Charter rises past 105, then eases to 102 bid; Level 3, GenCorp, Overstock at bat

By Ronda Fears

Nashville, Nov. 17 - Charter Communications Inc.'s new convertibles soared past 105 in early trading before easing back during the second half of the session to end at a 102 bid as players shrugged off or got comfortable with the tight borrow on the stock, which hit a new 52-week low of $2.08 Wednesday.

Meanwhile, Level 3 Communications Inc. was expected to price its new convert after the closing bell rather than wait until Thursday's close. Overstock.com Inc. and GenCorp Inc. also were at bat Wednesday with much smaller deals.

Some players skeptical of the riskier credits were kicking themselves for not getting involved, particularly with regard to Charter as its deal zoomed in the immediate aftermarket.

"I should have played in the name," said the manager of two big convertible funds, noting that at the time the new Charter convert was trading at 104. "I am a fool as loads of bad news [was] obviously priced in here."

But the fund manager said the credit quality of issuers rushing to tap the convertible market before year-end rattled him.

"I'm feeling like I am on the survivor island TV series with all these low-rated bonds washed up on shore," he said.

Six Flags Inc. was another junk credit returning to the convertible market earlier this week, and its new 4.5%, up 20% shot up another 1.25 points on Wednesday to 104.5 bid, 106 offered.

Level 3 issue looking cheap

Perhaps due to the market's response to Charter, the West Coast manager said he figured he would "have to really do some thinking on this name," referring to Level 3's deal.

A sellside trader commented that the Charter deal was the first new issue in a while in which players could flip the paper immediately and make money, which he said would likely pique interest in the other deals on the table this week.

In any event, some onlookers thought the Level 3 issue also was priced to sell.

"We haven't officially modeled up the LVLT issue, but by just shoving a couple of variables into our model (5.25s up 20), a 55% vol and 1,000 bps credit spread, the issue would be very (about 10%) cheap," said a sellside desk analyst, who is not associated with the deal manager. "At 1,200 basis points [over Treasuries] it would be 7% cheap."

Buyside sources said there were some concerns about the limited borrow on Level 3 shares, as well as the credit and the Broomfield, Colo.-based internet access provider's focus on voice over internet business.

Level 3's $200 million deal was talked to yield 5.0% to 5.5% with a 17.5% to 22.5% initial conversion premium. The company also is marketing a $450 million term loan, with proceeds from both transactions to be used in part to take out its $200 million of 8% notes.

Charter seen as Adelphia play

Even with the stock loan transaction Charter was doing with Citigroup, sole bookrunner on the convert, many thought that the stock borrow would hamper the deal - but that turned out not to be the case. Rather, some buyside sources said Charter's potential bid for cable assets of bankrupt Adelphia Communications Corp. was a major factor in the market's reaction to the new deal.

"Clearly, borrow does not matter with CHTR," said a buyside source. "I think CHTR was getting a bid because of the Adelphia story. All hedgies think they are better [to team with Adelphia's assets] than KKR [private equity firm Kolberg Kravitz, Roberts] and anybody else."

Time Warner Inc. and Comcast Corp. have decided to team up on a bid for Adelphia's assets, too, and are considered by some as forming the white knight bid. Adelphia said last week that interest in its bankruptcy auction has been hearty. It also said it would extend taking bids into January rather than cut off the process at year-end. Adelphia is hoping to get $17.5 billion for the 5 million cable subscribers.

Charter stock borrow ignored

"Most people seemed pretty happy with it [the new Charter convert], even considering the no-borrow situation, due to the issue's cheapness," said a sellside desk analyst. "Earlier, they were as high as 105.375."

Concurrent with the convertible offering, Charter made a stock loan deal with Citigroup for 150 million shares of common stock, specifically in order to help facilitate hedge fund participation in the convertible.

Charter's $750 million of five-year convertible notes were sold at par to yield 5.875% with a 12% initial conversion premium, at the cheaper end of yield talk of 5.5% to 6.0% and roughly in the middle of premium guidance for 10% to 15%.

At the middle of price talk, sellside analysts had put it about 13% cheap. Three years of collateralized coupons also were a plus for the issue.

Citigroup closed out the new issue Wednesday at 102 bid, 102.5 offered. Charter's 5.75% convertible due 2005, which is targeted to be refinanced with the proceeds, was still hovering at par, while its 4.75% convertible due 2006 was "a little soft" at 99 bid. But Charter shares dropped another 8 cents, or 3.7%, to end at a new low of $2.08.

UnumProvident seen "cheap"

In the wake of New York Attorney General Eliot Spitzer's latest attack on the insurance industry, which included allegations that brushed - though didn't directly accuse - such names as UnumProvident Corp., there has been some buying on the weakness, convertible traders said.

UnumProvident's 8.25% mandatory due 2006 was particularly strong in the face of the recent development. The issue on Wednesday added a quarter-point to close on the New York Stock Exchange at 29.65, but a dealer quoted it up a half-point to 29.875 bid, 30 offered. The underlying stock ended Wednesday up 9 cents, or 0.64%, to $14.09.

"This is a very cheap stock. It has always been a very cheap stock. Reminds me of CNO [Conseco Inc.]," said a trader. "There is always another write-off or regulatory issue around every corner. The majority of holders are value players. They see this getting taken over at $20."

UnumProvident is "still [the] largest workers comp insurer," the trader added, and the new Spitzer charges, which were leveled Friday against Universal Life, "only make it more likely they sell out. [UnumProvident is] a definite buy if you are strong-willed."

Conseco, which emerged from bankruptcy in September 2003 after one of the biggest insurance insolvencies on record, has been another popular insurance name among convertible players. It's 5.5% mandatory due 2007 on Wednesday was described as slightly better at 25.375 bid, 25.5 offered, while the stock ended off 11 cents, or 0.58%, at $18.75.

Terra, Bunge getting nibbles

A couple of fertilizer producers, Bunge Ltd. and Terra Industries Inc., were mentioned again Wednesday following some action in the names on Tuesday, with both edging up on some buying interest.

Bunge announced Wednesday that it is teaming up with Procter & Gamble Co. and Peter Cremer North America to make cholesterol-reducing ingredients for foods and drugs. Bunge predicted that by 2008, demand for these products will have a market value of $200 million to $250 million.

Interest in the agriculture names, though, is fundamentally driven by an expectation that grain production in the United States will be boosted to answer higher demand for livestock feed, a sellside trader said.

"There's the mad cow incidents, which has taken some beef off the market in the U.S., as well as globally," the trader said. "Beef and hog, or pork, shipments are going to rise to Mexico and Japan, too, and possibly China. So, the rise in demand is causing ranchers to increase herd sizes. More grain will be needed and, with that, more fertilizer."

Bunge's 3.75% convertible note due 2022 was quoted Wednesday up 0.5 points to 155.5 bid, 160 offered, while the stock closed up 4 cents, or 0.08%, to $48.85.

Terra Industries' 4.25% perpetual convertible preferred was quoted up a half-point, too, to 103.5 bid, 104 offered, with the stock ending up 13 cents, or 1.72%, to $7.70.

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