Convertibles still waiting for new issues; Adelphia still firm

By Peter Heap

New York, April 9 - The convertibles market recorded another slow and quiet day as participants carried on waiting - so far in vain - for new issuance to resume.

However Adelphia Communications Corp. convertibles continued to gain as investors who see them as a superior way to play the story compared to the cable television company's stock.

There was also activity seen in oil names although it did not translate into much price movement.

But overall much of the convertibles market is on hold until the next new deal arrives.

"It's been very quiet," said a trader with a convertible hedge fund. "There are no new issues."

Other than foreign issuers which were not widely followed in the U.S. markets, the last convertible deal was almost a week ago on April 3 and even that was for just $75 million, the deal from Skechers USA Inc.

Offerings this week and late last week by mining company Anglo American plc, which sold $1.1 billion, Australian issuer QBE Insurance Group Ltd., which sold $250 million, and Taiwan's Fubon Financial Holdings Co., which offered $375 million, were all available in the U.S. under Rule 144A but the underlying stocks were not widely traded in the U.S.

The absence of new issues has also resulted in a slowdown in secondary market activity, participants said.

However Adelphia managed to continue its rebound Tuesday.

News on Friday that the Coudersport, Pa. company hired Salomon Smith Barney, Bank of America Securities and Credit Suisse First Boston as financial advisors to look at options to reduce debt, strengthen its balance sheet and, in particular look, at potential asset sales marked the bottom in the convertibles prices. (Adelphia also engaged Daniels & Associates as a special advisor.)

Tuesday, Adelphia's 6% convertible subordinated notes due 2006 (B3/B) were at 74 bid, compared to their low of 70.75 late Thursday, while the 3¼% convertible subordinated notes due 2021 putable in May 2003 at par were at 86 bid, 86.5 offered, compared to their low of 84 bid late Thursday. Both were about a point better while the stock was down $0.48 at $10.51 compared to its recent low of $9.52.

"I guess people felt that most of the [convertible] issues were in an oversold situation," said Salomon Smith Barney analyst Stu Novick.

He noted that the 31/4s are offering a yield to put of 17¾%, which he said was: "A pretty big bang for the buck if you are willing to believe in the story."

The convertibles also have the advantage over the stock of likely faring better if the worst comes to the worst and Adelphia suffers a financial collapse, Novick noted.

In such a situation, the stock is likely to be worthless, he said. But valuing the cable assets at $3,000 per subscriber - the low end of where systems have traded lately - produces an asset value of $17 billion, Novick said, adding that the figure is roughly the same as the amount of debt that Adelphia is responsible for that it has publicly disclosed.

Of course the recent controversy over Adelphia has been because of previously undisclosed debt and the market is still waiting for regulatory filings, especially the first quarter 10-Q, to find out whether any more has been added in recent months.

But the $17 billion of assets would likely still "leave bondholders recouping most of their investment," Novick said.

He also saw activity in the oil sector during the session, which he characterized as two-way flows that left prices little changed, noting Devon Energy Corp.'s 0s of 2020 at 47½ for a yield to the put in 2005 of 5¼% and Diamond Offshore Drilling's 0s of 2020 at 51½ for a 4.6% yield to the put, also in 2005. Devon's stock was down $0.75 at $47.00 while Diamond was $0.69 lower at $30.20.

"Some people are taking very short term profits," Novick said while other still see current levels as a long-term entry point.

Oil prices fell back Tuesday. May crude was down 27 cents to $25.82 a barrel after Saudi Arabia said it would make up any shortfall caused by Iraq's stoppage of supplies. Prices had been rising recently in response to the troubles in the Middle East, with the move up receiving an extra push Monday from Saddam Hussein's boycott threat.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.