BearingPoint believers step up; Calpine sell-off gathering steam; Deutsche Telekom convertibles ease

By Ronda Fears

Nashville, April 28 - Convertibles on Thursday retreated sharply with stocks as concerns mount about the potential fallout of a slowing economy augured by the most recent gross domestic product data. In just one area of sharp declines, convertible traders said distressed credits such as Calpine Corp. continue to freefall.

Another area of credit anxiety centered on General Motors Corp. and Ford Motor Co. Both automakers again were feeling pressure, from the big miss in earnings from DaimlerChrysler AG as well as increased pain among their parts and component suppliers. But, dealers said selling volume in the GM and Ford convertibles was moderate to light, rather than massive. GM's issues pulled back around 0.25 point while Ford's lost 0.625 point.

In Europe, traders said telecom issues were a bit soft, and Deutsche Telekom AG was specifically mentioned by sellside analysts.

Nearly the entire scope of biotech convertibles was hammered in the widespread downdraft Thursday, as well.

Invitrogen Corp. was mentioned by a sellside trader, who pointed out that in the company's first-quarter earnings it was disclosed that after the quarter ended it repurchased about $125 million of its 2.25% convertible due 2006. Before the earnings were posted after the close, Invitrogen's convertibles followed the stock south. The shares fell $2.02 on the day, or 2.75%, to close at $71.35, but in after-hours trading were seen regaining $1.52, or 2.13%.

The buyback, according to Invitrogen, reduces fully diluted shares outstanding by around 1 million shares for fiscal 2005. The company said the transaction was financed with a short term bridge loan, which is secured by the short-term marketable securities. The bridge loan facility provides up to $250 million, about half of which was drawn to finance the repurchase, the company said.

BearingPoint better after call

BearingPoint Inc. was seeing a little bounce Thursday following a conference call with investors late Wednesday.

The company's convertibles were slaughtered last week amid news that it would miss the extended deadline to file its 2004 10-K annual report, a warning about potential funding shortfalls, and negative cash flow projections that triggered violations in its bank covenants and sparked credit downgrades.

Amid the spate of bad news, the company - formerly KPMG Consulting Inc. - marketed a private placement that ultimately was downsized to $200 million from $250 million, and the company also ponied up a little more yield to print it with a 5% coupon versus the 2.5% and 2.75% two-parter it sold in December.

On the news, the convertibles plunged in excess of 30 points but on Thursday traders said the converts traded up 2 to 3 points to around 75, having added back around 10 points of last week's drop.

A sellside desk analyst said there are some convertible guys willing to make a bet, since the new deal relieves near-term liquidity, even though the company does not expect to be cash flow positive until at least next year.

"Probably it couldn't get much worse for them, so it's uphill from here," he said.

Some of the move in the converts, too, was on the boost in the stock, which was mostly attributed to plans laid out by company to buy back about $100 million of shares. BearingPoint shares gained 28 cents, or 4.72%, to close Thursday at $6.21.

"As for the call, not much of substance was discussed, really. The company said it wouldn't issue guidance for the rest of this year, that it would probably take a couple of quarters to iron out accounting issues," the analyst said. "There are some people willing to make a bet, though."

Calpine's distress compounds

Calpine paper was hammered again Thursday amid ever-increasing concern about a potential bankruptcy filing by the San Jose, Calif.-based independent power producer as it labors under a massive $18 billion debtload.

"The company already was walking a tightrope," said one sellside market source. "It's not going to take much to knock them off."

The Calpine convertibles plunged amid what one trader described as good two-way action with a mass exodus by convertible guys bringing in distressed guys. The 4.75% issue dropped 4.75 points to the 42.5 area, the 6% issue lost 8.5 point to the 45 area and the 5% preferred lost 3.5 points to the 33.5 area.

In the junk bond market, Calpine paper also was in a freefall, with the 8.5% notes due 2011 tumbling 6 points to end Thursday at 42 bid, 44 offered.

Calpine shares closed Thursday at $1.45, off 33 cents on the day, or a whopping 18.5%.

"Their options are getting slimmer and slimmer. Yes, they need to do some massive refinancing, but how are they going to do that with the stock at $1.45? It's a joke," a convertible analyst said. "They are getting killed, and it's not going to matter much what happens to the price of natural gas or spark spreads."

TOP Tankers hits road

Athens-based oil shipper TOP Tankers Inc. hit the road Thursday with a $300 million perpetual convertible preferred talked to price with a 5.625% to 5.875% dividend and 32.5% to 37.5% initial conversion premium.

The issue is effectively being sold on swap, as the company also said that it has been advised that Kingdom Holdings, one of its shareholders, intends to purchase approximately $20 million of TOP Tankers shares from convertible buyers. In addition, the oil shipper said it would use about $50 million of proceeds to repurchase stock.

Cantor Fitzgerald is sole bookrunner of the Rule 144A offering, which is slated to price after the market close next Wednesday or Thursday.

TOP deal tight, but in hot area

One of the few complaints about the TOP Tankers deal was that the dividend offered such a slim yield pickup over the common stock, which pays around 5.4%. That said, players and onlookers said the deal was expected to be hotly played because the oil shipping industry is "on fire right now," as one analyst put it.

TOP Tankers shares ended Thursday down 57 cents, or 3.55%, at $15.48.

A source familiar with the deal said it seems a convertible is a better way to own TOP Tankers than the common, and pointed out that there is a put on the convertible preferred in year five.

Also, there is full dividend protection, as well as takeover protection, for holders.

Shortages in oil tankers have created opportunity for firms like TOP Tankers, a buyside analyst added, and the company has inked long-term shipping contracts with stable, triple-B rated or higher companies.

Earlier in the week, TOP Tankers reported first-quarter net income of $19.10 million, or 69 cents a share, compared with net income of $1.24 million, or 21 cents a share, for first quarter 2004. That does not include compensation from the delayed delivery of five Suezmax tankers bought with proceeds from a follow-on stock offering in November, which the company said would have boosted net income to $25.87 million, or 93 cents a share. Revenues for first quarter climbed to $47.30 million from $7.73 million a year before.

Oil shippers resistant to prices

The buysider continued, saying oil shippers are relatively impervious to oil prices, chiefly because of anticipation that there will be a build-up of refinery capacity in the United States.

"Because oil prices have stayed up in the $50 a barrel area - and beyond, even though they are coming down right now - for so long, there is a widespread belief that there will be an effort to add to refining capacity," he said. "We heard president Bush advocate that yesterday. There may be some incentives for refiners to do that."

Oil futures fell $2.59 to $51.61 a barrel on the New York Mercantile Exchange after U.S. government data showed a large build up of inventories and president Bush urged construction of new oil refineries and advocated increased use of coal and other alternative fuels.

Other than the pending TOP Tankers convertible, the market doesn't have much paper in the oil tanker space to consider.

Even with the new deal on the table and the rebound in oil futures, convertible traders said there was not a lot of activity in OMI Corp. and the stock was described as lower with the rest of the market, which pressured the converts. The OMI's 2.875% issue was quoted off about 1.5 points at 91.5, with the underlying stock off 74 cents on the day, or 3.95%, closing at $18.

Deutsche Telekom issues ease

Following Deutsche Telekom AG's decision to make the dividend adjustment for its €2.3 billion 6.5% convertible in cash rather than a conversion ratio adjustment, which was essentially mirrored by KfW in regard to the 0.75% exchangeable into DT shares, traders in London said those issues were easier Thursday by about a quarter-point.

DT did not boost its dividend, one trader said, but the telecom still will pay one of the highest dividends of its peers in Europe, equivalent to 4% of its share price, or €0.62 per share.

On the determination to adjust the 6.5% convertible in cash, Barclay's Capital Markets analysts ratcheted down the value of the mandatory to fair value.

"Our analysis shows that this cash adjustment results in a theoretical value approximately 15 bps lower than it would have been with a ratio adjustment, leaving holders slightly worse off," said Barclays convertible analysts Luke Olsen and Haidje Rustau in a report Thursday.

They find the mandatory fairly priced but added that "nevertheless, the mandatory may be an interesting play for investors who believe that the [implied volatility] skew will decline substantially." Then, they pointed out that "if lower skew comes with an overall rise in volatility ... the KfW exchangeable due '08 might be a better investment as it would have significantly higher vega."

However, they analysts cautioned that the KfW 0.75% exchangeable is exposed to a later point in the volatility term structure and has a greater risk of dampened volatility due to strike-pinning, given its larger size - €5 billion.

Like Deutsche Telekom, KfW also made the dividend adjustment on the issue in cash instead of shares via a conversion ratio adjustment, again less favorable for bondholders.

The Barclays analysts estimated that the dividend adjustment in cash is worse for bondholders by about 0.28 points of theoretical value than if KfW had opted for a share adjustment.

"Whilst we believe that the market was aware of this risk, we note that similar risks remain for future years and that the proportion of cash in the exchange property may therefore rise further, depending on how KfW adjusts for future Deutsche Telekom dividends," the analysts said in a report.

All else equal and assuming unchanged future dividend levels, they estimate that the theoretical value differential between these two dividend adjustment mechanisms over the full life of the bond is about 0.57 points, with cash adjustments being the less favorable for bondholders.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.