Delta convertibles drop 1-2 points on heightened bankruptcy fears; CSG Systems declines 1.5 points,

By Ronda Fears

Nashville, May 28 - Delta Air Lines Inc. convertibles lost ground Friday amid elevated market buzz that the carrier has hired restructuring specialists, which could mean an imminent bankruptcy filing. Otherwise, new paper saw most of the activity in the light session and was easier with stocks weakening.

While convertibles did not close early, when the Treasury market ended early at 1 p.m. ET it was pretty much over for convertible trading. Besides, traders were busy marking their end-of-month prices already.

There has been some concern, again, that less robust returns among the hedge funds might prompt investors to pull some cash off the table.

"A lot of investors are on the sidelines. Many have 30-day notice periods for quarter-end redemptions, so waiting to determine the extent of any redemptions before this weekend is probably a sensible course for most," said a portfolio manager in New York.

Otherwise, he continued, "I think there have been some cheap prices available in these past few days. The age-old adage might be starting to apply here - bet against prevailing winds."

With the start of a new month and midyear approaching rapidly, many convertible market players and onlookers expect that new deal flow will pick up. Most convertible banker types expect the heaviest of convertible issuance to take place in the first half of 2004, ahead of rising interest rates.

"My hope [is], as managements regain confidence in the economy, we'll see more capex and more acquisitions, and that will create new deals across the spectrum - not jut refi deals," said another portfolio manager.

CSG Systems drops to 101.25

CSG Systems International Inc.'s new convertible lost ground, and while dealers offered no explanation, some buyside sources said there was some concern raised about the change-of-control provisions in the bond documentation, or lack thereof.

Several stock analysts recently have boosted their target price for CSG Systems, some merely due to less cash flow risk because of new contracts like with Comcast Corp. or renewed contracts like with Cox Communications Inc. and EchoStar Communications Corp.

Some analysts, too, have noted that CSG Systems could tick up because it is considered an appealing takeover target. Amdocs Ltd. has been rumored as a likely suitor for the billing services and software supplier, one analyst said, and that buzz heated up earlier this month when CSG Systems announced the resignations of its chief operating officer, Jack Pogge, and head of software services, William Fisher.

Englewood, Colo.-based CSG Systems, which provides next-generation billing and customer services for the cable television, satellite, advanced internet protocol services, next-generation mobile and fixed wireline markets, said up to $40 million of the $200 million issue proceeds might be used to buy back stock from note buyers short selling the common, and the remainder plus cash on hand would go toward repaying debt.

The CSG 2.5%, up 43% convertible - which priced at the middle of yield talk of 2.25% to 2.75% and at the cheap end of premium guidance of 43% to 47% - dropped 1.5 points on Friday to 101.25 bid, 101.75 offered. The underlying stock lost 48 cents, or 2.45%, to close at $19.09.

While some buyside sources expressed anxiety about no takeover provisions, others were not overly concerned.

Besides Amdocs being a somewhat "mysterious" company, one buyside source, who acknowledged that he did not get involved in the CSG Systems convertible, commented, "There's a history of issuers weaseling out of change-in-control provisions."

Delta falls on bankruptcy fears

Some Delta Air Lines bondholders might like the idea of a takeover for the beleaguered carrier, but few were holding out much hope of that. There was considerable selling in the Delta paper for most of the week, traders said, but especially in the latter half of the week.

The Delta 8% convertibles dropped 2 points on Friday to 52.5 bid, 53.5 offered, and the 2.875% converts dropped about 1 point to 57.625 bid, 58.625 offered. The stock lost 13 cents, or 2.09%, to close at $6.10.

Reuters reported Friday that Delta Air Lines Inc. has hired the New York-based law firm Davis Polk & Wardwell as a restructuring adviser, and late Wednesday had reported that The Blackstone Group chairman Pete Peterson said Delta had hired that firm in a restructuring advisory capacity.

Delta officials could not be reached for comment but reportedly acknowledged working with several restructuring specialist firms.

"With liquidity already strained and the protracted negotiations with pilots yet to produce any concessions, Delta's fate seems to be following the path of United," said a fund manager in Boston, referring to United Airlines parent UAL Corp.'s bankruptcy.

But, she added, "There could be a white knight lurking somewhere out there and they would do like American - avoid the stroll up the bankruptcy steps at the 11th hour."

American Airlines parent AMR Corp. narrowly avoided bankruptcy last spring, after getting wage concessions from unions.

Concern that Delta may be on the brink of a bankruptcy filing has swirled around the markets for months, but not until a couple of weeks ago did the carrier acknowledge the possibility.

In a conference call in early May, the airline executives bemoaned Delta's high cost structure, puting the blame on the pilots and warning that current cost levels were unsustainable but stopped short of a bankruptcy warning. However, in a 10-Q filing on May 10, Delta officially warned that it might be forced into bankruptcy if no accord is reached with the pilots.

Vishay put notable

In another call situation, a buyside market source noted that Vishay Intertechnology Inc.'s payment of the upcoming put on its 0% convertibles on June 4 in stock is "probably the first time this has ever happened."

In February, analysts had noted the Vishay convertibles - both the 0% and the 3.625% - were trading rich, but also pointed out that the company had cash available to pay the put on the 0% converts, which is estimated at $325 million.

Tuesday's closing price is the last day for the five-day averaging period to determine the amount of stock to be issued. It is based on the average closing price of Vishay shares for May 25 through June 1.

When Vishay announced the put payment earlier this month, the 0% convertibles took a hit, dropping from a previous trading level of around 62 to the put level of 60.277 and have since been hovering at that mark. The stock was at $17.99 on May 4 - the day before the announcement - with heavy volume of 8.5 million shares; it then fell back to $17.40 with 2.5 million shares trading on the day of the announcement.

Vishay shares closed Friday up 26 cents, or 1.4%, to $18.87.

"This has been rough on arbs and has caused odd behavior of the stock," the buyside source said. "Why didn't Vishay use cash? I don't know."

A sellside analyst, who declined to be identified, said it could be that Vishay is conserving cash for an acquisition. Still, he said, it was odd not only that the company would choose to pay the put in stock because of the resultant dilution but also because it is cheap financing that usually an issuer considers worth paying a sweetener in order to avoid the put getting exercised.

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