Simon Property when-issued convertible at 52 bid; new TiMet convertible eyed; Adelphia easier

By Ronda Fears

Nashville, Sept. 15 - For want of fresh paper, Simon Property Group Inc.'s when-issued 6% convertible preferred has been very active in the gray market this week, as anticipated by market sources. The $695 million convertible, which will not get issued for real for another month or so, was seen in the gray market Wednesday closing 2 points over par.

Regarding another "new" issue, Titanium Metals Corp.'s roughly $200 million of 6.75% convertible preferred - issued two weeks ago in exchange for its old 6.625% convertible preferred - also was finding interest at 54 versus a 50 par, a sellside market source said.

L-3 Communications Inc. also was finding takers for the New York defense communications systems provider's 4% convertible due 2011 at about a point over parity.

"The big question is: Will they [L-3] call them next month?" said a sellside market source. "I think they will, but there are some buyers out there that think it's worth risking 1 point over parity to take a chance on them not being called."

L-3's 4% issue is callable Oct. 24 at 102. Parity is about 120. After the market close Wednesday, too, L-3 announced that through March 15, the $420 million convertible would be accruing 0.4% extra interest because the contingent payment feature has kicked in.

Otherwise, traders said secondary market action was widely mixed, although bent toward selling, particularly in the telecommunications group.

Charter Communications Inc. was easier, and there was weakness elsewhere in the telecom sector as a distressed trader said Adelphia Communications Corp. bonds were better to buy.

In another distressed name, Foster Wheeler Ltd.'s convertibles dropped about 3 points Wednesday on fears that its debt-for equity exchange will not get done, but there was some optimism in the situation. Yet, Foster Wheeler again extended the exchange, warning of severe consequences if it fails, which many interpret to mean that bankruptcy would follow a failure.

Delta Air Lines Inc., yet another distressed situation, announced late Wednesday that it would amend its 2003 annual report on file with the Securities and Exchange Commission to include troubles that have been haunting the Atlanta-based airline carrier, such as what the company referred to as the possibility of a bankruptcy filing "near term."

The Delta convertibles had eased back by about 1 point each during Wednesday's session, while the straight bonds were better by 1 to 2 points. But the convertibles and Delta stock were both seen losing ground after the close.

Simon convertible offered at 52.25

With Simon Property's $4.9 billion acquisition of Chelsea Property Group Inc. on track to close sometime next month, as the stockholder vote is set for Oct. 13, the 6% convertible preferred that will be issued as part of the merger consideration began trading in the when-issued market this week.

As expected, it is well over the 50 par level, closing Wednesday at 52 bid, 52.25 offered, moving up around a half-point during the session.

Simon shares on Wednesday lost 19 cents, or 0.35%, to $53.75.

Lehman Brothers head of U.S. convertible research Venu Krishna said Wednesday that based on current trading levels and features of the security, the convert looks attractive. He noted high risk arbitrage interest in the situation and said the current risk arb spread is 0.43 point, for an annualized spread of 7.7% with a breakeven probability of 97%.

Basic terms of the issue are unchanged, with the perpetual convertible preferred carrying a dividend of 6% and conversion price of $63.86, or conversion ratio of 0.783.

The security will have a dividend protection feature via a conversion rate adjustment for Simon Property common dividends in excess of $0.65 per quarter, the current dividend, but another sellside market source noted that the conversion ratio adjustment is capped at 0.9787.

At 51.5 bid, 51.75 offered and Simon Property stock at $53.94 - where the convertible and common opened Wednesday - Lehman's Krishna puts fair value on the convert at 53.05 using a credit spread of 200 basis points over Libor and an 18% stock volatility. On the bid side, that would put theoretical cheapness at 2.92%.

TiMet "new" convert up to 54

Titanium Metals' new 6.75% convertible preferred also is finding buying interest.

"Buyers seem to be liking this [new TiMet convert]," said a sellside contact, "essentially [because of] the fact that the old issue wasn't callable, the new issue offered a slightly higher yield and has a far more achievable conversion price - $30 a share versus something like $72 on the old ones."

The new TiMet convertible ended Wednesday at around 54. TiMet shares on Wednesday gained 33 cents, or 1.39%, to close at $24.13.

On Sept. 1, the transaction was completed, exchanging the new 6.75% convertible preferreds for the old 6.625% convertible preferreds, which are in the Beneficial Unsecured Convertible Securities, or BUCS, structure.

The Denver producer of titanium metal products on Monday in an SEC filing said it still expects 2004 net income in the range of $8 million to $18 million on sales of $490 million to $510 million. In 2003, the company recorded sales of $383.5 million and a net loss of $13 million.

Titanium Metals also said the demand for new airplanes is continuing and it believes major airlines throughout the world are going to continue to add new planes and that the new aircraft build rate will pick up. Startup airlines are mostly buying new airplanes, helping to boost the demand for new aircraft, the filing said.

Titanium Metals primarily supplies the commercial and military aerospace markets. Currently commercial or military and aerospace sales represent about 65% to 70% of the company's revenue, the filing said.

Adelphia bonds better to buy

Adelphia Communications Corp. bonds were better to buy Wednesday, with the 6% convertibles offered at 33.25, but supply was short for that paper.

A buyside market source said the 33.25 asking price was down about 2 points, but a sellside distressed trader said he hadn't seen the converts any higher recently. The trader noted Adelphia's 10.875% bonds were in the 94 area and the 9.875% bonds in the 92 neighborhood. Adelphia shares Wednesday lost a penny, or 2.5%, to end at 39 cents.

Late Tuesday, Adelphia announced that the bankruptcy court had approved UBS Investment Bank and Allen & Co. LLC as financial advisers for the Adelphia auction process, which was no surprise, and otherwise, there was no new developments on the Greenwood Village, Colo.-based cable company's sale, which is slated to begin later this month and extend through the remainder of the year.

Among potential buyers for the Adelphia assets, which analysts estimate could fetch up to $20 billion, are cable giants like Comcast Corp., Time Warner Inc. and possibly Cox Communications as well as Charter or top executives at some of those cable companies.

Last week, Time Warner chief financial officer Wayne Pace said at a Morgan Stanley investor conference in Washington, D.C., that it could finance such a deal via a reverse merger with its own cable unit. In a reverse merger, Adelphia would offer to buy Time Warner's cable division and the two companies would merge with Time Warner retaining a majority but smaller stake in the new company.

Most onlookers feel that is not a reasonable probability, however, the distressed trader said.

Foster Wheeler threat falls flat

Foster Wheeler again extended its equity-for-debt exchange, saying the participation threshold for its 9% convertible preferreds had still not been met, and issued a sharp warning of the consequences if the exchange fails. But the market perceived it as a signal that a bankruptcy filing by the Clinton, N.J., oilfield construction firm was imminent, and the 6.5% convertible bonds traded down about 3 points.

"Let me be perfectly clear," said Raymond J. Milchovich, chief executive of Foster Wheeler, in a prepared statement. "Unless the tendered amount of preferred securities meets or exceeds an acceptable minimum threshold, this exchange offer will fail. If it does fail, all of the company's stakeholders will suffer."

The Foster convertibles dropped 3 points on Wednesday to 87 from 90 on Tuesday, a buyside market sources said, "due to the fear of the deal not closing."

"Apparently, the company only needs another 800,000 convertible trust preferred shares to close the deal and is asking the preferred holders to tender a pro rata amount of the preferreds they hold, up to 800,000, so the holders can preserve the balance of their preferred position and not make the company file Chapter 11 [bankruptcy]," the buyside source said.

"The preferred holders' feeling is that there isn't any chance of the company filing Chapter 11 because of 800,000 shares of preferred not tendering their shares. It's kind of interesting."

Thus far, only 49.3% of the preferreds have been tendered, up from 48.7% at the last report on Sept. 10 but still shy of the 60% threshold, which was amended Sept. 2 from the previous 75% threshold and down from an original target of 85%. The exchange offer, which also includes the 6.5% convertible bonds and three series of "Robbins" bonds, now expires at 5 p.m. ET Sept. 17.

A sellside trader said the Foster Wheeler convertible bonds traded lower out of a fear that the convertible preferred holders could in fact force the company into bankruptcy by refusing to go along with the exchange. Nearly all, or 99.97%, of the $210 million 6.5% convertible bond issue has been tendered for the exchange.

"It has been a game of chicken that has just gone too far for a lot of people; they were ready to bail out," the trader said.

Foster Wheeler has been trying to accomplish the debt exchanges since July 2003.

Delta skids further after hours

Delta's convertibles were easier by about 1 point each during the regular session Wednesday with the 8s at 35 and the 2.875s at 36, but headlines after the closing bell sent those bonds lower along with the stock, which fell more than 6% in after-hours trading, traders said.

The Delta straight junk bonds on Wednesday, however, rose 1 to 2 points on hopes that its pilot wage concessions might be resolved soon. The short-dated 7.7s were seen up 2 points to 44 bid, 46 offered.

Delta shares on Wednesday closed up a penny to $4.10 but in after-hours trading fell by a quarter, or 6.1%, as language about bankruptcy in a news release by the company made it seem more likely and imminent.

After the close, Delta said in the news release as well as an SEC filing that it was amending its 2003 financial reports filed with the SEC to include "significant events" that have transpired in recent months.

"These events, which have been reported in Delta's subsequent SEC filings, include a further decrease in domestic passenger mile yield and near historically high levels of aircraft fuel prices," Delta said.

"The annual report has been revised to disclose these events and the possibility of a Chapter 11 filing in the near term. Additionally, as a result of Delta's recurring losses, labor and liquidity issues and increased risk of a Chapter 11 filing, Deloitte & Touche LLP, Delta's independent auditor, has reissued its Independent Auditors' Report to state that these matters raise substantial doubt about the company's ability to continue as a going concern."

Also after the close, Delta made an offer for $680 million of new notes in exchange for $2.6 billion of unsecured debt and enhanced passthrough certificates. Some passthrough certificate holders and equipment trust security holders have already rejected the company's effort to amend indentures to allow debt buybacks.

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