Headwaters bobs up, down; new-issue terms seen worsening again; Calpine convertibles higher

By Ronda Fears

Nashville, May 26 - Calpine Corp. convertibles, particularly the 5.75% convertible preferreds, continued to power up Wednesday as the likelihood of repayment seems higher now that the independent power producer has some key refinancings behind it.

The Calpine 5.75% issue, in the High Tides structure, was very active and up about 0.5 to 1 point. Calpine's 4.75% convertible bonds also rode along, gaining about 1 to 2 points, and also gained steam from heavy activity in the stock.

The gains came even as some credit analysts have issued cautions about the name.

Outside of Calpine, most of the market was focused on new issues and evolving terms.

"Terms on new issues are worsening again," said a portfolio manager in New York involved with a variety of convertible strategies.

Remaining at bat was CSG Systems International Inc. with a $200 million issue talked to yield 2.25% to 2.75% with a 43% to 47% initial conversion premium.

The real "kick in the teeth," as another buyside source put it, was the Digital River Inc. $175 million deal talked to yield 0.75% to 1.25% with a 33% to 38% initial conversion premium. He said it would likely be repriced below par, but that could not be confirmed from the underwriter.

Digital River's convertible was printed late Wednesday with a 1.25% coupon and 33% initial conversion premium - at the cheap end of price talk for a 0.75% to 1.25% coupon and 33% to 38% initial conversion premium.

Digital River was nowhere to be seen in the gray market, but other new issues from Headwaters Inc. and Wild Oats Markets Inc. dropped right out of the chute.

Headwaters sinks to 98.75

Headwaters bobbed up and down the par mark, but when the closing bell rang the issue was underwater.

The South Jordan, Utah-based energy services firm sold the $150 million of 12-year convertible notes to yield 2.875% with a 42.86% initial conversion premium.

The company plans to use proceeds, together with borrowings from its senior secured credit facility and internally generated funds, to finance its previously announced $202 million acquisition of Eldorado Stone LLC.

"This [Headwaters convertible] was all over the place," said a convertible trader at a hedge fund in New Jersey.

Before the open, he said, it was bid plus 5/8 to plus 1, then the offer went to plus 1 1/8 right at the opening bell. Soon thereafter, however, the issue went south and stayed below par for most of the session.

Bookrunner Morgan Stanley & Co. Inc. closed the Headwaters convertible, which priced smack in the middle of yield talk for a 2.625% to 3.125% coupon and in the mid-range of premium guidance of 40% to 45%, at 98.75 bid, 99.5 offered.

Headwaters stock closed off 41 cents, or 1.95%, to $20.59.

Wild Oats swells to 100.375

It was a mirror image reaction to the Wild Oats deal as it began out of the gate with a trade below par but steadily gained ground to end slightly higher.

Wild Oats sold the small $100 million issue of 30-year convertible cash-to-zero notes for a yield to maturity of 3.25% with a 45% initial conversion premium. The notes priced at the cheap end of price talk for a 2.75% to 3.25% coupon and 40% to 45% initial conversion premium. It pays a cash coupon for seven years and then become a zero-coupon accreting bond.

The issue traded at 99.375 shortly after it broke to trade, a buyside trader in New York said.

From there it gained steam, and the trader said the Wild Oats convertible closed out at 100.375 bid, 100.875 offered. The underlying stock closed up 43 cents, or 4.3%, at $13.07.

Deutsche Bank Securities analysts put the deal 1.71% cheap at the final terms using a credit spread of 500 basis points over Libor and a 40% stock volatility.

Calpine still powering up

Despite concerns from credit analysts regarding Calpine Corp.'s debt levels, traders said the convertibles were active with heavy buying Wednesday. Mostly, traders said, convertible players feel more comfortable about the convertibles getting taken out now that Calpine has some key refinancings behind it.

One trader also said that the sharp losses marked in the Calpine convertibles in recent weeks also have made the issues more appealing to buyers.

There was still pointed interest in the Calpine 5.75% convertible trust preferreds, distressed traders said. That issue added about 0.5 to 1 point to close out Wednesday at 42.75 bid, 43.25 offered.

Calpine's 4.75% convertible bonds also gained, though, as the stock rose on heavy volume. The bonds added another 1.5 points or so to 76.25 bid, 76.75 offered.

Calpine shares closed up 7 cents, or 1.94%, to $3.67.

The Calpine convertibles spiked up more than 5 points on Tuesday, but credit analysts expressed skepticism of recent levels in the Calpine bonds because of the risk of further subordination.

Secondary cheapening subjective

From a global perspective, money managers say U.S. convertibles have cheapened remarkably in recent weeks.

"U.S. convertible bonds appear cheap in investment value terms around the globe at the moment - and appears to have an overhang of people holding similar positions," said a convertible portfolio manager with funds focused on U.S. convertibles as well as Pacific Rim and other convertible strategies.

"The background is interesting. Where U.S. default rates are at extremely low levels, credit spreads remain tight, supported by credit buyers of synthetic CDO [collateralised debt obligations] structures, and equities trying to find value levels.

"To me it is somewhat a reflection that observed vol is not helping Gamma profits - and too many players holding similar positions. Vol has not reacted to the upside in this period of uncertainty, which is somewhat counter intuitive."

Outrights boon vs. hedgers pain

While convertible arbitrageurs are estimated to be losing 50 basis points or more in their returns for May, outright players are treading water with gains somewhere around 2% to 3%. Yet, outright players don't particularly think the convertible market is looking cheap.

"I am not sure that converts are cheap anywhere in the world, except where you can't hedge - emerging markets or Japanese mid- to small cap names," said Hart Woodson, portfolio manager of the Gabelli Global Convertible Securities Fund.

"Vol has not picked up probably because [there are] too may arbs on the same positions in the larger names. Opportunities exist on the smaller, less liquid names."

"We're still seeing a lot of interest in outright converts as people want to shift from higher duration fixed-income allocations to converts. For example, my fund has an average life of about seven years and a duration of 1.3 years, while the seven-year U.S. Treasury, with a 5% coupon, has a six-year duration."

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