with pricing guidance of a 4.0% to 4.5% yield and a 17.5% to 22.5% initial conversion premium, which appears pretty generous. But analysts said the deal was right at fair value, assuming a credit spread of about 935 basis points over Libor and 50% volatility in the stock.

OSI shares closed Friday down $2.06 to $42.

Market sources said there are several overnighters expected next week, which has become the norm. But that is still somewhat unsettling to market players.

"The deals are coming, but they are rather small, outside of the Ford deal, obviously. But the big ones are mostly coming very quickly and it puts a great deal of stress on everyone," said a hedge fund manager in New York. "There's still a lot of demand, though. And there appears to be plenty of issuers lined up."

New paper was mixed chiefly because of terms, but traders also noted that liquidity had dried up already on some of the smaller deals. Emulex's 1.75% notes due 2007 gained another 2.375 points to 106.375 bid, 106.875 offered with the stock up $1.49 to $44.39. Advanced Micro Devices' 4.75% notes due 2022 (B3/B) edged up 0.25 point to 99.25 bid, 99.5 offered with the stock up 17c to $16.30.

Elsewhere, it was a mixed bag as well, but overall unchanged as stocks were mostly flat, reacting to disappointing outlooks from fiber-optics equipment maker JDS Uniphase Corp. and mobile phone maker Ericsson that was only partly offset by growing speculation that there will be limits placed on asbestos claims that have rocked so many companies lately. The Nasdaq closed off 4.88, or 0.25%, to 1937.70 and the Dow Jones Industrial Average edged up 44.01, or 0.45%, to 9840.08.

Hanover Compressor's convertibles were inactive along with the stock, which was halted, a trader said, on news pending from the company about a news article that paralleled the oil and gas service company's off-balance sheet transactions to troubles that led to Enron Corp.'s demise and subsequent tragedies. The Hanover 4.75% convertibles due 2008 closed Thursday at 79 with the stock at $16.05. No news ever hit the tape, however.

ImClone Systems securities continued to dive, Friday on news that a board member had resigned amid SEC and Congressional inquiries. The 5.5% convertible notes due 2005 fell 10 points on the bid to 59 and 8.5 points on the offer to 64.25. The stock dropped $3.09 to $16.49.

Heading northward, though, was Amazon.com Inc. after an upgrade by Moody's on the heels of reporting a profit. Traders said there wasn't a great deal of volume in the name, as investors continue to digest the earnings report but there was some buying that pushed the convert higher. The 4.75% convertible due 2009 (Caa2/CCC+) added 2.5 points on the day to 60 bid, 61 offered with the stock up 43c to $14.44.

Moody's said Amazon's cash drain has declined substantially and the $1 billion of cash on the balance sheet at the end of 2001 will be sufficient to finance operations through the medium term and, barring a change to corporate strategy on acquisitions or expansion, the company should not need to access the capital markets to finance ongoing operations over the next two years.

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