Charter 2005s gain, 2006s drop; Alliant deal trades +0.25 in gray; Delta dives, other air issues trail

By Ronda Fears

Nashville, Aug. 9 - Charter Communications Inc.'s shorter-dated 5.75% convertibles gained slightly while the longer dated 4.75% converts dropped after the company reported earnings Monday, amid concerns about cash levels, acquisitions talk and no clear view of whether the huge capital infusion abuzz last week will come to fruition.

Delta Air Lines Inc.'s convertibles plunged 2 to 3 points Monday as the carrier used what was perceived as stronger language suggesting a bankruptcy if costs - made worse by skyrocketing fuel prices - are not checked in short order.

"There was a lot of negative blather in the market today," said a sellside market source, referring specifically to the Delta situation. But traders also remarked that it was a "dismal" session what with the Federal Reserve due to meet and crude oil hitting yet another record amid terrorism scares in the Iraqi oilfields and trouble with getting OAO Yukos Oil Ltd.'s supplies on the market.

Still, before the open Alliant Techsystems Inc. launched $180 million of 20-year convertible notes talked to yield 2.75% to 3.25% with a 35% to 40% initial conversion premium for a one-day marketing effort and priced the deal at the middle of guidance with a 3% coupon, up 37.5%.

There was not a lot of stir in the market over the deal, which sent Alliant Tech's existing 1.75% converts down by 2.5 points to par on short-selling in the stock, but the new issue traded a half-point over issue price in the gray market. The advanced weapon and space systems concern's shares dropped $2.14, or 3.57%, to $57.79.

Otherwise, new paper was "a little soft," as one buyside trader put it. Century Aluminum was a standout gainer, however, with its new 1.7% convertible adding a point to 100.875 bid, 101.375 offered as the company launched $250 million of junk notes, which are talked in the 7.5% to 7.75% yield area.

XO Communications Inc., an issue familiar to convertible players, also announced Monday that it has sold $200 million of 5.5-year mandatory class A convertible preferred shares with a 6.0% dividend a 27.6% initial conversion premium in a private placement. Carl C. Icahn affiliates, which currently own 50% of XO common stock, bought $190 million of the issue. Amalgamated Gadget LP, which presently holds 9.4% of XO common stock, bought the remaining $10 million.

XO shares ended Monday up 6 cents, or 1.74%, to $3.75.

Charter 5.75s edge up to 89 bid

On Charter's renewed pledge to do something further about its outstanding convertibles, the 5.75% due 2005 gained to 89 bid, 90 offered while the 4.75% due 2006 dropped to 85.75 bid, 86.25 offered. Concerns about the cable company's cash levels were a drag on the issues, along with the parallel being drawn to an exchange of portions of both those issues last year at 85.

The 5.75s of 2005 were up a half point before easing back to the 89 bid area, a gain of 0.25 point from Friday. The 4.75s of 2006 were down by 1.75 points before easing back to 85.75 bid, which was off 1.25 points from Friday.

Charter's straight junk bonds were little changed after the earnings data and conference call with the 8.625s due 2009 at 75.5.

On the call, Charter management recognized that leverage is still an issue to wrestle with, and the 2005 converts "must be addressed," although no details were provided other that to say that one option would be a debt-for-debt exchange similar to what was done in 2003.

"It's certainly something that we continue to consider," said Derek Chang, executive vice president of finance, when asked on the call if another exchange for the 5.75% convertibles last year was possible.

"I know there's a lot of desire from all of you for us to get moving on this particular front and we understand that. There's certainly a desire on our own part to do so. So we are gonna be moving forward, hopefully."

In September, Charter exchanged a total of $1.9 billion of senior notes and convertibles - from the 4.75% and 5.75% issues - for new 10.25% notes due 2010. Charter took out $609 million of the convertible issues together, or 44% of its convertible debt, at a price of around 85.

Charter's cash levels a concern

At June 30, Charter said it had $18.4 billion of debt with $124 million cash on hand, plus net availability of $977 million under the Charter Operating credit facility.

"They talked about it being a weak quarter seasonally, but the numbers looked like crap. They have negative net cash flow and a paltry $124 million of cash. We're kind of nervous about the situation," said a buyside trader at a hedge fund in New York.

"If they [the converts] go past 90 we probably will sell, I just can't see Charter paying more than that, not even that much really. They don't really want to borrow any more and it's not clear to me where they are going to get another $600 to $750 million to take out the rest of these converts."

For second quarter, Charter reported revenues rose to $1.239 billion from $1.168 billion in second quarter 2003 and up from $1.217 billion in first quarter. Charter's net loss climbed to $416 million, or $1.39a share, from a net loss of $38 million, or 13 cents a share, a year before.

Charter reported negative free cash flow of $60 million for the second quarter of 2004 compared to pro forma free cash flow of $42 million and actual free cash flow of $56 million for the second quarter of 2003.

There were rumors in the markets last week that Charter chairman Paul Allen and/or some big-hitter Charter investors were preparing to inject $1.5 billion into the company, but that has not transpired or been confirmed by the company.

Delta converts dive to high 30s

As Delta executives again used bankruptcy language in its financial filing with the Securities and Exchange Commission, and oil prices soared, the convertibles were sold off and both issues dropped into the low 30s.

Delta's 8% converts dropped about 1.75 points to 37 bid, 38 offered and the 2.875% converts fell around 3.5 points to 38.75 bid, 39.75 offered. Delta's straight junk bonds fell 6 points, with the 7.7% due 2005 at 46 bid, 48 offered.

The stock lost 13 cents on the day, or 3.16%, to $3.98.

"If we cannot make substantial progress in the near term toward achieving a competitive cost structure" a bankruptcy filing will be necessary, Delta said in its quarterly SEC filing Monday.

Delta first acknowledged the possibility of a bankruptcy in its first quarter SEC filing, but now is more grave because of its cash drain and the ceaseless rise in fuel costs, with the negotiations for pilot wage concessions as a backdrop.

"The [Delta] pilots couldn't bail them out," said a sellside convert trader. "They will probably take the blame, or most of it, but fuels prices are the big whammy."

Delta also expressed concern about its cash position, saying its cash reserves dropped to $2 billion at midyear from $2.7 billion at the beginning of the year. Thus, with soaring fuel prices expected to drastically trim cash flow projections, Delta said it cannot pay certain obligations with cash flow from operations.

"A lot of the analysts think this [cash flow and cash reserves] language is just preparing the market for a bankruptcy filing," the sellside trader said.

The airline projects 2004 fuel costs will be about $680 million higher than in 2003.

Delta sellers leery of fuel costs

One convertible player who sold out of a Delta position said that the two top concerns were fuel costs and terrorism risk, which the former having the greatest weight.

"The fuel issue is critical," said the source at a hedge fund in Connecticut. "We just decided to sell out at a little loss, but it wasn't that big a deal. It [bankruptcy] is getting there. Delta is a goner, or close to being a goner."

Rather, he said, his firm decided to buy fuel futures and credit default swaps in airline names.

Another former Delta convertible holder noted late-day activity in the stock may be signaling a big move Tuesday.

"There was almost a million shares traded right at the close. I'm not sure if it was a big buyer or a big seller, but when that happens there will almost certainly be a gap up or down at the open based on some news," he said. "My money says it will be a gap down only because I don't think the pilots would have had a chance to respond to management quite yet."

While talks between Delta management and union pilots have been slow progressing, the company is hoping to hammer out a restructuring package that includes wage concession by the end of August. The airline wants $1.02 billion in total concessions while the pilots have offered to give up between $655 million and $705 million.

Oil converts too rich to play

With oil prices soaring, it is difficult to play any of the oilpatch names in convertibles because those issues were pricey even before oil spiked, players said.

"Convertible oil names have gotten expensive," said a hedge fund analyst. "They are pricey on a technical basis if you're on a hedge. There's also a lot of dividend risk in oil names and most of those converts are older and don't have dividend protection."

For example, Amerada Hess Corp.'s 7% mandatory due 2006 gained 1.39 point to 73 on Monday on the New York Stock Exchange on low volume, while the stock rose $1.13, or 1.45%, to $79.25.

Crude oil futures climbed to $44.98 a barrel, before the September contract settled at $44.84, up 89 cents, on the New York Mercantile Exchange.

A convertible dealer at a sellside shop said there is considerable skittishness on the part of investors to dip into the oil converts because most are skeptical that oil prices can stay so high for very much longer.

"Oil can't go any higher, there's too much supply in the market," the trader said. "They are talking about $60 oil but the price of oil has to come down, soon."

Energy players look to coal

Coal is one of the best alternatives to crude oil, perhaps as a fuel source, but also from a convertible investment standpoint, the hedge fund analyst said.

"We've been playing energy in coal," he said, specifically mentioning Massey Energy Co.

"I think that stock [Massey] will go up another $10 in the next 12 months. We have that convert on an outright bias."

Massey's newest convert, the 2.25% notes due 2024 were up about a quarter-point, a sellside trader said, to 104.625 bid, 105.625 offered on Monday with the stock up a dime, or 0.4%, to $25.34.

The Richmond, Va.-based coal mining concern also has a 4.75% convertible deep in the money. It is trading about 25 to 30 points over parity at 157, the trader said.

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