Calpine up after big drop last week; Kroll bonds flag while stock soars on merger news

By Ronda Fears

Nashville, May 19 - Telecom paper was active and moved higher as the stocks rose, but convertible traders said Wednesday's session really was without direction or conviction and traffic fizzled considerably in the afternoon.

Several buyside traders commented that their desks were light because lots of convertible players attended the Bear Stearns Global Credit Conference Wednesday afternoon, when the topics focused on credits and derivatives like credit default swaps.

Despite the rise in stocks this week, traders said the bids have not been rolling in as the gains might suggest. In fact, one buyside trader said what bids were put out there Wednesday were rather puny - in the neighborhood of quarter-point to half-point ticks. That, she said, is just an indication of how rich the convertible market had gotten, and she believes there is a lot more pain coming down the pike.

"The market has cheapened up quite a bit, but not that much, not enough. We're not backing up the truck yet," said the convertible trader, who is with a big hedge fund based in New York. "We've kept our leverage low."

Kroll converts edge to parity

The pain was severe for holders of the Kroll Inc. convertible set up on a traditional hedge, so no one really wanted to cop to owning the security system paper. A lot of the paper traded Wednesday, however, on the heels of its $1.9 billion acquisition announced by Marsh & McLennan Cos., which pushed the stock up 30%.

"The bonds were right at parity [up about 1.5-2 points from Tuesday] and the stock went up, what, 30%, close to the offer price," said a sellside market source.

It caught holders off guard, he added, and certainly no one anticipated an all-cash deal.

Tuesday after the market closed, Marsh & McLennan - the world's top insurance broker - announced that it is acquiring Kroll - a security and risk management firm - for $1.9 billion in cash, paying $37 per share for Kroll, a more than 32% premium over the closing price Tuesday of $28.10.

Kroll shares shot up Wednesday by $8.46, or 30.11%, to $36.56. The 1.75% convertible bonds edged up about 1.5 points to 105 from 103 bid at the close Tuesday.

With the bonds barely up and the stock way up, arbs in a traditional hedge got crushed in the short squeeze, which one source referred to as a "disaster."

Thoratec issue tucked away

Thoratec Corp.'s new $125 million of 30-year discount cash-to-zero notes - which priced at 58.098 for a yield to maturity of 2.375%, up 37.5% - was primarily bought by institutional investors that were buy-and-hold investors, a buyside market source said.

The deal - which pays a cash coupon on the face amount for seven years and then becomes an accreting zero-coupon convertible - priced at the middle of yield talk of 2.0% to 2.5% and at the cheap end of premium guidance of 37.5% to 42.5%.

Coupon payments for three years are collateralized with Treasuries.

The Pleasanton, Calif.-based firm, which makes products for patients with congestive heart failure, plans to use up to $60 million of proceeds to buy back stock, with the balance possibly going toward more stock buybacks and acquisitions.

A buyside market source said the most likely big buyers in the deal were the likes of Medtronic Inc. and Johnson & Johnson, that have a specific interest in Thoratec's business. He noted that the borrow on the stock was too tough for hedgers to get heavily involved. He added, though, that it was pretty well known on the Street that one of Thoratec's big goals for the proceeds of the convertible deal was to buy out a big chunk of Thermo Electron Corp.'s equity stake in the company.

"This was a good deal," he said. "Thermo is no longer an overhang or a problem."

Tower optimists step in

Tower Automotive Inc.'s new 5.75% up 30% convertible continued to see some traffic Wednesday but was little changed at Wednesday's closing level of 105.5 bid, 106 offered.

The issue was panned by several buyside and sellside market sources, as the Novi, Mich.-based auto parts maker had to richen the coupon to take out its old 5% convertible that matures Aug. 1. The new issue, however, had shot up some 5.5 points out of the gate.

A buyside source from the outright camps said he felt the negative chatter about the impact to Tower Automotive from any downturn in auto sales was overblown. In addition, he said, there have been a lot of reports about how the Big Three automakers are shifting away from so many small suppliers.

Tower Automotive might feel some pressure on its bottom-line results short term, he said, but will get its fair share of business from having a long-standing relationship with the automakers.

"There is no need to jump ship now," he said. "It is not really leaking all that badly."

Calpine rebounds somewhat

On Monday, Calpine Corp. shares hit a new 52-week low and in the past week or so the convertible bonds lost around 15 points. The drop finally brought in a few bidders Wednesday, dealers said.

The Calpine 4.75% convertible gained 1.25 points to 67.5 bid, 68.25 offered, while the stock added just 2 cents, or 0.63%, to $3.17.

"No one is breaking their neck to buy [Calpine convertibles] here at this level, but we did see a little bit of action there," a dealer said.

"The problem is that their [the company's] breakeven guidance looks pretty aggressive. The more common line of thought is that they are going to have to have a lot more asset sales to get there, if you can get there from here."

Calpine said earlier this month it still expects to break even in 2004 and affirmed its cash flow target of about $1.7 billion for the year.

The San Jose, Calif.-based independent power producer reported a first quarter net loss of $71.2 million, or 17 cents a share, from $52 million, or 14 cents a share, in first quarter 2003. Revenue dropped 6% to $2.04 billion.

PDLI slide deepens

Protein Design Labs Inc.'s pain worsened Wednesday despite a conference call midday to elaborate on its drug prospects in the wake of disappointing trial results for its drug daclizumab in fighting a severe bowel disorder.

The PDLI 2.75% convertible due 2023 dropped another 4 or 4.5 points to 119.25 bid, 119.75 offered on Wednesday, while the stock also continued to lose ground. The PDLI shares lost $1.54, or 7.7%, to close at $18.46.

"All I can think is that maybe somebody smart is still selling PDLI," said a sellside market source.

The Fremont, Calif.-based biotech company said that based on results of the trial, it would not pursue tests for the drug in ulcerative colitis but is looking at its potential use in asthma and multiple sclerosis.

PDLI announced the news Sunday and scheduled the conference call for Wednesday. But the sellside market source said that the call was so esoteric that maybe some holders just became exasperated and sold PDLI securities out of frustration.

Dieting may hurt Casual Male

Casual Male Retail Group Inc. is due to report earnings Thursday, and some holders, fearing profits are slimming alongside the trimming efforts sweeping across the United States, were selling ahead of the event as the new George Foreman line of clothes for big men may not whip up sales as hoped.

The 5% convertible ended Wednesday at 99 bid, 100 offered, which one dealer said was off about 0.75 point. Casual Male shares closed up a dime, or 1.36%, to $7.45.

The company reports earnings before the market opens Thursday, and a conference call is set for 11 a.m. ET. The company earlier this month warned that fiscal first quarter results would be lower from year-ago levels due to some $3.5 million in advertising to boost sales in its new George Foreman line of clothes.

Since that warning, the convertibles have lost more than 15 points.

"The company in my view is in trouble," said a market source on the West Coast, noting that George Foreman joined the board and within one month left the board.

When asked if he would be a buyer for the converts after the big drop in recent weeks, at 99 or so, he said, "With $4 million in cash versus $120 million in debt, no thanks.

"By the end of the year CMRG will have no cash on the balance sheet. I think the average waist size they sell to is 55 and people are on Atkins - look at Krispy Kreme Donuts - so why do you need CMRG?

"Like KKD, if people keep losing weight they will be buying George Foreman's other product," he said, referring to Foreman's lean grilling machine.

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