Many players skip out early for long weekend; expectations high for healthy pipeline of new deals

By Ronda Fears

Nashville, April 17 - A lot of players skipped out early Thursday to get a jump on the extended weekend, and traders said it didn't make much difference in an already thin convertible market.

"Everyone dashed out as early as they could. We had a lot of people leave around 2 o'clock," said a convertible trader at one of the big desks.

As for moves in convertibles, there was little different Thursday from the rest of the week - some of the junkier names continued to firm up while most of the recent new deals were still languishing under par, aside from The Walt Disney Co. and Photronics Inc.

Disney's new 2.125% was quoted up 0.5 point to 102.25 bid, 102.5 offered. The underlying stock closed up 41c, or 2.28%, to $18.40.

The new Photronics 2.25% was quoted up 1.25 points to 107.5 bid, 108 offered. The common shares ended up 26c, or 2.23%, to $11.90.

Hilton Hotels Corp.'s new issue also ticked up. The new 3.375% convert was quoted up 0.25 point to 97.75 bid, 98 offered while the stock closed up 6c, or 0.48%, to $12.59.

Given the extremely slow week, particularly with regard to new issues, many market participants are anticipating a surge is on its way - most likely after the earnings season is over.

"We are hearing there is a very healthy shadow calendar out there, waiting for just the right day to jump in," said a hedge fund manager in New York that is a big player in new issues.

"As far as potential issuers, what we have is pure speculation, but we've heard Rite Aid, although they just did a junk bond deal, I believe, and Vivendi Universal. We've also heard, generically, that there are probably a couple of biotech names in the shadows and maybe a big industrial."

Just Wednesday, Rite Aid Corp. sold an upsized $360 million of seven-year notes. The 8.125% notes were issued at 98.688 to yield 8.375%.

Rite Aid also is in the process of negotiating a new $2 billion of senior secured bank credit facilities with Citigroup and JPMorgan. Prospect News has heard the $850 million revolver talked at Libor plus 350 basis points and the $1.15 billion term loan at Libor plus 375 bps. Closing on the bank facilities is anticipated next week.

General Electric Co. filed a $5 billion shelf registration Monday that seemed to make room for a convertible, and it piqued some speculation, but nothing concrete has really formed from that development.

Bankers that handle convertibles also have been talking about a "heavy pipeline building" but timing is still the wildcard.

Buyside sources also are feeling a bit more optimistic insofar as they see terms easing off the aggressive path seen lately. Most expect the competitive environment for fees to keep the bankers aggressive, as they seek to ameliorate relationships with issuers, but they take comfort in the recent discount re-pricing of a few deals.

"If the IPO market would pick up, and there's a good chance of that real soon if the stock market really pops, then the pressure will ease for the capital market guys in converts to generate fees," said a convertible fund manager in the Boston area.

"That will help with the terms we've been seeing, I think. Outside of that, we just have to continue to pass on most of these new deals. Eventually that has an impact too, I suppose, if enough big players do it."

Indeed, the discount re-pricing is the result of a buyers revolt, as the banks forfeit some portion of the underwriting fees in order to place the issue with accounts.

There are some convertible market participants, also, who believe that some of the major underwriters have a hefty portion of some of the new convertible issues sitting in their own inventories.

The latter has not been confirmed, or even discussed, by any of the major banks, however.

Meanwhile, market participants were happy to see the week end without any blowups, particularly since it was filled with so many earnings reports.

"No matter what you were sitting on, outside of most of the plate of new deals, you probably did better this week," said a hedge fund manager in New York.

Michael Revy, who co-manages a convertible hedge fund for Froley Revy and also an outright fund for Nuveen Investments, said the market tone in general seems to be better these days, with the war in Iraq winding down and there having been no major disasters recently among convertible names.

"Of course there are always credit worries - on an historical basis, spreads are still wide - but I don't think we're going back to the blown out spreads," Revy said.

"So, yes, I think we're feeling better."

Even with some pressure from call threats in the high-grade portion of the market, traders noted that Carnival Corp. firmed sharply this week, despite some less-than-enthusiastic comments from the rating agencies.

"Carnival tightened something like 100 basis points over the course of this week in the face of both Moody's and S&P downgrading the credit," said a dealer.

"We're not very bullish on this name anyway because the Princess merger is going to bump the credit metrics out of line and certainly not at these levels."

The Carnival 2% convertibles due 2021 were quoted Thursday closing out higher by 1 point to 107.625 bid, 107.875 offered. Carnival shares ended up $1, or 3.84%, to $27.01.

Moody's cut Carnival's debt ratings on Monday and S&P followed suit on Wednesday, both expressing some concern about the P&O Princess plc merger - which ended a vigorous rivalry with Royal Caribbean Cruises Ltd. for the Princess wedding - particularly since economic conditions and other pressures, like from the war and SARS, have curtailed leisure activity.

Sellside analysts also have been a bit skeptical on Carnival.

"We are surprised at S&P's stable outlook on Carnival's debt," said Wachovia Securities, inc. convertible analyst Sri Nadesan in a report Thursday.

"We believe that over the next two years the new Carnival's debt levels will rise substantially from the $5.9 billion at Feb. 28, 2003. This is largely because of the substantial capex in 2003 and 2004.

"Capex will likely be $2.8 billion in 2003 and about $3.0 billion in 2004, as the company accepts seven new ships in each of these years.

"In addition, the new company will have substantial dividend obligations; last year, Carnival and P&O Princess paid about $394 million in dividends."

Total debt to EBITDA, which stood at 2.3x for Carnival on a stand-alone basis on Feb. 28, will be at 2.9x for the new company, he said. And, he added, this ratio will likely deteriorate to the low 3x level by the end of 2003 and further to the mid to high 3x level by the end of 2004.

"Although the new Carnival has a lot of financial flexibility because of its size, industry position and substantial profitability (pro forma EBITDA is above $2.0 billion), we think Carnival must pay attention to its balance sheet during the merger process," Nadesan said.

"The company needs to show substantial cost reductions to help keep additional debt at manageable levels."

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