Genesis finds bid; UniSource goes past 102; Calpine bonds fall, then bounce back while preferreds gain

By Ronda Fears

Nashville, Feb. 24 - Genesis HealthCare Corp. was at bat after the closing bell and found a couple of gray market bids late in the session, while UniSource Energy Corp.'s upsized deal shot up more than 2 point out of the gate.

Genesis HealthCare's $150 million convertible - talked with a coupon of 2.25% to 2.75% and initial conversion premium of 32.5% to 37.5% - had an offer on the Street early Thursday at 1.25 points over issue price, but that kept trickling lower as no bids were showing up, said a convert trader at a hedge fund in New Jersey.

Later in the day, he said, the first gray market bid for the new Genesis convertible was at 0.125 point below issue price, but as the market was closing he said the bid had edged up to 0.125 point over, with the offer having declined to 0.5 point over. Genesis shares closed out the day down 86 cents, or 2.1%, at $40.15.

UniSource's issue, which priced aggressively, gained in the immediate aftermarket while secondary dealings otherwise were mostly driven by earnings. Aside from trading on earnings and the like, with the market described as slightly firmer, several traders remarked that lots of convertible players were busy with the bidding battle over MCI Inc. between Qwest Communications Inc. and Verizon Communications Inc.

Lamar Advertising Co. snapped back sharply Thursday from a drop the previous day on disappointing 2004 results and a bleak first-quarter forecast, which analysts argued was overdone, while there was some buying mentioned on recent weakness in Roper Industries Inc. due to its warning of lower-than-expected 2005 results.

Calpine Corp. was very active on its results, moving lower before bouncing back.

UniSource upsizes, trades up

UniSource sold an upsized $125 million convertible, boosted from $100 million, with a 4.5% coupon and 25% initial conversion premium - at the tight end of guidance for a 4.5% to 5.0% coupon and initial conversion premium between 20% and 25%.

The Tucson, Ariz.-based utility holding company said proceeds would be funneled to its subsidiary, Tucson Electric Power Co., to repay debt, in whole or in part, and for other general corporate purposes. UniSource said Tucson has not determined the series of debt to be repaid or repurchased, however.

"It was the closest thing we've seen to a home run in quite a while," said one participant in the deal.

Sole bookrunner Credit Suisse First Boston took the issue out at 102.1875 bid, 102.4375 offered - up from an issue price of par - while the underlying stock ended unchanged at $30. In the gray market before pricing, it was bid late Wednesday 1.5 points over with an offer at 2.5 to 3 points over.

Analysts had put the UniSource convertible 1.5% cheap at the midpoint of guidance, using a credit spread of 275 basis points over the comparable Treasury note and a stock volatility of 20%.

Calpine slides on 2005 outlook

For 2005, Calpine is forecasting total revenue of $11.8 billion, adjusted EBITDA of $1.6 billion to $1.7 billion, resulting in a GAAP diluted net loss per share of 80 cents to 90 cents. But the company also said it has a 2005 target of $1 billion in further net debt reduction, which encouraged some players, although traders said short selling predominated in the stock and Calpine paper traded lower for most of the day.

To accomplish further debt reductions, Calpine chief financial officer Bob Kelly said the company is evaluating the sale of certain projects, including its Saltend Power Plant, plus some $865 million in liquidity transaction, among other things.

Calpine aims to get its total debt down to $15 billion, hoping to achieve a lower debt to EBITDA ratio of 6 times by 2008. The California-based independent power producer ended 2004 with total debt of $17.9 billion, about 11 times the recorded $1.63 billion of EBITDA.

In addition, the company outlined a comprehensive program for 2005 that includes credit enhancement for its Calpine Energy Services unit, additional power sales contracts and reductions in plant operating costs.

Calpine plans another convertible

As for taking out the remaining $400 million outstanding on Calpine's third and last convertible preferred, the 5% High Tides that come due in August, the company said it will most likely use another convertible offering similar to its 6% issue sold last September in conjunction with a stock borrow transaction through bookrunner Deutsche Bank Securities.

"We have a program in place to address those [5% High Tides notes]. It's always been our policy to replace equity-linked products with equity-linked products," Kelly said.

"We learned a lot from the last convert [the $600 million 6% convertible due 2014].We'll just take out the High Tides using a similar product."

Redemption of the 5% High Tides is above and beyond Calpine's target of $1 billion in net debt reductions, which follows nearly $2.4 billion in debt repurchases, refinancing or redemptions in 2004.

Calpine bonds dip, but end flat

The news came as no big surprise but helped prop up the 5% issue while Calpine's other convertibles traded lower on the earnings, a sellside trader said. He pegged the 5s at 49.125 bid, 49.25 offered; on the New York Stock Exchange it shot up 0.75 point to close at 49.25 while Calpine shares fell 17 cents, or 4.96%, to end at $3.26.

Calpine's older 4.75% convertible traded off about 1.5 to 2 points following the earnings news, the sellside trader said, but bounced back along with Calpine's straight junk bonds and then settled out the day about unchanged at 75 bid, 75.5 offered.

Buyside market sources showed mixed reaction to the plan for another convert like the 6% issue, as many recalled the stock borrow portion of the equation threw a wrench in modeling the issue. Some argue the lack of a sufficient borrow has caused the bonds to trade cheaper and cheaper.

On Thursday the 6% convertible was quoted down 6 points to the 97 bid, 98 offered context.

Short interest in Calpine high

A lot of high-yield funds buy deeply discounted straight bonds and short stock against them, such as with Calpine, so a lot of stock borrow gets used up by those players. In fact, short interest in Calpine shares remains on the rise while most utility and power stocks are seeing a decline in short selling.

According to the latest data available, which is that as of Jan. 14, measuring investor sentiment by short interest in stocks, CreditSights analysts noted in a report Thursday on short interest in the utility and power sector that Calpine continues to show the largest short positions relative to total shares outstanding - a whopping 41%.

Sierra Pacific Resources Corp., another convertible name, showed the next highest short interest at 23.4% of outstanding shares. Short interest among the top 10 most shorted names in the group declined an average of 9.4% in the latest month's data, the credit analysts pointed out.

Enzon 4.5s looking attractive

Enzon Pharmaceuticals Inc.'s 4.5% convertibles "seem pretty attractive," a sellside market source said.

The issue is carrying a yield of 6.6%, and he speculated the company is likely to refinance the issue before it matures in 2008. Another sellside source quoted the convert moving lower by about 0.875 point on Thursday as the underlying stock dropped 25 cents, or 2.25%, to $10.86.

The biotech firm focuses on three areas of therapeutic treatments - oncology and hematology; transplantation and infectious diseases - and shares royalties with Big Pharma concerns like Schering-Plough Corp. A big area for the company is hepatitis, said the source pounding the table for Enzon.

"Hepatitis ain't going away, and Schering-Plough's market share has stabilized after eroding due to stiff competition from Roche over the last few years," he said, adding that there is a "potential huge market opening in China."

Enzon ended its last quarter with $70 million in cash plus $76 million in short-term investments, $63 million in marketable securities and another $27 million in other equity investments versus $400 million in debt.

Barclays likes new Hagemeyer

Barclays Capital Markets convertible analysts Luke Olsen and Haidje Rustau said the new Hagemeyer NV convertible looks to be priced at about fair value, and they recommend switching out of the existing 5.75% convert into the new 3.5% issue.

Hagemeyer on Thursday priced an upsized €120 million of seven-year subordinated convertible bonds, non-callable for four years, with a 3.5% coupon and 33% conversion premium - at the aggressive end of the indicated range of 3.5% to 4.25%, up 28% to 33%.

"We think its valuation looks at least fair value relative to the existing Hagemeyer convertible due 2009, and therefore recommend the switch for investors who prefer the longer duration," the Barclays analysts said, noting the equity risks are fairly similar between the two bonds.

The analysts noted that Hagemeyer's current debt maturity profile is skewed to the shorter end, with significant potential maturities in 2005 through 2007, before either convertible falls due. Therefore, they see the future evolution of the convertible credit spreads depends heavily on whether the company manages to further refinance itself and extend its maturities in the months ahead.

Hagemeyer open to a takeover

Dutch business products distributor Hagemeyer on Wednesday forecast a return to profit by 2006 after charges weighed on results in 2004 and signaled it was open to takeover proposals.

Chief executive Rudi de Becker said he had no contact with suitors but was not opposed to approaches for Hagemeyer, which reported a 2004 net loss of €164.1 million on the back of restructuring charges.

"No, I would not sabotage such a proposal," Becker said in a news conference. "The question is, what is best for the shareholders?"

Hagemeyer shares have recently picked up again, partly on talk of a possible bid by a consortium of private equity funds that is in the process of buying rival Rexel. U.S. equity group Clayton Dubilier & Rice, which was unsuccessful in an attempt to buy Hagemeyer during its crisis, is part of a group buying Rexel.

For 2005, Hagemeyer expects to significantly narrow its net loss after cutting losses in 2004 to about half of the 2003 loss of €318 million.

Hagemeyer is a distributor of products ranging from hard hats to spark plugs focused on markets for electrical materials and products for safety, maintenance and repair, with operations in Europe, North America and Asia-Pacific.

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