Southern Union up as Enron auction nears; Red Hat gains; QLT retreats; Delta steady

By Ronda Fears

Nashville, Aug. 27 - Southern Union Co.'s mandatory convertible gained "nicely," traders said, as the bankruptcy auction for Enron Corp. assets approaches. In a joint bid, Southern Union and a General Electric Co. unit have submitted the $2.35 billion stalking horse bid.

The Enron auction is scheduled for Sept. 1. The winning bid is expected to be announced Sept. 9 and the sale closed by mid-December.

Delta Air Lines Inc.'s committee of senior secured creditors rejected the company's request for consents to proceed with its restructuring plans, namely debt exchanges and/or buybacks, but the airline's bonds - convertibles as well as straight junk bonds - were steady. The convertibles are in the high 30s to 40 while the junk paper is in the mid-40s area.

QLT Inc. retreated Friday, which traders attributed to short selling by convertible holders, as a competing eye treatment from Eyetech Pharmaceuticals Inc. did not get a U.S. Food and Drug Administration panel approval. The FDA panel did not entirely reject the Eyetech treatment, however, so traders said hedge funds were positioning for potential weakness in the QLT stock.

Elsewhere, Red Hat Inc. was a top performer, albeit amid light volume, among software names that traders said were active on a Standard & Poor's report on that industry group. Computer Associates International Inc. also was a little stronger, traders said.

After a slow week, and another shutout for new deals, convertible players are expecting it to be even worse during the week ahead of Labor Day but said at least one new deal could pop up in the short week following the holiday.

"It's been pretty slow, which isn't bad for me, as I have gotten a little more caught up than otherwise," said a fund manager in New York. "Everything I hear from the Street suggests it's very slow, and I expect next week will be even worse, as anyone who can will be exiting NYC to avoid getting caught in the security net. I've been told they will search every vehicle on the bridges and tunnels. [That] should make for some interesting shots on the evening news."

Southern Union up 0.25 point

Reportedly there are two competing bids for the Enron pipeline assets in the bankruptcy court auction, but convertible traders said the sentiment is that Southern Union's bid will prevail next week. One trader noted that was the nature of Merrill Lynch analysts' opinion in a report Thursday, as well.

"It appears that all the bids are in and the state of New Mexico is not involved. That was a wildcard because they surprised everyone when they popped up at a hearing back in June, which got people to thinking they would throw in a bid or create some quasi-public/private venture to make a bid," said a sellside trader.

"Now, it looks like the Southern Union/GE bid is tops."

New Mexico is one of Enron' creditors with claims totaling $67.8 million, the trader said. It is one of the biggest customers of the natural gas pipeline assets in question, which tap the San Juan Basin. The pipeline, Transwestern, is part of Enron's CrossCountry Energy subsidiary, which also has a 50% stake in Florida Gas Transmission and operates as controlling general partner in the Northern Border Partners system.

"If they are successful in acquiring the Enron properties, there is some chatter about the possibility of some new debt from Southern Union," the trader said.

"We have been hearing that [two bulge bracket investment banks] have committed bridge financing and everyone is figuring there will be some bonds issued, maybe even a convertible."

Southern Union's 5.75% mandatory shot up 0.25 point Friday to 59.75 bid, 60.25 offered, he said. On the New York Stock Exchange, the issue closed up 0.64 point to 60.03. Southern Union shares added a dime, or 0.54%, to end at $18.70.

Red Hat hot software issue

Red Hat is still the hottest software play, convertibles traders said Friday, noting some buying in the issue on the company getting mentioned in an S&P report.

Red Hat's 0.5% convertible gained 1 point to 89.75 bid, 90.25 offered with the stock up 45 cents, or 3.53%, to $13.20.

Computer Associates also was a gainer, but traders said buying is still somewhat spoiled by the company's accounting scandal and management issues. The Computer Associates 1.625% convertible was quoted at 140 and the 5% convert due 2007 at 113.5. Computer Associates shares closed Friday up 27 cents, or 1.11%, at $24.51.

S&P credit analyst Phillip Schrank noted in the report Friday that the software industry is characterized by intense competition and rapid technology evolution, requiring high development spending, offset by adequate liquidity levels, good profit margins and low fixed-asset investment requirements relative to other technology industries.

The keys to success in the software industry, the S&P credit analyst said, are a broad product portfolio, a defensible market position, effective distribution capabilities, technology innovation, a recurring revenue base and adequate financial flexibility.

"Software purchasers tend to rally around vendors with better liquidity," Schrank said in the report. "While additional industry consolidation ultimately could place an even greater emphasis on liquidity as a strategic asset for software companies, a number of point-solutions providers had cash positions strong enough to survive the brutal downturn of the past few years."

The latter point, he added, has left the industry more fragmented than it otherwise would be.

"Red Hat is a vol [volatility] play. On the credit side, it's weak and certainly only for high-risk players," a sellside trader said.

Red Hat's funds-from-operations ratio was stated in the S&P report at 7% with EBITDA coverage of 1.3 times. That compares favorably to Computer Associates' funds-from-operations ratio of 4.5% and EBITDA coverage of 0.7 times, but was slightly worse than Veritas Software Corp.'s funds-from-operations ratio of 48.3% and EBITDA coverage of 7.1 times.

Veritas Software's 0.25% convertible was quoted flat at 94.25 bid, 94.75 offered, with the stock off 18 cents, or 1%, to $17.86.

Delta convertibles holding on

Delta's convertibles continued to hold in the mid- to high-30s, traders said, as the committee of senior secured aircraft creditors said they will refuse to go along with the airline's solicitation of consents.

After the committee, which holds $1.4 billion of the Delta equipment trust certificates and passthrough securities, demanded more information on the company's restructuring plans before giving any consents, the company came up with eight questions and answers. But the company's effort to resolve the committee's hesitation failed.

The committee said it would not grant consents to the amendments because Delta has not provided it with requested information and will not "engage in any meaningful dialogue with the committee" over its restructuring efforts.

The Atlanta-based airline began soliciting consents on Aug. 18, essentially seeking waivers to buy back or exchange the equipment trust certificates and passthrough securities, for which all or a good portion of the airline's planes are pledged as collateral.

The consent solicitation runs through 5 p.m. ET Aug. 31.

"There does seem to be progress with the pilot negotiations, at least they haven't entirely broken down," said a buyside trader. "We have heard that there's a rumor that there will be something by Labor Day. Remember, their goal was to get a plan together by the end of August."

When asked about the rumored Labor Day announcement, the trader said the chatter was to the effect that there would be something ironed out with pilots and distributed to Delta employees internally. As for an announcement, he said, that would not necessarily coincide with the purported memo.

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