Retail paper weaker on mixed shopping figures; OMI bid up; American Equity deal emerges

By Ronda Fears

Nashville, Nov. 29 - Convertible players were eager Monday to dive into a healthy fare of post-Thanksgiving new issues. OMI Corp. put a $200 million deal on the table and the overnighter - talked to yield 3.75% to 4.25% with a 42.5% to 47.5% initial conversion premium - was bid up as much as 2.5 points over issue price in the gray market.

American Equity Investment Life Holding Co. also announced a sale, $125 million of 20-year convertible notes talked to yield 5.125% to 5.625% with a 45% to 50% initial conversion premium, for Thursday's business.

"We're thinking it should be pretty busy through the next holiday, which you might as well call year-end," said a fund manager in New York. "I just hope we see at least one more nice sized deal, but most of these deals will likely be small."

In secondary dealings, traders said post-Thanksgiving shopping reports were mixed and the general reaction was to sell retailers' paper.

"We've gone from a surge in holiday shopping Friday to tepid sales Saturday and Sunday to mediocre today [Monday]," a sellside convert trader said.

Saks, Lowe's, Best Buy lower

Headlines suggested many retailers showing decent but hardly impressive sales. A particular damper on the festivities was retail giant Wal-Mart Stores Inc. as it described sales at its discount stores for the seven days that ended Friday as "disappointing" and lowered its sales projections.

But the trader said retail converts across the sector - from electronics retailer Best Buy Co., Inc. to upscale apparel retailer Saks Inc. to home improvement goods retailer Lowe's Cos., Inc. - were all easier by about 1.5 points on Monday. Best Buy's 2.25% convert dropped to 107.25 bid with the stock closing off by $1.14, or 1.93%, to $57.78. Saks' 2% convert fell to 97 bid offered while the common slipped 25 cents, or 1.71%, to $14.39.

Gap Inc.'s convert was another big loser, but the trader noted that the issue also is beginning to feel some pressure because of speculation that it will get called by the company early in 2005. The 5.75% convert was marked down Monday to 141 bid as the stock dropped 64 cents, or 2.78%, to $22.40.

"Friday overall was strong, but Saturday was weak and disappointing," said Michael P. Niemira, chief economist at International Council of Shopping Centers and an advisor to ShopperTrak RCT, which measures store traffic for clients. Yet, he said he is still optimistic it will be a better shopping season.

Toys 'R' Us holders take profits

Squeamishness about the holiday shopping season sparked some profit taking in some retail issues like the Toys 'R' Us Inc. mandatory, a buyside trader said, following a sharp run-up in the issue since August when the company began exploring a re-definition process which could include splitting its toys and baby retail group.

"A strong season for Toys 'R' Us may add to its value and a weak season may subtract from it. There's also the dot-com fiasco, which may be another division that may go bye-bye after this season is over with," the trader said.

Weakness at Wal-Mart - a thorn in Toys 'R' Us' side for some time - is of particular concern, he added, "so selling out now seems to be the smart thing to do." Concern about bankruptcy at Toys 'R' Us has somewhat cooled since summer, he said, but it still faces "a losing battle" with discounters like Wal-Mart.

Toys 'R' Us paper has richened recently, he added, on tightening in the credit. Before Thanksgiving, he said, the 6.25% convert due 2006 was at about 50.5, compared to the low 40s in early summer. On Monday, the mandatory dropped by about a quarter-point, he said, to 50.125 bid.

Toys 'R' Us stock closed Monday down by 16 cents, or 0.82%, to $19.39.

Collegiate Pacific at 114.75

With year-end approaching, many fund managers are or will be looking to reorganize their portfolios anyway, and a sellside market source suggested Monday that several of the recent small convertible issues like Collegiate Pacific Inc. are worth a look.

"Look at the Collegiate Pacific deal. It is acting nicely. The stock has been heading upward and in fact closed at its 52-week high. Great looking bond too," he said.

Last Tuesday, the Dallas-based catalog retailer of sports uniforms and equipment sold $40 million of five-year convertibles to yield 5.75% with a 10% initial conversion premium. On Wednesday, the issue had run up to 109 bid, 110 offered with the stock at $13.40 and on Monday were quoted ending at 114.75 bid, 115.75 as the stock gained 33 cents, or 2.32%, to close at $14.58.

"It is a growth story. It's an improving credit story, too," the market source said, noting that Collegiate's 2004 earnings per share were 25 cents and the EPS estimate for 2005 is 60 to 65 cents and for 2006, 85 to 90 cents.

A source familiar with the deal said most of the buyers for the convert initially were outright but since then the hedge guys are getting involved as the stock borrow opened up.

"I know people think 5.75%, up 10% looks stupid but the management was very progressive and not looking to squeeze the last drop out of the turnip," the source said. "I guess they could have done 5.75%, up 20% but now investors are more happy and next time they come to market they will have investors that will be more happy to invest freely. Why be greedy, is what I say. Everyone is happy with the deal."

Lion's Gate, K2 pique interest

Lots of the smaller deals pay big, the sellside market source said.

"Seems to me these smaller issues are names people should really look at: LGF [Lion's Gate Entertainment Corp.], KTO [K2 Inc.], etc., all done last November and last I looked LGF was 201-202 and KTO was 149 -150. I think the people that do the work can really make a killing," the analyst said. "Most people are lazy and just want to buy liquid issues that everyone else is buying. Where is the edge there?"

Lion's Gate is a Santa Monica, Calif.-based movie production company. The $70 million issue of 4.375% convertibles due 2010, issued in November 2003 with a 29.19% initial conversion premium, was quoted Monday at 204.25 with the stock down 20 cents, or 1.84%, to close at $10.67.

K2 is a Carlsbad, Calif.-based sporting goods manufacturer. The K2 5% convertible due 2010, a $75 million issue sold with an initial conversion premium of 30%, was quoted at Monday's close at 147.375. K2 shares ended up a nickel, or 0.3%, at $16.70.

Traders noted that both issues are rarely seen - a common problem with regard to smaller issues.

"Yes, it is tough to find them, but I think patience will be rewarded," the sellside market source said. "You just buy a little at a time. You're not buying bonds or selling bonds for ¼ or 1/8, you're buying them because you think you can make points."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.