Cablevision soars on news of spin-offs; new paper mixed as two new deals emerge late

By Ronda Fears

Nashville, June 2 - Trading was slow even for a Monday, traders said, but there were some bright spots, like Cablevision Systems Corp. and Charter Communications Inc., as well as airline paper. In the primary market, two new deals emerged after the close, while recent new issues were widely mixed.

Maverick Tube Corp. launched a $100 million deal to price after the close Tuesday and Jakks Pacific Inc. said it plans a $75 million convertible offering.

Late in the day there was a $700 million deal said to be in the works but details were not available as Prospect News went to press.

There also was buzz about a possible deal from American Airlines Inc., or parent AMR Corp., since there have been recent deals from Delta Air Lines Inc. and Alaska Airlines Inc., which followed the Continental Airlines Inc. deal in early 2002.

Delta's new 8% due 2023 gained 1.25 points to 96.875 bid, 97.875 asked with the stock up 49c, or 3.67%, to $13.85. Alaska Airlines' floater due 2023 added 2 points to 107.75 bid, 108.25 asked as the stock rose 68c, or 3.58%, to $19.69. Continental Airlines' 4.5% due 2007 was up 1.5 points to 69.5 bid, 72.5 asked while the stock climbed $1.39, or 12.61%, to $12.41.

But for the most part, convert players stood on the sidelines as stocks zigzagged through the session with the Dow Jones Industrial Average flirting with the 9,000 mark. When the closing bell rang, stocks were mixed with the Dow up just 0.54% and the Nasdaq off by 0.32%.

"It was exceptionally quiet today," said a convert dealer.

"The focus was just in a few areas," like new issues.

Demand is still strong by most accounts, so issuance is expected to continue at a nice, steady pace.

Merrill Lynch convertible analysts noted in a report Monday that convertibles richened a bit more in May as the average theoretical discount fell to 0.55% from 0.76% during the month - "a persistent sign that demand continues to outpace supply in the convertible market despite strong new issue flow."

But market sources expect there will continue to be a lot of small deals, interspersed with a few jumbos or "meaty" sized issues.

"I still am not impressed with the quality of issuance so far," said a market source.

He said there has been speculation that American Airlines will follow in the path of other airlines tapping the convert market for new capital.

"Why not? It's free money on both sides of the coin - the bond side and the option," the sellside source said.

Buyside sources who are traditional convertible players say demand indeed is still high due to the returns seen by convertible funds and convert arbs, but also as other investors look to the convertible market for opportunity to put money to work.

"A lot of the paper right now is going into straight bond funds. The stuff with any kind of yield is getting sucked out of our universe," said a convertible trader.

"A lot of this paper is very dysfunctional" anyway and will not behave like a convertible, he added. The high premiums will not allow the convert to participate much with any stock gains, he said, and low or non-existent coupons will hurt them when interest rates begin to rise.

Still, hedge funds make up the bulk of the activity in the convertible market, sources say.

And, sellside sources say there seems to be an elevated amount of capital structure arbitrage activity in relation to the new deals of late - also perhaps a sign of more fixed-income hedge funds participating in converts.

"I've heard of at least $800 million in the last week allocated to that [capital structure arb] strategy," one sellside source said.

This sort of activity may also explain situations like the i2 Technologies Inc. converts shooting up some 15 points over the last month or so, he added. The convert is bid as high as 70 with sell offers as high as 74, while the pink sheet stock closed Monday just over $1.

i2 is similar to the XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. stories in which converts buyers are hoping a debt-for-equity swap is in the offing, one trader said. Sirius just completed such a transaction earlier this year.

Sirius Satellite's new convert has skyrocketed since it was sold a couple of weeks ago. The 3.5% issue gained nearly 20 points Monday to about 151 bid, 153 asked, a dealer said. The stock closed Monday up 35c, or 21.88%, to $1.95.

"The stock really rocked," the trader said of Sirius.

"The converts are just flying up there. It's just crazy, though. I don't see the pay-radio market supporting two names, and XM is way ahead of Sirius. The value [of Sirius] is in bankruptcy - the only thing they have you want is the satellite and programming."

A narrower focus at Cablevision - illustrated by its announcement that it will spin off its satellite service, Rainbow DBS, and Clearview Cinemas theater chain to boost financial flexibility and focus on core cable operations - was a big shot in the arm of converts linked to the New York cable concern.

Cablevision's 6.5% mandatory due 2004 shot up 2.125 points on the day to 24.25 bid, 24.375 asked and the AT&T Corp./Cablevision 6.25% mandatory due 2005 soared 2.75 points on the day to 25 bid, 25.5 asked.

Cablevision shares ended up $2.43, or 12.55%, to $21.79.

Cablevision said the move, to be structured as a spin-off to Cablevision's shareholders, would include a cash infusion from Cablevision of as much as $450 million and Cablevision's board also approved an additional $114 million investment this year for Rainbow.

The spin-off will likely be completed by the end of the year, pending regulatory approval and a final go-ahead vote from the Cablevision board.

Standard & Poor's said the ratings and outlook for Cablevision (BB/negative) would not be affected by the move. The spin-off reduces the longer-term business risk for the company by removing uncertainty about the satellite venture, but S&P said, given the incremental cash contributions, the financial profile will be under pressure in 2003.

As a result of the cash contributions, consolidated debt to EBITDA is expected to be in the low-6x area for 2003, excluding preferred stock, and about the mid-7x area, including the preferred stock as debt, S&P said. These credit metrics are somewhat weaker than those previously incorporated in the ratings, S&P said, and liquidity pro forma for the spin-off is somewhat lower.

Consequently, while the plan to spin off its satellite venture will not affect the ratings, S&P said failure to improve financial metrics and overall liquidity prospects beyond 2003 through ongoing growth in its overall cable TV operating cash flows could result in a downgrade.

Charter Communications was also sharply higher on optimism about refinancing prospects, traders said.

The Charter converts - both the 5.75s and 4.75s - were bid up around 4.5 points, one trader said.

Calpine Corp. fell victim to another S&P downgrade Monday, but said it would not trigger any defaults under its credit agreements and the company continues to conduct its business with its usual creditworthy counterparties.

And, the rating cut did not impact Calpine's converts much either, as one trader said, "most of the risk, even probably at a triple-C level, is either priced in or being disregarded."

S&P cut Calpine's convertible notes to CCC+ from B+ and its convertible preferreds to CCC from B.

"We are committed and on target to completing Calpine's previously announced $2.3 billion liquidity program," said Bob Kelly, chief financial officer of Calpine, in a statement.

"Proceeds from this program will be used to complete our current construction plan and will allow Calpine to begin reducing debt levels later this year. The strength of our operating assets and contractual portfolio, and increasing spark spreads in certain energy markets continue to provide significant cash flow and value for Calpine."

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