Delta convertibles rise sharply; Amkor buyers heartened; Lucent edges up, Apex easier

By Ronda Fears

Nashville, Oct. 13 - Contrarians were busy in the convertible market Wednesday, traders said, with bids surfacing on lots of beaten-down paper, particularly issues reverting back to busted status. In addition, traders said there were a lot of picks being made based on a marked spike in volatility.

"We were seeing bids come to us. There wasn't anything to make of it today except that people are reaching for yield," said a top convertible trader at a big sellside shop. "The number of busted converts are back on the rise again, after really shrinking and taking away some of the high-yield players. Now, they are beginning to come back to us."

Another sellside source noted increased interest in drug and healthcare paper as HCA Inc. was downgraded into junk territory Wednesday by Standard & Poor's. "People are snooping around in the biotech area," he said, specifically mentioning Wyeth's convertible floater and CuraGen Corp.'s 4% convertible due 2011.

Buyside traders said there also were a lot of volatility bets getting placed, especially in the technology and biotech sectors.

"Volatility spiked big today," a buyside convert trader said, noting the Nasdaq volatility index shot up 5% and the old VIX index rose around 2.5%. "There's some overlap in what you're hearing from the buyside traders, too, in that there are a lot of vol opportunities in the tech and biotech names."

Convertibles buck stock slide

While in the broader markets, stocks retreated and bonds were treading water, the strong bidding mentioned by the sellside trader was borne out as several other traders remarked about convertibles moving higher Wednesday. A surge in oil prices along with anxiety about the weekly jobless claims report due Thursday were blamed for the weakness in the broader markets.

Specifically in secondary dealings, Delta Air Lines Inc. was higher on chatter about a pilot deal, and Amkor Technology Inc. was higher again as the company began shopping a new loan. Lucent Technologies Inc. also edged up as more buybacks in its longer-dated paper were speculated.

Ahead of Sandisk Corp. reporting earnings after the close Wednesday, which showed that profits tripled but missed analysts' estimates, the deep-in-the-money 4.5% convertible due 2006 was described as steady and traders said there was no reaction to the 19% drop in Sandisk shares in after-hours trading on the earnings.

There were decliners in the convertible universe, traders said, but just not a huge sell-off.

For instance, a sell-off in metals hurt commodity-related companies like Apex Silver Ltd. Thus, the new Apex Silver convertible eased back to 99.875 bid from 100.125 bid, while the stock dropped 1.74% to $19.16.

Delta convertibles rise 4-7 points

Buzz that Delta and its union pilots were close to inking a new contract fueled short covering in the stock, convert traders said, but there was an equal amount of noise that suggested the wage concessions won't be enough to keep Delta above the tidal waves rocking its ship. Thus, traders said the Delta convertibles saw a new wave of buying from special situation funds.

Delta's 8% convertibles ended Wednesday at 33.5 and the 2.875% converts at 36.875, according to a sellside trader. Both convertible issues had been in the 29 context at the beginning of the week. Delta's straight junk bonds also were lifted on the chatter, by 3 to 5 points.

Delta shares surged up by 67 cents, or a whopping 21.41%, to closed at $3.80, which was largely attributed to short covering. But the stock retreated by a nickel, or 1.32%, in after-hours trading.

Reuters reported after the market closed Wednesday that the Delta pilots have offered a new contract proposal, but no specific details were disclosed. Delta is seeking $1 billion in annual savings by wage cuts and other benefits concessions from the pilots. The pilots previously had countered with an offer for roughly $750 million in reductions.

Analysts have said it is crucial for Delta to come up with a new pilot contract by the end of the month. Third-quarter results are set to be released Oct. 20 and many speculate that if the airline's cash position is between $1 billion to $1.5 billion, the company may decide to file bankruptcy.

Pilot pact seen after Thursday

"I don't think there will be any [pilot] deal before the bond exchange results Thursday. The pilots will wait until a successful exchange to reach a deal because it then shows everyone is taking part in saving Delta," said a holder of the Delta 8% convertibles. "It is for sure that if the exchange is successful, there will be a deal with the pilots."

On Sept. 15, Delta launched an offer for up to $680 million of new senior secured notes in exchange for $1.56 billion of its non-convertible unsecured debt and enhanced pass-through certificates. The exchange expires at 5 p.m. ET on Thursday, unless extended.

"Since the beginning, almost every analyst agrees that reaching a deal with pilots will be much easier than getting concession from creditors," the 8% noteholder said. "Now, the thing we all should worry about is the results of the exchange offer. You'd think creditors will likely accept the offer because in bankruptcy they will get almost next to nothing because they are unsecured debt holders."

A holder of the Delta 2.875% convertibles disagreed, adding that he believes the pilot concessions and exchange together won't be enough to keep Delta out of bankruptcy. "The exchange itself is viewed almost as a default by the credit agencies," he said. "At this point, by reaction to a deal with the pilots is: So what. That $1 billion is a drop in the bucket when they need to cut costs by, what, $5 billion."

Amkor 5.75s up 3 points more

Convertible players cheered Wednesday as Amkor initiated discussions with a group of institutional lenders about a new $300 million six-year second-lien term loan, essentially shrugging off the downgrade to Amkor's long-term ratings by Moody's.

The Amkor 5.75% converts added another 3 points or so to 94 bid, 95 offered, a buyside trader said. Also, Amkor's straight junk paper bounced up 2 points. The stock gained 36 cents on the day, or 8.55%, to $4.57.

The new loan and downgrade came a day after Amkor revealed that federal regulators were conducting an informal inquiry into trading in its securities, which the company said may be related to insider trading activity.

Angst about earnings in the chip sector also has weighed on Amkor. West Chester, Pa.-based Amkor, which makes chips and silicon sensor devices used in digital cameras and cellular telephones, among other electronics, is scheduled to report third quarter earnings after the market closes Oct. 26.

Loan to ease cash constraints

Amkor's leverage would get bumped up by virtue of the new six-year second-lien term loan, but the trader said the boost to cash balances was a positive for the likelihood of the 5.75% convertible due 2006 getting paid.

"If they get the new capital, then the pressure eases up considerably for the '06 bonds," he said, while holders wait for demand for Amkor's chip packaging and testing products to rebound, naturally adding to cash flow.

Moody's downgraded Amkor's long-term debt, however, due to the increased leverage, but said the company's outlook is now stable, as the term loan will replenish cash balances, resolving near-term liquidity concerns as well as provide a cushion for upcoming periods.

Standard & Poor's, on the other hand, affirmed Amkor's ratings but revised the outlook to negative on the weakened credit metrics from the extra debt. S&P also pointed out that Amkor has warned that broad-based softness in demand and an adverse product mix will negatively affect profitability near term.

The term loan is talked at Libor plus 450 basis points, sources in the bank debt market told Prospect News. Covenants contained in the agreement will be similar to those in Amkor's outstanding 7.125% senior notes due 2011, according to the company.

Lucent 2.75s both up 1 point

Lucent convertibles rebounded slightly after dropping ahead of Intel Corp.'s earnings on Tuesday, which were positive, adding back about 1 point each. Lucent is due to report third quarter earnings next Wednesday before the market open.

Lucent's converts were "cautiously" higher, a sellside trader said, on a optimistic view from credit analysts on the prospects of buybacks from the company, particularly long-dated paper like the 2023 and 2025 convertibles.

He specifically cited a report Tuesday by Merrill Lynch bond analyst Sundar Varadarajan.

In the report, Varadarajan upgraded Lucent's long-term notes - the straight 6.5s of 2028 and 6.45s of 2029 - to overweight; while remaining neutral on the telecom equipment maker's short-dated paper.

"We believe they [Lucent's long dated bonds] offer an attractive total return opportunity for investors with a 12 to 15 month horizon," Varadarajan said in the report. "We expect an improving credit profile driven by stabilizing operating performance and opportunistic debt buybacks by the company to provide upside to current bond prices over the next 12 months. We expect that the long dated paper could trade around the 85 level over the next 12 months as the company demonstrates improvement in its financial results."

Lucent's 2.75% convertibles each added about 1 point, the convert trader said, with the 2023 issue at 103.5 bid and the 2025 issue at 136.5 bid. Lucent shares Wednesday gained 4 cents on the day, or 1.18%, to close at $3.42.

Varadarajan said solid liquidity at Lucent should lead to additional debt buybacks, specifically pointing out that Lucent has been proactive in reducing debt and has retired about $2.4 billion in debt and convertibles over the last seven quarters.

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