Criimi Mae piques interest of yield-grabbers; 13 new issues total $1.7 billion for the week

By Ronda Fears

Nashville, June 13 - Players expect convertible issuance will continue to rock along in the coming week, with nearly $1 billion already on the calendar, following 13 deals in the week just completed totaling $1.7 billion. While the week's tally was paltry compared to the previous week's $4.5 billion, it was a very decent figure for convertibles.

Xerox Corp.'s $650 million mandatory will likely be the most high-profile deal but a $300 million synthetic mandatory that converts into Regency Centers Corp. shares also is slated for next week's business.

Mandatories have not been a big part of convertible issuance lately, although as a group those are up from a year ago, and market sources said most of next week's slate will consist of the regular fare of bonds.

While mandatories are not as popular as cash-paying bonds, they generally offer a bigger yield and that is a paramount goal of investors in the current low interest rate environment.

The Xerox issue is talked to yield 6.25% to 6.75% with an 18% to 22% initial conversion premium.

Not a lot of valuations on the Xerox convert are out yet, but Lehman Brothers analysts put it 3.7% cheap, at the midpoint of guidance, using a credit spread of 700 basis points over Treasuries and a 37% to 40% stock volatility skew. That is based on the $10.70 stock price from Wednesday when the deal was launched. Xerox shares closed Friday off 52c, or 4.45%, to $11.05.

"The fact that it's a mandatory makes it less appealing," said Ted Southworth, a portfolio manager with Northern Trust Co.

"As far as the preliminary numbers, I'm seeing it look pretty cheap."

The cheapness, relative to new issues so far this year coming right around fair value, has lead some onlookers to speculate that the terms will be tightened, but bankers haven't tipped their hands along those lines.

As for pricing trends in convertibles, conventional wisdom seems to believe there is still a very healthy amount of demand that hasn't been met so terms are not likely to shift to buyer-friendly status anytime soon.

"It's the kind of situation that I'm not sure when or how it's going to end, but it eventually will end badly," Southworth said.

Many established convertible players, perhaps as opposed to new entrants into the asset class, describe their day-to-day activities as "just getting by" or "trying to survive" in the face of aggressive new issue terms and a rich secondary market.

"Some of the deal terms are just ridiculous. It's obvious that there's still a lot of liquidity out there," said John Siebel, head of trading at Silverado Capital Management.

"I'm just going to live through it. I'm not going to push the issue, reach for something that doesn't make sense, because that will get you killed."

There are lots of people in convertibles reaching, mostly for yield.

So anything that puts the squeeze on the convertible yield, whether price or the common dividend, can crush the convert. Such was the case Friday with Gtech Holdings Corp.

Buzz around trading desks that Gtech will begin paying a common dividend, or is at least thinking about it, quickly took a toll on the 1.75% convertible, which had been trading around 150, one trader said. The issue lost around 6.5 points on the speculation, he said, while the stock rose $2.50, or 7% to $38.41.

With a serious search for yield under way, there is a fair of amount of scouring and poring over existing issues in search of a reasonable situation to get involved with.

Criimi Mae Inc.'s convertible Series B preferred is a gem, said Jimmy Giordano, president of JGiordano Securities Group. Criimi Mae Inc. is a commercial mortgage company structured as a REIT, servicing approximately $17 billion of commercial mortgage loans.

It is a small issue, just $37.5 million or so, but it has a 10.875% dividend and the company is fixing to pay dividends - including those in arrears since fourth quarter 2002 - to holders of record as of Monday.

Two other regular Criimi Mae preferreds, which used to be convertible, also offer eye-popping yields by today's standards, Giordano noted. The Series F carries a 12% dividend and the Series G a 15% dividend.

All three can be set up, even at Friday's higher levels, below par on a cost basis, he said. He noted, though, that only the convertible preferred has any call protection, with a little over three years to go. He added that if Criimi Mae pays a common dividend, there is a ratchet feature that will bump up the preferreds.

The 10.875% convertible preferred, with a 25 par, closed Friday up 0.41 point, or 1.5%, to 27.64.

"It's an improving credit, and late today Moody's put it on review for upgrade," Giordano said.

"When everybody is starved for yield, you have to get excited about this."

Right after the market close, Moody's put the Ca rating on the Criimi Mae convertible preferred on review for possible upgrade as a result of the dividend reinstatement.

The payment of all the preferred dividends in arrears improves the position of those holders, Moody's said, and reflects a successful recapitalization under new management following Criimi Mae's exit from bankruptcy in April 2001.

The capital structure continues to be highly levered with secured debt, Moody's said, but the recapitalization in January 2003 with infusions of common equity and subordinate debt, as well as a new secured financing package, improved financial flexibility.

Criimi Mae also has significant net operating losses for tax purposes, which help it to retain cash.

Following the recapitalization, Brascan Real Estate Finance Fund assumed control of management but Moody's said the company's plans as they relate to strategy and capital structure are still being defined.

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