Charter deal emerges as junk bond to fund tender for its convertibles, which climb further

By Ronda Fears

Nashville, July 11 - Much to the disappointment of some convertible players, Charter Communications Inc. launched a $1.7 billion deal in the junk bond market instead of structuring another convertible deal. In fact, Charter also launched a tender Friday to take out its existing converts.

"I don't know what the line of thought was behind the deal structure," said a capital markets source who had been making a pitch for Charter to issue another convertible.

"The reception seemed to be pretty positive in the convert market. But in the end they decided to go with a junk bond. The competition [among bankers] is fierce right now and we're not real sure exactly what it was that ultimately was the deciding factor for Charter."

David Andersen, senior vice president of communications at Charter, said he could not respond to the rumors or speculation that abounded in the convertible market but he did say that "it appears the appetite is pretty strong" for a new debt offering by the St. Louis-based cable company.

"It's very positive," Andersen said.

"It's very good news for the company."

Around noon Thursday, buzz began circulating throughout the convert market of a $1 billion deal from Charter, and that alone pushed the two existing converts up another 2-3 points and on Friday both issues closed a full 2 points above the tender levels.

When nothing solidified with regard to Charter revisiting the convert market, it was chalked up as a "test balloon" that ultimately fell flat.

Charter's deal surfaced early Friday as a $1.7 billion junk bond deal anticipated to price next week, but terms were not available yet even on a whisper basis. Citigroup is running the books on that Rule 144A deal, as well as managing the tender offer for the converts.

Although many convert players were excited about the prospects of a new Charter convertible, some felt the interest was coming from too small a segment of the market and one that consisted of lots of crossover players.

"A lot of the people who would probably play a Charter convert are high yield accounts that will also buy the junk bonds, so maybe they figured they wouldn't issue stock if they didn't have to," said a convert trader at a hedge fund in New York.

"The credit is way out of our reach, so we wouldn't be a buyer even though it is a very enticing thought. You know, there are even some busted convert strategies that will be able to buy the junk bonds, so some of the market will probably still be involved."

Another player speculated that Charter didn't want to bring a convertible deal with its stock below $5, although several high-profile issuers have done so.

Charter's converts have been on a tear all week but they surprised some dealers Friday when they shot up another 6-8 points, even beyond the tender price Charter is offering.

The offer for the 4.75s due 2006, with some $632.5 million outstanding, is 80. That issue was closed Friday by one of the bulge bracket shops up 8 points to 82 bid, 83 offered.

The offer for the 5.75s due 2005, with some $750 million outstanding, is 82.5. That issue was closed Friday by one of the bulge bracket shops up 6.5 points to 84.5 bid, 85 offered.

Charter shares soared over 23%, closing up 92c to $4.90.

"Wacky, huh?" said the dealer quoting the Charter converts. "This is a wacky market these days."

While it is possible that Charter could boost the tender prices, he said it would be more logical to expect they would use proceeds from the new junk bond to take out other debt if the convertible tenders flop.

Outside of the residual chatter about Charter going on in convertibles, there was not a lot going on. Traders described flow as light, but said the market ended the week in a positive light for the most part.

"It's pretty quiet out there," said one dealer, at around noon. "Nobody's doing much of anything."

New issues were a bit lighter for the week, with eight deals totaling $1.9 billion, although it was a strong showing on an historical basis for the convertible market. Participants suspect this may be as much of a slowdown as they can expect for the summer, which is typically a dead zone for the markets.

Underwriters were finding it a bit more difficult to place converts with the aggressive terms that have prevailed for much of the year, though.

CMS Energy Corp. had to pony up more yield and most deals were priced at the wide end of guidance. The MedImmune Inc. deal was even reoffered by underwriters at 95, a new low for remarketed bought deals.

CMS sweetened the terms of its deal, boosting the yield by 25 bps even after adding 25 bps to price talk from two weeks ago. The 3.375% convert closed Friday up 0.875 point to 101 bid, 102 offered with the stock closing off 1c to $7.27.

TXU Corp.'s new floater, yielding three-month Libor plus 150 bps, slipped 0.25 point to 99.25 bid, 99.75 offered as the stock gained 16c, or 0.77%, to $20.90.

MedImmune's new 1% convert was flat at 95.5 bid, 95.75 offered, while the stock edged up 2c to $39.01.

Elsewhere in the secondary market, traders noted Mirant Corp. and Calpine Corp. were giving back some recent gains.

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