Mirant lower on lack of visibility on bank refinancing; Charter up as net loss narrows, hopes rise

By Ronda Fears

Nashville, May 7 - Trading was described as moderate Wednesday, but several players and analyst remarked that convertible holders seem to have replaced grab for yield with a search for delta as interest rates are seen rising eventually.

A couple of new deals emerged as well, late in the day.

RPM International Inc., a paint manufacturer, tossed out a $125 million deal for early Thursday pricing and ASML Holding N.V. launched a €300 million convert to price after the European markets close Thursday. Also, Nextel Partners Inc. was pricing its $100 million deal after the close Wednesday.

As ASML said it may use proceeds to redeem its 4.25% convertible due 2004 early, many players were going to be watching how that issue opens Thursday. The bond was quoted closing Wednesday at 99.5 bid, 100.5 offered.

While the Fed left rates unchanged Tuesday, many onlookers are expecting interest rates will begin to tick higher by late summer or at least before year-end.

Due to many new convertibles coming with high premiums, many expect to be disappointed with their performance when stocks take off - whether tied to interest rates or not. To boot, many of the new issues don't offer much in the way of yield.

The biggest worries lie with some of the deals with the quirky features like warrant kickers or call spreads, which also carry the highest premiums.

"It's more difficult now than even in the fall," said Derrick Wenger, convertible analyst at Jefferies & Co.

"Back then you could just focus on yield."

Now, he said, with the prospects looming nearer for interest rates to get bumped up, the typical expectation would be for stocks to do well and bonds not so well. Thus, low-yielding, high-premium converts would not perform well.

And, the arbitrage community would face an even bigger danger in holding some of the new paper.

So, Wenger said, there appears to be a push for delta, partly ignoring the grab for yield.

But, finding converts at a bargain is increasingly difficult, as the convertible universe has become very expensive.

No great position moves were noted, but dealers said Mirant Corp. lost ground on the lack of any solid news about refinancing its bank debt coming due in June, while Charter Communications Inc. gained nicely on its earnings report.

Veritas Software Inc.'s discount converts also were mentioned, moving southward, on speculation the company may make an aggressive move to call the issue. The 1.856% due 2006 became callable in August at 83.92 and lost about 4 points Wednesday to 90 bid, 90.5 offered as the stock ended off 22c, or 0.9%, to $24.15.

Mirant said Wednesday it is in talks with banks and bondholders to refinance $5.3 billion of debt, trying to buy time to pay off creditors and avoid bankruptcy, but a dealer said convertible holders were expecting more concrete news in the way of how the bank refinancing talks are coming along.

He said convert holders also were "spooked" by Mirant pledging more assets as collateral in return for extending payment terms on some debt and its restated earnings patterns.

The Mirant 5.75% convertible due 2007 were quoted down about 2.25 points to 73.5 bid, 75 offered. The 2.5% due 2021 were quoted flat at 80 bid, 82 offered. Mirant shares ended off 16c, or 5%, to $3.01.

Mirant said in a conference call with analysts that it will ask creditors to extend payment terms and, in return, pony up nearly all of its assets as collateral.

Mirant, which restated financial results going back to 2000 last week, said it expects to provide revised quarterly results for 2002 and 2001, as well as for the most recent first quarter "as soon as possible."

On the other hand, convertible holders were heartened by Charter's news.

Charter reported a narrower first quarter net loss with revenues up 9.7% on a boost in customers for high-speed data services.

Charter's 5.75% due due 2005 were quoted up about 4 points to 48 bid, 49 offered and the 4.75% due 2006 gained about 2.5 points to 44.5 bid, 45.5 offered. Charter shares closed up 9c, or 4.79%, to $1.97.

The cable company posted a net loss of $181 million, or 62c a share, compared with a year-earlier loss of $316 million, or $1.08 a share. EBITDA rose 7.5% to $458 million from $426 million and revenue increased to $1.18 billion from $1.07 billion.

Buyside sources said new deals continue to look rather aggressive.

RPM's $125 million in proceeds of 30-year convertible senior notes - a cash-to-zero issue - was talked to yield 2.5% to 3.0% with a 47.5% to 52.5% initial conversion premium. It will be sold at a discount, around 50.519, pay a cash coupon for five years on the face amount, then 0%.

At the midpoint of guidance, Deutsche Bank Securities puts the deal 3% cheap, using a credit spread of 275 basis points over Libor and a 45% stock volatility.

RPM shares closed up 40c, or 3.32%, to $12.45.

ASML's €300 million of seven-year convertible subordinated notes were talked to yield 5.375% to 5.875% with the initial conversion premium at 70% to 75%.

At the midpoint of guidance, Deutsche Bank puts the ASML deal 4.17% cheap, using a credit spread of 800 bps over Libor and a 60% stock volatility.

ASML shares closed in the U.S. down 41c, or 4.23%, to $9.29.

Nextel Partners's $100 million of 5.5-year convertible senior notes, at the midpoint of guidance for a yield of 1.5% to 2.0% with a 37.5% to 42.5% initial conversion premium, were put right at fair value by Deutsche Bank, using a credit spread of 650 bps over Libor and a 50% stock volatility.

Nextel Partners shares closed off 9c, or 1.5%, to $6.

Standard & Poor's said Wednesday the new issue will not affect Nextel Partners' ratings (B- senior) or outlook (stable).

Although the issue could moderately increase the company's total debt load, Nextel Partners' future financial leverage is really much more dependent on its ability to increase cash flows, S&P said. For first quarter, total debt was more than $1.4 billion with debt-to-annualized EBITDA leverage of about 13.8x.

Critical factors underpinning the rating and outlook are Nextel Partners' ability to maintain good liquidity and solid operations, and to move toward generating sustainable free cash flow, S&P said.

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