Delta weighs on airlines; JetBlue new issue quiet in gray; Playboy at 101; Encysive bid up

By Ronda Fears

Nashville, March 10 - Delta Air Lines Inc. brought down the field of airline paper Thursday after reviving the specter of bankruptcy in a Securities and Exchange Commission filing. The weight added to a heavy sentiment regarding the JetBlue Airways Corp. new issue that was on tap after the closing bell, too.

Encysive Pharmaceuticals Inc.'s new deal, though, caught a couple of bids late in the session just before final terms were set.

The small $100 million biotech issue, talked with a coupon of 2.25% to 2.75% and initial conversion premium of 30% to 35%, was seen with a bid at 0.875 point over issue price in the gray market right at the market close, but that was shortly followed with at bid at 1.25 points over. Encysive shares closed Thursday up 29 cents, or 2.89%, at $10.33, but in after-hours trading the stock was seen lower by 13 cents, or 1.26%.

Outside of the airline group, too, traders said convertibles were still getting battered in the secondary market, but reported perhaps "not as much huge selling as you'd think."

"It was a tough day, as many bonds seemed to get quoted down today," one sellside trader said, adding that he was "not really getting involved in these new issues since they are not in our sector coverage." Besides, he continued, the "pricing still seems too aggressive, given the environment, I think."

Nash Finch Co.'s deal seemed to confirm that the market thinks new deal terms are a bit aggressive, as it priced cheaply outside of yield talk and then still went south out of the chute.

Playboy Enterprises Inc.'s deal "just lolled around most of the day" at about par, a buyside trader said, after the "first peek showed a seller at 103.25." That level never took, he said, but the issue traded as high as 101.5 before getting put to bed at 101.

JetBlue jettisoned by several

JetBlue's return flight in the convertible market was a turbulent passage what with the airline group en masse suffering from Delta's bombshell, one buyside trader said, adding that the JetBlue issue was showing little visibility in the gray market. Even the offer at 2 points over par that surfaced in the Street at within minutes of the deal getting launched was nowhere to be seen Thursday, he said.

The low-cost carrier based at New York City's John F. Kennedy International Airport is pitching a $250 million 30-year convertible with guidance for a 3.25% to 3.75% handle and 42.5% to 47.5% initial conversion premium.

Buyside sources were expecting the deal to get priced at the wide end of the price talk, or maybe even sweetened, but sellside sources working on the deal gave no indication of that.

"We think this deal is horrible," said a hedge fund manager in Chicago. It looks like it will price at the cheapest end of guidance, he said, although "the only caveat is if outrights want the deal, [which] seems unlikely though."

Indeed, outrights seemed to be uninterested, as well. One outright manager said, "I'll buy when the bond busts and Jet Blue stops burning cash."

JetBlue 3.5% rich to 7% cheap

Valuation sheets always vary on new issues, because of different opinions about credit spreads and volatility inputs, but few as disparagingly as with JetBlue. In part, instability in the credit markets overall has made it increasingly difficult to get a handle on specific companies, one buyside source said, but equally to blame is the wide swings of late in airline stocks.

"The assumptions [on JetBlue] are all over the map. You got [credit] spreads anywhere from 275 bps over [Treasuries] to 500 bps over," said one buyside source in Boston said. "We plugged vol in at 50% but we've heard some [put it] in the 30s."

A sellside source working out of Boston, however, put the new JetBlue issue 7% cheap at the midpoint of price talk using a credit spread of about 290 basis points over Treasuries and 39% volatility.

Another sellside source at a big convertible shop in New York, though, put it 3.5% rich at the middle of indicative terms, using a credit spread of 500 bps over Treasuries and 41% volatility.

Another market source pointed out that on Wednesday, the five-year credit default swaps for JetBlue were quoted at 490/515 bps over Libor. "JBLU, I think, will be a hard sell," a sellside trader said.

Delta darkens JetBlue skyline

Delta's warning, too, was a drag on all the airlines.

In an SEC filing, the Atlanta-based legacy carrier cautioned yet again of the possibility that it may have to file bankruptcy amid "a substantial net loss in 2005," as cash flows from operations "will not be sufficient to meet all...liquidity needs for that period."

Delta's convertibles dived more than 5 points, with both the 8% issue and 2.875% issue seen late in the session at 44 bid, 46 offered. The stock on Thursday fell 56 cents, or 11.45%, to close at $4.33.

The Delta junk bonds fell similarly, with sources telling Prospect News that the 7.9% issue due 2009 was seen losing 5 to 6 points at 43 bid, 45 offered.

Delta said it may have to file bankruptcy if it is unable to access capital markets or if its cash falls to "unacceptably low" levels. There has been low-level chatter about another Delta convertible circulating in the market since shortly before the year began, but sources said Thursday that no rumbles were heard lately.

Delta said it got an extension on $176 million in equipment debt, and Standard & Poor's said the warning would not affect Delta's CC ratings or the positive watch on the company. Basically, S&P said it was not surprised by the warning, given the airline's whopping $2.3 billion net loss from operations in 2004 and the current high fuel prices.

Playboy risk outweighs appeal

Credit risk, however, was weighing on the market tone overall, traders said. Playboy's new issue, while perhaps exciting to some because of name recognition, lost a great deal of its sex appeal because of "rising aversion to risk and the rising rate of defaults we're seeing," as one buyside trader put it. Many complained of a tight borrow on the stock, too.

Playboy sold the $100 million issue to yield 3.0% with a 30% initial conversion premium - at the cheap end of guidance for a 2.5% to 3.0% coupon and initial conversion premium of 30% to 35%. Pre-market Thursday, another buyside trader said he saw a seller at 103.25 but that never got hit and then there was another offer at 101.25.

"Early [in the] afternoon, I saw PLA at 101.5 bid, 102.25 offered, which is where I had them if priced on the cheap end," one trader said, but he still did not get involved in the issue. In the gray market before pricing, the issue had seen offers at 1 point over and 0.75 point over, buyside traders said, with bids failing to stand up. At the middle of price talk, sellside analysts had put the issue about 0.35% cheap.

Bookrunner UBS Investment Bank settled the issue at 101. Playboy shares closed Thursday up 16 cents, or 1.22%, at $13.25.

Nash Finch ponies up yield

Nash Finch sold its $150 million in proceeds of 30-year cash-to-zero convertible notes at 46.611 to yield 3.5% with a 36.5% initial conversion premium - cheaply outside of yield talk for a yield to maturity of 2.75% to 3.25% and at the cheaper end of premium guidance of 32.5% to 37.5%.

The issue will pay a cash coupon of 1.6314% on the face amount of $322 million for eight years. Minneapolis-based Nash Finch, a food distributor, said proceeds would be used for its $225 million asset acquisition from Roundy's Inc., or alternatively to repay part of a term loan under its senior credit facility.

Even after Nash Finch sweetened the yield, the issue spent most of the day underwater, buyside traders said. Bookrunner Merrill Lynch & Co. closed the new issue at roughly 46 bid, 46.25 offered, while the underlying stock lost 74 cents on the day, or 2.02%, to end at $35.93.

Disney finally begins to crack

The chaos continuing to spew from the House of Mouse, or The Walt Disney Co., has finally caused a fissure in the entertainment giant's convertible bonds that several onlookers have been waiting for from the sidelines.

One such spectator was at last ready to get involved, but his view was still very negative so he said Thursday he was looking at setting the issue up on a so-called "Texas hedge" where the holder has a short position in both the bonds and stock.

Disney's 2.125% convertible traded at 109 on Thursday, coming in about a quarter-point after losing something like 1 to 1.5 points on Wednesday. Disney shares closed Thursday at $28.00, up 2 cents on the day.

The disorder surrounding Disney is an ongoing struggle to seat a new leader at the company with CEO Michael Eisner scheduled to leave in 2006. In a letter to directors and released to the public, former board members Roy E. Disney and Stanley Gold are still very much embroiled in the controversy, asserting they were told by two credible sources that Eisner will be present at all interviews for his successor, which they find questionable.

Disney's board has hired an independent search firm and said it will name Eisner's successor by June. Eisner has said he will step down next year.

The Burbank, Calif.-based company did issue a statement questioning the credibility and motives of the two ex-board members. "They have been consistently wrong in the past, and this is nothing more than a perpetuation of a campaign of distortions aimed at advancing their own personal agenda," the statement said.

Toys "R" Us bounces on news

Fresh blood so to speak in the bidding process for Toys "R" Us Inc. gave it a boost Thursday, at least from the convertible and stock standpoints. The 6.25% mandatory got a big bounce on reports of another bidder in the mix, adding as much as 1.25 points to 57, and the stock gained 62 cents, or 2.69%, to $23.67 on the news.

Toys "R" Us junk bonds, though, dropped 2 points on the reports, with the 8.75% issue last seen at 97 bid, 98 offered, sources told Prospect News.

One convertible holder said he felt like the emergence of another bidder might result in a higher price tag for Toys "R" Us. But, others felt that the situation merely served as a wrench in the bidding process. Press reports did not identify the name of the new bidder or the amount being offered.

Toys "R" Us has been planning to divide its struggling toy business from its budding Babies "R" Us segment for months now.

According to previous reports, there are four groups heading up the bidding - buyout specialists Kohlberg Kravis Roberts & Co.; a partnership of Apollo Advisors LP and Permira Advisors Ltd.; an alliance between Bain Capital LLC and Vornado Realty Trust; and a group that includes Cerberus Capital Management LP, Kimco Realty Corp. and Goldman Sachs Group Inc. The New York Post item, though, said that at least three of those have been told that their bids are too low.

Toys "R" Us has said that an evaluation on restructuring would be completed by July.

Results for fiscal 2005 are scheduled to be released on St. Patrick's Day, March 17.

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