HCC prices drive-by deal, closes at par; Calpine gains on exchange speculation

By Ronda Fears

Nashville, March 25 - In a moderately busy session, it was a mixed bag with the convertible market on whole ending rather unchanged as forces like tighter spreads for junk paper and a rebound in stocks seemed to "stabilize the market's mood," as one dealer put it.

He attributed some calming effect to Moody's teleconference Monday in which credit analysts said the ratings of most U.S. corporations are unlikely to be pressured by the war in Iraq provided there is a relatively expedient resolution to the conflict.

"Of course the word 'expedient,' and that was Moody's word, is subjective, but I think most everyone is fairly confident that the U.S. and British forces will prevail and rather quickly, like within a month at least," the dealer said.

Little in the way of staking out new positions by convertible investors is going on, though. Most of the activity is what is referred to as tweaking portfolios, hedges and the like.

Profit-taking in areas like tech and biotech was noted by some players

There is "lots of volatility, especially in tech names," said Barry Nelson, who manages a convertible fund at Advest Capital.

"Yesterday we were buying some techs that we like. Today we've taken some profits in some techs that appear less attractive."

Dealers said financials weakened on a Standard & Poor's report on the impact of the war to that group but the S&P note came after HCC Insurance Holding Inc.'s deal.

Virtually everything on Tuesday came after the HCC deal, though.

HCC returned to the convertible market to tap investors for $125 million in a deal that launched and priced before the opening bell. It traded 0.5 points over issue price in the gray market before pricing, and closed at around par.

Airborne Inc. continued to climb as an agreement to sell its ground operations to Deutsche Post AG was struck. The convert added another 2 points or so, traders said.

A couple of power names were also higher - Calpine Corp., Mirant Corp. and AES Corp.

Calpine gained on buzz that it might soon be making an exchange offer for its convertible bonds, although there has been no such indication from the company.

Mirant was moving higher, one trader said, as a decision on its California refund case could come as early as Wednesday and "with this behind them, the cloud removed, some buyers stepped in because they like the name on a fundamental basis."

AES got a boost from an asset sale.

HCC's deal sold without a hitch, sources said, even though the marketing period was a brief hour before the opening bell.

In a very swift deal, HCC sold the 20-year convertibles at par to yield 1.3% with a 30% initial conversion premium via sole lead manager Salomon Smith Barney.

It was launched at 8:30 a.m. ET Tuesday with the books closing at 9:30 a.m. ET, so as to price off HCC's stock price at the close Monday.

Terms were decided from the outset, with no guidance ranges for the yield or premium.

"It was a quick deal. We marketed for an hour," said a source at one of the managing firms.

"It was real easy to get it done," he said, partly because of the small size.

Being straightforward, or sans guidance, helped speed up the marketing process, one salesman said, as it "either was something they were going to get involved in, or not."

It being registered with an investment-grade rating anticipated also helped, because sellside analysts at firms not involved with the deal said it was fairly rich.

Wachovia Securities, Inc. convertible analyst Kimberlee Brody put it 5.26% rich, using a credit spread of 175 basis points over Treasuries and 23% stock volatility.

Deutsche Bank Securities Inc. put it 0.3% rich, using a spread of 125 bps over Libor and 30% volatility.

Still, in the hour the deal traded in the gray market before regular trading hours the issue traded 0.5 point over issue price.

Out of the gate, dealers said the new HCC convertibles traded down to 99.25 but closed at about par. HCC's old 2% due 2021 dropped 2.5 points on the day to 106.75 bid, 107.75 asked.

HCC shares ended off 82c, or 3%, to $25.31.

Convertible participants are expecting a couple more deals this week and there's considerable buzz about what companies those might involve, but nothing has really solidified in the way of a name.

One interesting bit of speculation, from a convertible origination official at a very busy shop, was about an issuer from the managed care sector. It could prove interesting given the events at HealthSouth over the past week, if for no other reason.

"I think once the war's over, or at least the markets calm down in the face of that, we'll see quite a lot more companies bring deals to market," he said.

There is a lot of refinancing needs, he added, especially with regard to convertibles with calls coming up shortly.

"Healthcare would be a bit of a surprise, given general market weakness in healthcare," said Nelson.

"I supposed HRC is psychologically negative, which suggests a buying opportunity to the extent that other healthcare securities are affected. At Advent Capital, we have avoided every headline-making scandal thus far. We didn't even own the biotech that was made famous by Martha Stewart [ImClone Systems Inc.]."

Speaking of the HealthSouth scandal, the latest turn of events was no huge surprise.

Market makers began Tuesday independently making a market for HealthSouth shares in the over-the-counter bulletin board system under the symbol HLSH. Meanwhile, the New York Stock Exchange filed a request with the Securities and Exchange Commission to delist the stock.

HealthSouth shares closed at 11c after trading in a range of 11c to 60c over the course of the session.

The HealthSouth 3.25% converts ended about 1 point lower at 18.5 bid, 19.5 asked.

"They traded up into the low 20s and then came back," said Michael Vaughn, head convertible trader at CRT Capital Group LLC.

"They did a round trip and are now back even with the other subordinated pari passu bonds [the 10.75% due 2008]."

After putting most issues such as alleged round trip energy trades and price gouging to rest, which stemmed from the California electricity crisis in 2000 and 2001, Calpine is now seen as likely to make an exchange offer for its convertible bonds, traders said.

"I don't know that anyone has anything firm on this, but there's a widely held opinion that there will be an exchange offer for these converts," said a convertible trader.

"The thinking behind this is that they will be successful in the bank negotiations, get to roll over the bank debt and refinance the convert with an exchange or take out these converts with some sort of refinancing package if they get the bank support that's anticipated."

Calpine has a $1 billion bank line maturing in May.

Earlier this month, an SEC review of Calpine's financial treatment of two power deals passed muster, without any restatements, and the company has renegotiated several power contracts in California. The company has also sold assets in an effort to bolster liquidity, although it has reduced its 2003 earnings outlook.

Calpine's 4% convertibles due 2006 were said to be about 2 points higher on the day, closing at 64 bid, 65 asked. The underlying stock ended up 19c, or 6%, to $3.30.

A peer independent power producer, AES, also got a lift as buyers bid up its convertibles on the news of an asset sale.

AES' 4.5% due 2005 were quoted up 6 points to 67 bid, 69 asked. The stock closed up 40c, or 12.20%, to $3.68.

On Wednesday, the Federal Energy Regulatory Commission is set to issue three decisions on cases in which California is demanding $9 billion in refunds for electricity it bought during the power crisis.

One involves Mirant, for $86 million, and its converts were up slightly, traders said, on the hope that the troublesome issue could "go away, at a fairly reasonable price."

Mirant's 2.5% and 5.75% converts were both quoted higher.

XM Satellite Radio Holdings Inc. shares rose Tuesday due to a bullish study suggesting satellite radio subscriber growth is growing faster than expected, but the converts were described as flat.

XM Satellite's convertible bonds seem to have hit a plateau, traders said, as the stock continues to rise. The 7.75% due 2006 was quoted 35 points over parity on the bid side and 37 points over parity on the offer side, or about 85 bid, 87 offered, with the stock ending up 74c, or 14%, to $6.05.

There had been a strong rally in the XM Satellite converts early this year, but traders said investors have now taken a "wait and see" approach to its situation, looking for results.

XM Satellite reports earnings Thursday and has a conference call scheduled that day.

Giving rise to the shares Tuesday, aside from the anticipated earnings, was a report released on PRNewswire by SkyWaves Research Report, of Ann Arbor, Mich.

"The stock continues to rise but the bonds continue to be in the neighborhood of 35/37 points over [parity]," said a convertible dealer at a boutique.

"The stock was up today because of this obscure, rather weird, report out there, but I think the bonds may have hit a high spot until there's a clearer picture, maybe. Maybe we see a slew of buyers right before the earnings. That could happen."

SkyWaves Research Report described itself in the press release as a quarterly satellite radio industry review, saying it was issuing its April 2003 complete report of the Satellite Digital Audio Radio Services industry on Tuesday.

The firm said it was an independent, research-only organization and provides no investment banking services. It said its owners and staffers may hold stock and/or bond positions in the companies it covers but no principal of SkyWaves is an officer, director or owns more than 5% of any publicly listed company.

SkyWaves forecast XM Satellite's total subscriptions at the end of the first quarter 2003 at 490,000 to 500,000 and sees year-end 2003 subscriber totals of 1.24 million.

XM Satellite in January said it had more than 360,000 total users at the end of 2002, and sees 1 million by the end of 2003. Wall Street Analysts had previously projected XM Satellite's year-end total at around 975,000.

In addition, SkyWaves Research Report forecast significantly lower XM Satellite subscriber acquisition costs throughout 2003, beginning in the first quarter.

SkyWaves also discusses Sirius Satellite Inc. in the report, but virtually all that company's converts - the old CD Radio Inc. converts - have been exchanged.

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