Shoppers look for bargains among insurance rubble; Shanda up; Cell Genesys off

By Ronda Fears

Nashville, Oct. 15 - In the wake of a routing in the insurance sector on charges by New York Attorney General Eliot Spitzer, the group - largely dominated by convertible names - was again very active Friday but traders said there was noteworthy buying on the weakness.

American International Group Inc., Ace Ltd., Chubb Corp., Hartford Financial and Munich Re's Munich American Risk Partners were all names in the charges leveled against giant insurance broker Marsh & McLennan. The list of insurers involved in the alleged kickbacks is growing and the headline risk weighed on St. Paul Travelers Cos. Inc. and Prudential Financial Inc. as well as broker Aon Corp.

"We've been involved in the insurance craziness the last two days," a sellside trader said. "At first panic," there was a lot of selling in the group, then buying on "differentiation."

In addition to those already mentioned, he said UnumProvident Corp., Charter One Financial Inc., HCC Insurance Holdings Inc. and XL Capital Ltd. saw action Friday.

PMA Capital Corp. even was active Friday, he said. The company is currently trying to persuade holders of its 4.25% convertible to agree to an exchange offer, but many have balked. The trader said the convert, which trades outright, ended Friday at the 101.5 level. PMA shares lost 2 cents to close at $7.96.

New issues also saw lots of activity, but the two deals that broke to trade Friday, both of which were upsized, were mixed in the immediate aftermarket.

Otherwise, Delta Air Lines Inc. plunged sharply Friday on its warnings of a bigger net loss in third quarter than expected. And, the company acknowledged that, even if with wage concessions from pilots and a successful bond exchange in addition to the deferral of $325 million of 2005 debt maturities, it would need $800 million of new financing in 2005.

"Smells like doing a bankruptcy without the filing," one trader remarked on the company's update. He suspects the airline will cut a deal, perhaps with pilots as well as bondholders, that involves swapping some debt for equity, which he estimated "worth zilch."

Shanda upsized, ends at 99.5

Shanghai-based Shanda Interactive Entertainment Ltd. sold $200 million of 10-year senior convertible notes, upsized from $150 million, at par to yield 0% with a 32.5% initial conversion premium. The notes priced at the rich end of price talk for coupon of 0% to 0.5% and 27.5% to 32.5% initial conversion premium.

Early out of the gate, the issue was bid at 103.375 -about where it was Thursday night after price talk was circulated, a buyside trader said. But it went downhill from there, and bookrunner Goldman Sachs & Co. closed it at 99.5 bid, 100 offered.

Shanda shares fell $2.01 on the day, or 6.71%, to end at $27.96.

The deal had been estimated by sellside analysts about 3.5% cheap.

Cell Genesys closes at 98 bid

Cell Genesys Inc. also upsized its deal, to $110 million from $100 million, and priced the notes at par to yield 3.125% with a 30% initial conversion premium - at the cheap end of guidance for a yield of 2.625% to 3.125% and 30% to 35% initial conversion premium.

It, too, came out of the chute on higher ground, albeit slightly, with a bid of a half-point over par, a buyside trader said. Though, it also soon faded and traded as low as 97.5, he said, remarking, "bombs away." Joint bookrunner Lehman Brothers Inc. closed the deal at 98 bid, 99 offered.

Cell Genesys shares ended down 42 cents, or 6%, to $6.58.

Sellside analysts away from the new deal put it anywhere from around fair value at par to nearly 4% cheap.

Picks from insurance rubble

Traders said the picks by convertible players among the fallout in the insurance sector included AIG, UnumProvident, Charter One, HCC and XL Capital. They were seeing both outright and convertible arbitrage strategies get involved.

HCC also was a volatility play. The issue on Friday was quoted closing off about 1 to 2 points at 100.5 bid while the stock lost 45 cents, or 1.52%, to $29.13.

Merrill Lynch analysts Jay A. Cohen, Alison Jacobowitz and Matthew Palazola in a report Friday said they still think a lot of the insurance stocks, including several of the convertible picks as well as St. Paul Travelers, are still a good buy following Spitzer's attack on the insurance industry.

"When a group corrects sharply, it always makes sense to look for attractive values when the dust settles," the analysts said.

One approach is to find insurers that may have some exposure to an investigation but show good valuation support. In that category, the Merrill analysts' top pick was St. Paul, noting that "to the best of our knowledge" St. Paul was not even subpoenaed by Spitzer. "This does not mean that it too could not be investigated, but given the valuation, based on what we currently know, we see little downside risk," they said.

St. Paul's convertibles saw considerable buying on the weakness, a buyside trader said. The 9% mandatory due 2005 ended the day losing 1.625 points to 59.625 bid, 59.75 offered and the 4.5% junior subordinated notes due 2032 - which have a par of 25 - slipped a half-point to 22.25 bid, 22.375 offered. St. Paul shares fell another $1.06, or 3.21%, to $31.94.

AIG, hard hit, among picks

Even AIG, which had two executives plead out to the Spitzer charges, was kept at a buy by the Merrill analysts, who noted that AIG's market cap fell by nearly $18 billion on Thursday.

"The alleged actions by AIG in the NYAG complaint do not shine the brightest light on the company. Still, the question comes down to what lasting financial impact will the Attorney General's investigation have on the company? Again, we believe we should expect there will be financial penalties," the analysts said.

"These would be one-time charges and may be in addition to any settlement the company might reach with the SEC on a separate investigation into certain financial products transactions. Still, total penalties would be less than the drop in the company's market cap of late, in our view."

On Friday, the AIG 0.5% convertible due 2007 dropped another 3 points or so, a sellside trader said, with bids getting hit at 90.5.

AIG shares plunged another $2.15, or 3.58%, to $57.85 and the trader said that, in addition to Merrill maintaining a buy on the stock, Morgan Stanley upgraded it to equal weight from underweight.

Delta converts dive 5-7 points

Delta warned Friday that its net loss for third quarter will be somewhere between $625 million and $675 million, a much wider loss than expected, and that its cash balances are rapidly evaporating. The Atlanta-based airline also disclosed that it is in negotiations with certain debtholders to defer the $325 million of securities due in 2005.

The Delta convertibles plunged 5 to 7 points on the news, and its junk bonds lost 3 to 5 points.

"The arbs [arbitrageurs] are loving the vol [volatility]," however, one sellside trader said. "The bonds have bounced and bobbed around all week."

On Thursday, the bonds were buoyed by views that the exchange deadline extension, which also included several sweeteners, might delay if not altogether stave off bankruptcy. But, amid the spike in oil prices credit analysts warned about a sharp cash drain, which Delta confirmed Friday.

Standard & Poor's credit analysts Philip Baggaley had warned Thursday that the airline's cash is dwindling rapidly and rising fuel prices will accelerate the drain. Delta acknowledged that its cash position was dropping precipitously, from $2 billion at June 30 to $1.45 billion at Sept. 30. And fuel prices continue to rise, as oil hit another fresh high of $54.93.

Delta bondholders also were worried by the slim participation thus far in the exchange offer and the sign that pilot talks are not going well since the exchange now hinges on pilot wage concessions.

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