Genesis settles at par; Calpine up; Toys R Us better; Digital River drops, Ask Jeeves higher

By Ronda Fears

Nashville, Feb. 25 - Convertibles ended the holiday-shortened week on a rather blah note with trading flow described as moderate. Traders on both sides of the market expressed more caution as stocks ended the week higher.

"The best way to describe it is cautious optimism, I suppose," said a sellside trader. "There were definitely more sellers over the past week or so, but today we were starting to see some buying interest. Interest, that is, there's still not a lot of bids out there. But, it's good news that people are looking to buy maybe."

But buyside traders said there were not a lot of buyers for the new paper put into circulation Friday by Genesis HealthCare Corp. The Kennett Square, Pa.-based company focused on eldercare sold the $150 million issue with a 2.5% coupon and 35% initial conversion premium - at the middle of guidance for a 2.25% to 2.75% coupon and initial conversion premium of 32.5% to 37.5%.

Offers continued to dominate the market for the new Genesis issue, though, much as it had in the gray market before pricing, one buyside trader said. It broke with an offer at 100.25, he said, and soon went underwater with a bid finally showing up at 99.625 that got lifted.

"I don't know what happened, it just lost momentum," the trader said.

Genesis' new convertible settled the day at 100 bid, 100.5 offered with the stock gaining 45 cents on the day, or 1.12%, to close at $40.60.

Toys R Us up, hedge eyed

Merger activity has spooked a lot of convertible players, but traders noted some buying, albeit very small, in the Toys R Us Inc. mandatory on Friday. The big story, a sellside trader said, is a derivatives strategy considered while the toy giant peruses bids for the spinoff of its toy unit while retaining the Kids R Us franchise.

The Toys R Us 6.25% mandatory gained about 0.125 point to 55.375, he said. The stock ended better by a penny at $22.92.

Banc of America credit derivatives strategist Glen Taksler put a research piece out Friday on Toys R Us that was catching some looks.

In the piece, Taksler noted that on the contemplated sale of Toys R Us, concern about an equity-friendly spinoff has sent the debt-to-equity breakeven recovery rate to around zero. Thus, he suggested that investors sell two-year Toys R Us credit default protection and hedge with 596 of the January 2007 equity $12.50 put options. Hedging to a 30% breakeven recovery rate, an investor can take in $6,800 per $1 million CDS notional in present value - equivalent to taking in 68 basis points upfront or selling two-year protection at 34 basis points.

The trade has significant mark-to-market risk because of the potential for a leveraged buyout, so investors who execute this trade have to be willing to hold the position until maturity. Taksler noted the hedge could be adjusted depending on one's risk comfort zone, but as the situation stands now the actual recovery rate should clear the 30% hedge ratio easily.

Toys R Us bids big wildcard

Bids were due to Toys R Us by mid-February and the company is said to be in the midst of reviewing several, so the window of opportunity for the specific trade suggested by Banc of America's Taksler could close suddenly.

Several Toys R Us holders in the convertible market were making inquiries Friday across the capital structure, the sellside trader said.

"It's a dicey situation," he said. "They're going to look at this thoroughly before they make a move. The feeling is that they [Toys R Us] are going to announce something pretty soon."

There still would likely be a similar trade opportunity, but if Toys R Us should announce a deal then the exact mechanics might have to be tweaked.

According to reports, the most aggressive bidders for Toys R Us include private equity firm Apollo Management and the toy retailer's former chief executive, Michael Goldstein. Rivals are said to include Bain Capital, Cerberus Capital Management LP and real estate firm Vornado Realty Trust.

Digital slides, Ask Jeeves up

Friday brought more turmoil in the internet names on the heels of Yahoo! Inc. and Google Inc. stocks getting downgraded. While Digital River Inc. took a belated dive, Ask Jeeves Inc. bounced back from a sharp drop.

Digital River's 1.25% convertible lost about 4 points to 100 bid, 101 offered while the stock fell $2.52, or 7.85%, to $29.58. "The credit actually held up pretty good," compared to the stock, a market source said.

The Ask Jeeves 0% deep-in-the-money convert, which trades about 14 to 15 points over parity, added back a couple of points on Friday, he added. Ask Jeeves stock got an upgrade Friday, which helped propel it by 4.18%, or 91 cents, to $22.68.

Juxtaposing the decline in advertising prices for search-engine sites, the market source said, are some signs of strong PC sales, which could boost volume to make up for revenues lost by price declines.

Calpine bounces back

Views on Calpine continue to be broadly mixed, traders said, as the convertible bonds again Friday saw a dip followed by a bounce to end the day better by 1 to 3 points. Similarly, Calpine's junk bonds were better as well as the stock. But, the 5% High Tides that are scheduled to be taken out before the August maturity slipped by 0.25 point to 49.

"There are as many people ready to get out of Calpine as build on their position," one buyside trader said.

Calpine's 4.75% convertible on Friday ended up 1 point at 76 bid, 77 offered but traded as low as 74.75 compared with Thursday's close of 75 bid. The Calpine 6% convert was quoted up 3 points at 100 bid, 100.5 offered.

The Calpine 8.75% junk bonds gained 2.5 points to the 80 neighborhood.

Calpine shares rose 12 cents on the day, or 3.68%, to close at $3.38.

Reactions are split between those who are "disheartened" by Calpine's forecast for a net loss in 2005 on top of the fourth-quarter loss, the trader said, and others who are prepared to take a risk on the credit as the independent power producer plans to further trim its debtload.

For 2005, Calpine has targeted $1 billion of net debt reductions, on top of maturities like the $400 million 5% convertible High Tides, and on the back of reducing net debt by $2.4 billion in 2004.

Calpine deal piques interest

A new convertible from Calpine to take out the 5% High Tides was turning heads, but there still was no firm word on its timing.

One market source, however, suggested Calpine would wait until nearer the August maturity of the 5s but before the summer vacation season got fully under way.

"I think a lot of people are talking about it anyway," the buyside source said. "The fact that it would be similar to the 6% issue is interesting."

Calpine officials said on the company's earnings conference call Thursday that it would most likely use another convertible offering similar to the 6% issue sold last September to refinance the 5% High Tides. The 6% issue was sold in conjunction with a stock borrow transaction through bookrunner Deutsche Bank Securities.

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