CompuCredit prices wide, gets reoffered at 97, still craters; JDS Uniphase joins tech party;

By Ronda Fears

Nashville, May 24 - CompuCredit Corp.'s new deal hit the market "like a sinking rock," as one convertible market observer put it, but it was still seen as a brave attempt to break the shutout experienced in the primary market for the past several weeks.

With stocks as well as bonds providing a lackluster backdrop, plus General Motors Corp. suffering yet another blow as Fitch became the second rating agency to cut the automaker's debt to junk, convertible traders said the market was "remarkably" firm Tuesday with outright players stealing center stage from hedge funds. GM's converts were anywhere from steady on the Fitch event to lower by a half-point.

"Buyers outright are looking for names. Hedge sellers are not able to take the pain and hit the bids," said one sellside trader.

Tech names were hot, traders said, and JDS Uniphase Corp. joined the party with its convertibles bid higher - again mostly by outright players - despite analysts raising concerns about a negative credit impact from its $760 million acquisition of closely held Acterna Inc.

Conversely, Royal Caribbean Cruises Ltd. was expected to see a positive credit impact from an amendment to its bank revolver, pushing out the maturity and reducing rates. Terms of the Miami-based cruise company's amendment, completed on May 18, emerged Tuesday showing the maturity was extended to March 27, 2010, and effectively reducing its borrowing costs, based on its credit ratings.

Royal Caribbean's converts "ticked up a tad," a trader said. He said the news was basically taken as a positive event, but added that having rates tied to credit ratings "might make some people a little nervous."

Selling subsides but bids patchy

The tide of sellers has eased back, lending free rein to bidders but traders said flow in the secondary market is too light to get very enthusiastic. Nonetheless many now hope the worst of the routing is over.

"It's a sloppy market right now. The worst of the selling is over, I think, but the bidders just come in spurts," one trader said.

While the nastiest round of selling is thought to have passed, no figures have been compiled yet so there could be another depression of moods in store for players. At the most, onlookers expect second quarter hedge fund redemptions data to be worse that first quarter data that was reported Tuesday by Tremont Capital Management.

Convertible arbitrage hedge funds saw $2.8 billion in redemptions in first quarter, countered by $1 billion of inflows for a net $1.8 billion withdrawal, Tremont said in a report Tuesday on the state of the hedge fund industry.

Overall, Tremont found that hedge funds were a magnet for $25 billion of inflows in first quarter, up from $16 billion that flowed into hedge funds in third quarter 2004. Convertible arbitrage was the only sub-category of hedge funds to see an outflow during the quarter, data reported by Tremont shows.

Second quarter data won't be out for another two months or thereabouts, so some players who have come to terms with the facts thus far decided to stay as players. Thus, some are beginning to make their move on the market.

"It's been a tough period for CB players. I'm glad to report we have weathered the storm, and delivered solid returns to our investors," said a hedge fund manager in Australia, who has an allocation to convertibles. Going into 2005, the Aussie manager said, "we thought CBs were likely to under perform. That said, I think we are now starting to see some value in the space again, and looking to add vega exposure selectively."

CompuCredit bids as low as 93.5

Reactions to the CompuCredit deal specifically were not very pleasant, but on a more general basis convertible players were glad to see something put on the table.

CompuCredit sold the $250 million overnighter at par to yield 3.625% with a 30% initial conversion premium - at the wide end of guidance for a 3.125% to 3.625% coupon and 30% to 35% initial conversion premium - but joint bookrunners Banc of America Securities and JPMorgan Securities reoffered it below par.

Buyside sources said the reoffer price started higher but eventually was pushed down to 97, and the deal still sank out of the chute.

The first trade was seen at 96.5, one observer noted. But at one point of the session it was seen at 93.5 bid, 94.25 offered, which was thought to be the low of the day.

Overnighter a gaffe right now

Besides several specific gripes with the deal itself, several sources thought it was a mistake to bring an overnight deal to the market at this time.

"This was a really bad deal ... to come out with," said a buyside analyst. "First, it was an overnight - big mistake in this market. Second, it's a lousy financial company with the ability to play lots of games with their financials. And, finally, the pricing was atrocious, especially as an overnight."

A banker remarked that it was unusual to see the underlying stock get hammered right away with such a big share buyback as part of the use of proceeds. "I hear they didn't get much out to the market," he said. "No one wanted to buy, [they] couldn't understand the deal size and were (correctly) afraid."

CompuCredit, described as a company that issues credit cards to consumers with less than perfect financial histories, said that after using some $100 million to buy back stock concurrently with the deal it would use proceeds to fund acquisitions and/or for general corporate and working capital purposes.

Moreover, onlookers seemed to think the terms on the deal were too aggressive, given the market's recent resistance to the TOP Tankers Inc. deal at 6.75% plus an annual cash payment of 1.08% in the form of a commons stock dividend pass-through. It was pulled last week - and officially scrapped by the Athens based oil tanker on Tuesday - after a brutal two weeks of haggling over terms with potential buyers and three rounds of sweetening.

GSI Commerce for Wednesday

GSI Commerce Inc.'s $50 million of 20-year convertible debentures, talked to yield 2.5% to 3.0% with a 25% to 30% initial conversion premium, is scheduled to price after the market close Wednesday via sole bookrunner Morgan Stanley.

Bear Stearns & Co. is joint lead manager. Co-managers include CIBC World Markets, Friedman Billings Ramsey and Pacific Crest Securities.

The notes will be non-callable for five years, then with a 150% threshold in years six and seven with no make-whole provision. There are puts in years seven, 10 and 15. Full dividend and takeover protection are provided.

There is a $7.5 million greenshoe available on the deal, which was first announced in late April.

Concurrently, GSI Commerce plans to sell 1.5 million shares and selling shareholders will offer a further 1.5 million to 2.5 million shares. The selling shareholders include chief executive officer Michael Rubin, Softbank Capital Partners and Rustic Canyon Partners. The stock sale is expected to have a greenshoe of 450,000 to 600,000 shares.

The King of Prussia, Pa., based provider of ecommerce solutions said proceeds will be used for general corporate purposes.

GSI Commerce shares closed Tuesday up 9 cents, or 0.61%, at $14.87.

JDS popular as an outright play

Hedge funds were not overly excited about fiber optic telecom equipment maker JDS Uniphase Corp. buying privately held Acterna, which makes test equipment for telecom providers and cable network vendors, but outright convertible players shrugged off all concerns to bid up the paper by as much as 2 points Tuesday.

The zero-coupon convert traded in the 76 area, versus a close Monday at 74, according to sellside traders. JDS Uniphase shares shot up nearly 6% on the development, closing Tuesday at $1.64.

"It's a popular name," one sellside trader said. "Outright guys don't seem to be bothered" by the credit impact concerns.

San Jose, Calif., based JDS Uniphase said the $760 million Acterna purchase would be paid for with $450 million in cash and $310 million in stock. The deal is expected to close in the September quarter.

Analysts ponder credit impact

CreditSights analysts Zhiping "Ping" Zhao and David Reich said the price JDS Uniphase is paying for Acterna seems reasonable but they are not big fans of the deal and see it as a poor use of cash.

"We believe that this deal has a lot to do with JDSU having the luxury of a large cash horde, which could be the worst reason to make an acquisition," the analysts said in a report Tuesday.

"We believe that JDS Uniphase does not have any liquidity issues and has enough cash to finance the deal. It is not under any pressure from rating agencies on its zero-coupon convertible notes as they are not rated. However, JDSU needs to turn its operations around quickly as [the] converts are putable in 2008."

Supporting the convertible market's view that the JDS Uniphase situation is better played only on an outright basis, the CreditSights analysts said: "We recommend that investors who do not own the stock to stay away. However, we do not recommend actively shorting the stock, as we believe there is a floor on the stock price supported by JDS Uniphase's cash position."

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