Yield-grabbers reach for busted convertibles, distressed issues; new paper mixed in secondary

By Ronda Fears

Nashville, June 12 - Yield-grabbers were picking over busted convertibles and distressed issues, with even HealthSouth Corp. mentioned as a mover - although in a southerly fashion amid fresh news on the congressional probe of its accounting troubles.

New issues with fat coupons also continue to firm, while the newest crop of zeroes and those with low yields are floundering. For Friday's open, the market is looking at another CV Therapeutics Inc. convert of $100 million, talked at a 1.5% to 2.0% handle with a 34% to 38% initial conversion premium.

Otherwise, players described it as a market without conviction.

"There's just not a lot of clarity in the market right now, some of it due to there being such a steady stream of new deals getting launched every night or pricing before the open," said the head convertible trader at one of the major investment banks.

"Generically, people are reaching for yield but even some of those issues are pretty rich these days, everything is picked over. The new issues are not very exciting, and risk aversion is still pretty low, so anything with a fat coupon is getting bid up."

Airline paper recently put into circulation by Continental Air Lines Inc. and Northwest Airlines Inc., as well as the fairly recent AirTran Holdings Inc. convertible, were all firmer.

Continental's new 5% convertible topped 111 bid, gaining about 2 points, while Northwest's 6.625% issue gained about 1 point to 102.5 bid. AirTran's 7% convertible has been bid up to nearly 123, one trader commented, and it gained 5 or 6 points Thursday.

Conversely, several new issues priced with aggressive terms - Cephalon Inc., for example - continued to struggle. The two new tranches of Cephalon's 0% converts were pegged around 96 or 97 bid, down 1 to 1.5 points on the day. The stock ended down 99c, or 2.18%, to $44.34.

NPS Pharmaceuticals Inc.'s new issue was upsized, and priced at the tight end of guidance for a 3% yield, up 35%, which suggest good demand. But it went south out of the gate. Morgan Stanley, the lead bank, closed it at 99.375 bid, 99.875 offer with the stock off 34c, or 1.25%, to $26.76.

Traders handling high-yield, busted or distressed convertible paper said they were quite busy Thursday, mentioning Calpine Corp., Mirant Corp., Charter Communications Inc. and even HealthSouth.

HealthSouth's 3.25% converts, which have been tied up in the $2.5 billion alleged accounting debacle that surfaced just a couple of weeks before the April 1 maturity date, dropped 4 to 5 points Thursday after moving higher the day before.

"Yes, these [HealthSouth] bonds have made quite a comeback. They got down to the teens right after this [accounting scandal] broke," said a distressed trader.

"Most of this paper is still in the hands of attorney types that specialize in bankruptcies, or vulture funds. But there could be some high-yield types looking at it, now that a turnaround plan looks feasible and bankruptcy is less likely."

One trader said the HealthSouth issue traded at 58.5 on Wednesday, and it dropped to 53.5 bid on Thursday. HealthSouth shares, in over-the-counter trading, fell 20c, or 27.5%, to 50c.

Reports late Wednesday said HealthSouth records were the subject of a subpoena expected to be issued Thursday by U.S. Rep. Billy Tauzin, chairman of the House of Representatives Energy and Commerce Committee, which investigated Enron Corp. and other high-profile scandals.

Separately, the committee on Wednesday demanded former HealthSouth chief executive Richard Scrushy turn over any records on company finances and accounting practices by June 25. Scrushy is fighting SEC allegations of inflating company earnings, but 11 other former HealthSouth officers have pleaded guilty to criminal charges and are cooperating with ongoing investigations.

PricewaterhouseCoopers has said it expects to complete its review of HealthSouth by the end of June, and new management at HealthSouth has indicated it hopes to have a restructuring plan in place by then.

The company has some $3.3 billion of debt to contend with, including some bonds in default like the $350 million convertible. In the wake of the allegations, HealthSouth has laid off nearly 400 employees.

Calpine and Mirant were moving upward, however.

"Seems like there is still credit or yield buyers out there taking some of the busted names higher," said a market source at one of the shops that handles some high-yield or busted converts.

Mirant has been struggling recently amid clouded bank negotiations and troubles brewing over its exchange offer for its 2.5% converts and 7.4% senior notes, but there were a couple of big trades that moved the 5.75% converts up by about 3 points, a trader said.

The Mirant 5.75s moved up to 63 bid, 65 offer. The stock closed up 18c, or 7.38%, to 2.62.

Calpine's bonds also added about 3 points. The 4% converts were at 88 bid and the 8.5% junk bonds at 73.5 bid. Calpine shares shot up 70c, or 11.5%, to $6.80.

© 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.