Providian 4% convertibles find buyers on cash takeover protection; Calpine, other power issues see bids

By Ronda Fears

Nashville, June 10 - The convertible market welcomed an unexpected three-day weekend - a memorial to President Ronald Reagan - after a tumultuous week. The furor over cash takeover protection, which spurred some sharp discounting in the market, had died down by Thursday and traders said there were a few issues catching a bid.

Providian Financial Corp. was catching some bids, specifically the Providian 4% convertibles, which have specific language regarding an all-cash takeover. But traders noted that the price on the issue was lower by at least 1 or 2 points from a week ago.

Nibbles also were seen in the energy group, for Calpine Corp., AES Corp., Dynegy Inc. and Reliant Resources Inc.

The broader convertibles market had weakened earlier in the week after an all-cash $7.65 billion bid for Mandalay Resort Group by MGM Mirage. The bid caused Mandalay's convertibles to fall on a lack of cash takeover protection and other convertibles to decline as the market assessed whether other convertible issues similarly lacked takeover protection.

Airline paper, however, took another dive Thursday, led by the precipitous drop in Delta Air Lines Inc. that caused valuation concerns for other major carrier convertibles.

Issuance buzz remains quiet, meanwhile, with only a small $94 million deal on the calendar in the June 7 week from QuadraMed Corp. Market sources said, however, that now that the chaos created by the Mandalay situation has settled down, some of the deals that had been ready to go would likely pop up.

Providian buyers emerge

Providian's 4% convertible due 2008 got a plug as one of a few convertible issues with cash takeover protection for holders, and dealers noted some buying in the paper - albeit at cheaper levels than a week ago.

The San Francisco credit card company is probably a ripe target for some would-be acquirer but it would probably not be an all-cash takeover unless the purchase was an offshore, or foreign, entity, one analyst said. If a domestic buyer came calling, he said, it would likely be some combination of cash and stock.

"There has been some interest in the Providian 4s because they inserted some language about a cash takeover," said a buyside trader, adding, however, that the name still suffers from a legacy of high credit losses and a portfolio of weak credit quality borrowers.

While the situation at Providian has improved considerably in the last couple of years, since management was forced out, he said there is still some doubt surrounding Providian. For one thing, he said, an economic recovery scenario is a mixed blessing of sorts as higher interest rates slow credit card payoffs and inflationary pressures from higher interest rates can cause performance among bad credit card customers to worsen.

"We sold our position back in February, which turned out to be pretty smart because that was right before the market started to tank," the trader said. "We are avoiding getting involved again, even at these lower prices."

The Providian 4s went out Thursday, he said, at 121 bid, 121.5 offered. That was off about 1 point on the day, he noted, but down 2 or 3 points from a week ago. Providian shares ended Thursday at $13.95, lower by 20 cents on the day, or 1.41%.

Calpine, power issues up

Calpine triggered some buying interest in the power sector, which traders attributed somewhat to recent cheapening.

"These guys [Calpine convertibles] have been coming in for several weeks, months really," since trading around par in the first quarter of 2004, one sellside dealer said. "Some of the other energy issues, Reliant and Dynegy especially, are still kind of expensive but this is an area investors are getting more comfortable with, comfortable holding, now that most of the California crisis is behind us."

Lots of the energy producers, including Calpine, were severely crippled and/or fined as a result of alleged price fixing in the 2000 and 2001 electricity catastrophe. But most of those charges have been settled.

Another boost to Calpine, a buyside trader said, was its announcement Thursday that it was looking to sell some natural gas reserves in Canada, with proceeds going to repay $500 million in first-lien debt. The San Jose, Calif.-based independent power producer also said it may sell some natural gas reserves in the United States.

Calpine's 4.75% convertible added about 2 points to 78.5 bid, 79 offered. The stock gained 13 cents, or 3.42%, to close at $3.93.

Dynegy and Reliant convertibles also were higher by about 2 points, traders said.

Delta steers airlines lower

Delta Air Lines has had the market's watchful eye for some time amid growing concern about the possibility that it will take a stroll up the bankruptcy court steps. Meanwhile, Delta's bonds have headed down and took most airline paper with it this week.

Particularly this week, with the widespread concern about valuations in convertibles, traders said there was an elevated level of anxiety about holding airline paper.

"Everyone has been trying to get a feel for what this stuff [Delta convertibles] is worth," said a sellside dealer. "Just because distressed paper has been up there, at some truly mind-boggling levels, you cannot keep marking this stuff up."

Early in the week, he said, some of the Delta junk bonds were seen trading in the mid-30s. That, in turn, caused some to wonder if the converts should be in that neighborhood. Then, he added, that concern trickled down further to other major carriers like AMR Corp., parent of American Airlines, as well as Continental Airlines Corp. and Northwest Airlines Corp.

All those convertibles, plus those of regional carriers like ExpressJet Holdings Inc., Jet Blue Airways Corp. and others, were lower by at least 2 points and as much as 6 points on Thursday.

Delta's convertibles dropped about 2 points each with the 8s at 48 bid, 49 offered and 2.875s at 53.75 bid, 54.75 offered. The stock lost 27 cents on the day, or 4.44%, to $5.81.

A high-yield trader said the Delta junk bonds were "a little weaker." He pegged the 7.7s at 58.5 bid, 59.5 offered - down from 61 bid, 62 offered on Wednesday - and the 8.3s at 37.5 bid, 38.5 offered -down from 39.5 bid, 40.5 offered. Another trader saw the 7.7s at 59 bid, 61 offered, down from 61 bid, 63 offered on Wednesday.

Delta chief executive Gerald Grinstein will be making a presentation at the Merrill Lynch Global Transportation Conference next Wednesday. It will be broadcast on the internet at 8 a.m. ET.

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