Tower prices wide of revised talk, jumps to 105.5 area; TXU climbs on new plan; Wyeth off on verdict

By Ronda Fears

Nashville, May 18 - Tower Automotive Inc.'s new deal was printed at the wide end of richened price talk and then, to many market participants' surprise, shot up more than 5 points in the immediate aftermarket. After the close, Thoratec Corp. was at bat with $125 million of 30-year convertible discount cash-to-zero notes talked to yield 2.0% to 2.5% with a 37.5% to 42.5% initial conversion premium

TXU Corp. was a big mover in the secondary market, too, as the Houston power firm hosted a day-long conference with investors and analysts on a plan to cut debt by 53%, boost interest coverage and improve earnings to $1.93 per share by the end of next year.

Most of the market "felt better" according to sellside traders, but traffic in convertibles was nothing to get excited about. A couple of retailers - namely J.C. Penney Co. Inc. and Gap Inc. - were mentioned moving up on brighter earnings guidance by the former and a credit upgrade for the latter.

"The market just sort of went into a holding pattern in the afternoon," one dealer said.

Another sellside market source said there were some trades in Big Pharma and the biotech group. Wyeth traded lower early in the session on the news that a $1 billion verdict was upheld against Wyeth as the maker of the fen-phen diet pills that have been linked to heart trouble.

Kroll Inc. may see some selling, traders said, after getting acquired by Marsh & McLennan Cos. for $1.9 billion as holders find no immediate boon from the deal and, moreover, convertible arbitrageurs are caught in a short squeeze as the stock shot up nearly 30% in after-hours trading on the late-day news.

Tower prices wide, zooms

Tower Automotive's deal was stamped with a 5.75% coupon and 30% initial conversion premium -at the cheap end of revised price talk for a 5.25% to 5.75% coupon and 30% to 35% initial conversion premium, which had been boosted during the one-day marketing period Monday from a yield range of 4.5% to 5.0%.

Joint bookrunner Morgan Stanley & Co. took the new Tower convert out at 105.25 bid, 106.25 offered, while the stock added back 21 cents, or 6.31%, to close at $3.54.

"I was very surprised they [the new Tower convertible] went up that much," said a sellside dealer away from the deal.

Buyside sources said the execution on the deal seemed a bit "sloppy" since the guidance was richened, it priced at the cheap end and then shot up 5 points out of the chute.

"I'm always glad when the buyside gets to flex some muscle, but this deal seemed a little wacky getting done the way it turned out," said a convertible trader at a hedge fund in New Jersey.

Market sources said the Novi, Mich.-based automotive components maker was forced to pony up a fatter coupon as potential buyers balked on the credit, which was a stickler for some potential buyers.

Moody's downgraded Tower Automotive credit last Friday, and analysts have expressed concern that more pressure could come if demand for vehicles declines as anticipated due to higher interest rates.

TXU debt plan cheered

TXU cheers were loud Tuesday, applauding the Houston power company's aggressive plan to cut debt more than 53% to $6.6 billion by 2005.

"We had quite a lot of traffic in all the TXU converts first thing [Tuesday morning], until about 10 a.m. Then it sort of died off" as the market overall got quieter, a dealer said.

Dealers quoted the TXU floater, sold last July to yield the three-month Libor plus 150 basis points, at 135.125 bid, 135.625 offered with the stock at $38.40. The 8.125% mandatory due 2006 was at 50.5 bid, 51.5 offered and the 8.75% mandatory due 2005 at 47.75 bid, 48.75 offered.

TXU shares hit a new 52-week high, closing Tuesday at $38.05, up $3.40 or 9.81%, after trading as high as $39.50 during the session.

If TXU cuts its total debt level to $6.6 billion from $13.9 billion at year-end 2003, chief executive John Wilder said the debt-to-capital ratio would drop to 49% from 70% and interest coverage would improve to 6.3 times from 3 times.

While the TXU convertible bonds were better by 6 points and the mandatory issues up 3.5 to 4 points on the news, sources in the high-yield market told Prospect News that there was little to no reaction in the straight bonds. In fact, one trader quoted the split-rated TXU 6.375% notes due 2008 at about 105.25, off from about 105.5 on Monday.

Kroll merger crushes arbs

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

Kroll shares were up 16 cents on the day at the closing price of $28.10 while the 1.75% convertible bonds ended off slightly, by about 0.125 point, at around 103 bid, 104 offered.

In after-hours trading, however, Kroll shares climbed $8.41, nearly 30%, to $36.51.

A sellside convertible trader said even though Kroll's credit (B) profile would improve under the Marsh & McLennan (A) umbrella, he could not find a positive for Kroll bondholders in the deal.

Buyside market sources also were not keen on the transaction.

The deal is "a disaster for arbs," one fund manager said, who is involved in both outright and hedged convertible strategies.

With the bonds barely up and the stock way up, arbs in a traditional hedge will get "crushed in the short squeeze," a convertible trader at a hedge fund in New York said.

Wyeth off on ruling

Late Monday news hit the tape that a Texas judge has upheld the $1 billion jury verdict against Wyeth related to diet pills, and the converts were lower as the stock declined. But dealers said the bonds actually held up very well against the tide of negative news.

Wyeth's floating-rate convertible, which pays the six-month Libor minus 50 basis points, was quoted virtually unchanged at 100.75 bid, 101 offered. The underlying stock was off 22 cents, or 0.58%, to close at $37.76.

The verdict is related to a case in which Wyeth's now-withdrawn diet drugs, Pondimin and Redux - better known as fen-phen, allegedly caused a fatal heart disease, primary pulmonary hypertension. Wyeth is in the midst of trying to settle all the diet pill lawsuits on an individual basis.

The company recently disclosed some 350 lawsuits pending as of April 30 involving the heart complications related to diet pills made by Wyeth.

Standard & Poor's said the $1 billion verdict is much larger than it expected, but an appeal is anticipated and the rating agency said it would wait for the outcome of the appeal and then determine what, if any, impact it will have on the remaining PPH cases, as well as any impact to Wyeth's credit ratings.

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