America West intrigues traders; CompuCredit pitches overnighter; JDS Uniphase off; REITs mixed

By Ronda Fears

Nashville, May 23 - Overall, convertible traders said the market was still feeling a bit firmer with decent bids rolling in and, if the seams can hold together through the next couple of weeks, some think the worst of the 2005 retrenchment will be over.

As for specifics Monday, it was a mixed bag. America West Holdings Corp.'s news from last week to acquire bankrupt US Airways Corp. continued to fuel interest, though little trading action, in airline paper. But not all technology issues participated in the surge in tech stocks and traders said one decliner, JDS Uniphase Corp., was likely to see a backlash Tuesday from an announced acquisition after the closing bell.

Real estate investment trust issues were active, seemingly with players switching their choices in that group as Vornado Realty Trust moved up while Simon Property Group Inc. tripped lower.

The 3.875% convertible of New York-based Vornado, one prong in the trio of investment vehicles acquiring Toys "R" Us Inc., was originally reoffered at 97 when it came to market a couple of months ago, but has climbed almost steadily since then. It traded at 102.75 on Monday with the underlying stock at $81. Vornado shares ended Monday at $81.25, up 45 cents on the day, or 0.56%.

Exide Technologies paper continued to retreat as the stock dropped 11% on a reported lower equity stake in the company by investment guru George Soros via his Soros Fund Management. The floater convertible was quoted off 1.5 points to 38.25 bid, 40.25 offered and 10.5% junk bonds due 2013 down 4 points to 68.5 bid, 69.5 offered. The battery maker, which emerged from bankruptcy in May 2004, took a dive last week after warning that it expects to be in violation its minimum EBITDA and leverage covenants in its $365 million senior credit facility.

CompuCredit deal afloat

Atlanta-based CompuCredit Corp. slipped into the overnight market Monday with $250 million of 20-year convertible notes talked with a 3.125% to 3.625% coupon and 30% to 35% initial conversion premium, effectively to be sold on swap as the company has earmarked up to $100 million of proceeds to concurrently buyback stock.

CompuCredit, described as a company that issues credit cards to consumers with less than perfect financial histories, said that after the stock buyback it would use proceeds to fund acquisitions and/or for general corporate and working capital purposes. A $50 million greenshoe also is available.

CompuCredit shares closed Monday up 19 cents, or 0.57%, at $33.40. In after-hours trading, the stock was down 70 cents, or 2.1%.

Reactions to the deal from were mixed with many just happy to see a deal on the table while others thought the terms were far too tight to fly.

"Nice to see some size again! It's only a matter of time before new issues resume," said one buysider.

A sellsider with similar sentiment said, "Hopefully, this is a beginning to a more steady flow."

Deal juxtaposed to TOP

But the terms seem unlikely to invoke much enthusiasm, a hedge fund manager said, in light of the TOP Tankers Inc. deal that was pulled last week after a brutal two weeks of haggling over terms with potential buyers.

"Have these people been living in a cave? This will never do," the manager said. "TOP Tankers flopped and, at the last there, they were going to pony up 6.75%."

Athens-based oil tanker TOP Tankers finally caved into market pressures last week, pulling the plug on its deal amid extremely tough market conditions underscored by potential buyers pushing for more incentives. After reducing it to $225 million from $300 million, the company gave up on pricing the deal even through it had been through three rounds of sweetening. At the end, indicative terms on the issue put the dividend to 6.75% plus adding an annual cash payment of 1.08% in the form of a common stock dividend pass-through, with an initial conversion premium of 20%. Original price talk on May 3 put the dividend at 5.625% to 5.875% and premium at 32.5% to 37.5%.

Another buyside source said it was not entirely fair to compare the CompuCredit deal with TOP Tanker, as he saw the biggest barrier to getting the TOP Tanker deal done was the perception that Cantor Fitzgerald & Co. was not willing to support a secondary market for it.

"I think a lot of people would have bought TOPT, even at the widest of the original price talk, if they had a feeling that there would be a market for it on down the road," another hedge fund manager said.

CompuCredit credit queried

Where to peg the CompuCredit credit was a particularly scary point for several buyside sources looking at the deal, too.

A sellside analyst, acknowledging "I haven't really done much work on this one," said it seemed Providian Financial Corp. was a reasonable comparison and their credit default swaps were recently in the area of 300 basis points over Libor.

Thus, the analyst said it seemed reasonable to model the CompuCredit deal using a credit spread of 325 bps to 375 bps over Treasuries. Some onlookers thought that seemed a bit tight, given an overall widening trend in credits recently. Some also saw CompuCredit as a triple-C credit versus Providian's B/B2 standings.

Merrill Lynch reported Monday that its high yield strategy team observed that U.S. and European high-yield markets saw spreads widen early last week; then narrow as the week progressed. Triple-C credits lost ground on net, single Bs broke even and double-Bs eked by with a net gain, the Merrill strategists found. In broad terms, the analysts said spreads ended the week at about 440 bps over Treasuries.

JDS Uniphase to buy Acterna

Fiber optic telecom equipment maker JDS Uniphase Corp. closed slightly lower Monday but news after the close may move it Tuesday. After the bell rang, JDS Uniphase announced that it was buying privately held Acterna Inc. of Germantown, Md., which makes test equipment for telecom providers and cable network vendors, for $760 million.

JDS Uniphase's zero-coupon convertible traded at 74.25 with the underlying stock at $1.58. The shares ended off 2 cents, or 1.27%, at $1.55 and in after-hours trading was seen up a penny, or 0.65%.

San Jose, Calif., based JDS Uniphase said the 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.

The acquisition, JDS Uniphase said in a prepared statement, will accelerate its path to profitability. The combined companies will have annual sales exceeding $1 billion and JDS Uniphase said it expects the size of its communications addressable market to double to over $5 billion by 2010.

In announcing the transaction, JDS Uniphase quoted Galen Wampler, president of Prime Data, an industry research firm as saying, "Acterna has a leading share in the communications T&M market. The industry addressed by Acterna represents a $2.6 billion market expected to grow at a 5 to 10% compounded annual growth rate over the next five years."

In the quarter ended March 31, JDS reported a loss of $38.6 million, or 3 cents a share, up from $7.3 million or 1 cent a share in the year-earlier period. Sales rose 3% to $166.3 million.

McKesson issue eases on call

McKesson Corp. announced Monday that it will redeem all of its $206 million 5% convertible trust preferreds and the issue eased by about a half-point to 52.85 bid, 53 offered, sellside sources said.

The call was no surprise really, but the timing was a bit off it seems. A desk analyst noted that the issue had been callable for some time, but a trader also pointed out that since it had not been called some holders had begun to think the San Francisco medical products distributor had no plans to call the issue.

In any event, "it had a nice run and there was a nice yield," despite "some ugliness to the story," because of some bad news in the medical industry and inquiries by federal regulators the analyst said.

McKesson said it would pay $50.50 per security plus accrued distributions up to but excluding the June 22 redemption date. On or before June 21, the preferreds may be converted into common stock at $37.26 per security. McKesson shares closed Monday up 45 cents, or 1.16%, at $39.39.

America West 7.5s at large

America West's acquisition of bankrupt US Airways continued to fuel interest in airline convertibles, although actual trading activity was light as traders were in search of a 7.5% convertible note due 2009 issued by America West in a private placement.

The merger will trigger the change-of-control put on America West's cash-to-zero convertible, which pays 2.4912% in cash on the discounted issue price for a 7.25% yield to put, but the 7.5% note is expected to continue in play through maturity unless otherwise disposed of by the airline, a sellside source said.

"They are tradable if you can find them. We were trying to get something going in these, but you can't find them," he said, noting, "nobody knows where to bid them."

Other airline issues also were quiet Monday, with reactions to the America West/US Airways merger still mixed.

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