AIG drops on large loss; Digital River in trade; Massey Energy gains on debut; Sprint cancels deal

By Rebecca Melvin

New York, Aug. 7 - American International Group Inc.'s mandatory convertibles tumbled, but not as hard as their underlying shares, after the giant insurer posted a huge quarterly loss, its third in a row, due to losses in credit default swaps among other things.

Market participants said they were watching the information flow surrounding the AIG earnings announcement, as well as subsequent trading patterns, even if they weren't involved in the name, due to its importance to the general outlook on financials.

"We paid attention just because a lot of people were paying attention. There's not a lot of macro data," one market source said, postulating that if the quarterly report had been different or positive, a very large move the other way would have occurred.

Digital River Inc. was also mentioned in trade Thursday, with the 1.25% convertible paper seen up more than 0.50 point as its stock climbed 2% in the session. The software maker filed its 10-Q with the Securities and Exchange Commission after posting its results for the second quarter a week ago.

Massey Energy Co.'s new 3.25% convertibles had a good debut on their release to secondary market trading, moving up to as high as 103.5 bid, 104 offered, before easing slightly to the 102.5 bid, 103 offered range.

But Sprint Nextel Corp. surprised the market by canceling its offering of $3 billion of cumulative perpetual convertible preferreds, which was expected to price after the market close Thursday.

Despite indications of decent interest, it wasn't possible to build the book on terms that were acceptable to the company, a syndicate source said.

Market volatility - the Dow Jones Industrial Average dropped 225 points, or 1.9%, on Thursday, following a two-day rise - has created an interesting market, to say the least, players said.

"We're focusing on our on core competency, which is vol extraction. You look at any of the stocks tied to major themes, like Bank of America, Transocean, or SunPower, and you're getting big intraday moves.... It's not a lot of risk on the table. But tighter credit, with decent vol., with gamma, it's what's been making money in the last two weeks," a West Coast-based buyside trader said.

AIG drops on whopping loss

AIG's 8.5% mandatory convertibles due 2011 were down 0.635 point to 0.875 point, depending on who you talked to.

"They were pretty active, all over the place," a New York-based sellsider said, citing volume of 3.5 million.

At the close Thursday, versus a stock of $24.20, they were $53.75. That compared to Wednesday, when the mandatories were $62 versus a stock price of $29.00,

The figures represent a stock decline of nearly 16% and a drop in the preferreds of 13.3%, according to a buysider. The ratio is 1.974, the max.

Losses on CDS drove AIG to a second-quarter net loss of $5.36 billion, its third over $5 billion, and bringing its tally to nearly $25 billion in unrealized losses from writing down the value of its CDS portfolio.

Opinion seemed mixed about what it all meant. "There is concern over the viability of the company and whether they will have do a capital raise in the form of the convertible," according to one sellsider. While a buysider, who said he didn't have AIG, but did have positions in other financials like Bank of American and Fifth Third Bancorp, said of AIG: "It's not going anywhere. It's been beat up everywhere to Tuesday, and if you're an investor in a personal account, you're happy to own it at these lower levels."

Another buysider said that AIG cheapened up, but not terribly much like a preferred with bigger premiums. "I like the mandies that are below the max strike. To me, they've come off, and they're testing the thesis: are they ready to buy or about to get cheaper."

The day certainly gives reason to the go-slow approach, he said.

As for AIG itself, comments during the conference call seem to point to a strategy of restructuring to go leaner. "A less complex AIG will be a better competitor," AIG chief executive Robert Willumstad said. No specific plans have been disclosed, however.

Shares of the New York-based insurance company (NYSE: AIG) closed down $5.25, or 18%, at $23.84.

Digital River at 107

Digital River's 1.25% convertibles due 2024 were last traded at 107.229, according to Trace. Another source put them at 106.87, compared to 106.18.

The Eden Prairie, Minn.-based e-commerce software maker said in its 10-Q filing, "We believe we are an example of an emerging trend known as 'Software as a Service' (SaaS). We have invested substantial resources to develop our e-commerce software platforms and we provide access and use of our platforms to our clients as a service as opposed to selling the software to be operated on their own in-house computer hardware."

Second-quarter results beat expectations, with the company reporting $98.4 million in revenue, up 26% from the year-earlier period. And second-quarter GAAP net income was $13.2 million, compared to GAAP net income of $14.5 million in the second quarter of 2007.

Shares of Digital River (Nasdaq: DRIV) gained 95 cents, or 2%, to $43.01 on Thursday.

Massey Energy

The new Massey 3.25% convertibles traded at 103 versus a stock price of $62.60 intraday and ended closer to 102.5 bid versus $62.30.

One source said a million dollars traded outright at 102.3125 late in the day.

Massey, a Richmond, Va.-based coal producer, priced $600 million of seven-year convertible senior notes to yield 3.25% with the initial conversion premium of 42.5%, which was the midpoint of talk.

The convertibles, offered at par of $1,000, will be non-callable and may not be put; and there is dividend and takeover protection.

There was a concurrent offering of common stock. UBS Investment Bank and J.P. Morgan Securities Inc. were joint bookrunners of both offerings, with PNC Capital Markets acting as joint lead manager for the convertible note offering and BB&T Capital Markets, Stifel, Nicolaus & Co., Inc. and Wachovia Capital Markets acting as co-managers of the common stock offering.

The Massey deal did well, a buysider said, adding that it's a long-dated coal option, with the risk being oil prices.

Shares of Massey (NYSE: MEE) closed down $2.11, or 3.3%, at $61.27.

Sprint deal pulled

"I was surprised, however, we weren't involved," a buyside trader said regarding the news that Sprint Nextel pulled its $3 billion offering of convertibles.

"What's surprising is the change in the norm. For the last six to 12 months, if there's been enough interest and they had something that could go through, people put things up and put the deal out."

And this buysider wasn't alone in being surprised; a lot of traders who had gone short on the stock to set up the deal found themselves needing to cover when they heard the deal wasn't going to happen at about 3 p.m. Thursday.

At that point, Sprint stock, which had been depressed due to the deal, jumped straight up, presumably due to short covering.

Shares of New York-based Sprint (NYSE: S) initially surged by double digits but subsequently eased to close up 45 cents, or 6%, at $7.79.

"People got caught. They would have been in the money, with a good short position, based on their allocation, and then the deal gets pulled; and, while you're not going to be short a ton of it, it's still going to sting," the buysider said.

The Rule 144A deal was being sold via joint bookrunners Deutsche Bank, Goldman Sachs, Citigroup and J.P. Morgan Securities.

The deal was withdrawn due to market conditions, which is the standard language for trying to build a book with the terms and being unable to, the source said.

Attempted modifications to the terms were not accepted by the company, he said.

Initially, the convertible preferreds, with a liquidation preference price of $1,000 per share, were being talked to yield 4.75% to 5.25% with an initial conversion premium of 25% to 30%.

Proceeds were intended for general corporate purposes, including such things as debt reduction.

Based in Overland Park, Kan., Sprint Nextel is the third-largest wireless carrier in the United States.

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