Sybase slightly over par in gray market; Saks up on Circuit City buyout news; Amkor, Primus up

By Ronda Fears

Nashville, Feb. 15 - Looking for "the trade" in convertibles has become a delicate balance of timing related to events - directed more toward credit events rather than the mostly stock events of mergers - and, thus, a waiting game. Meanwhile, dealers say they are staying busy, although admittedly in more of a "paper shuffle" unrelated to any buying or selling strategy.

The capital structure trade coming to convertibles, borne largely out of the lack of opportunity in distressed paper as that market tightened last year, has stirred a fair amount of business, but traders say it has not been the hoped for panacea that would boost returns in convertibles.

"As for the capital structure trade, what makes that interesting is an event in the credit, which has not come about because of low interest rates - which are just grinding slowly higher - low volatility and spreads still tightening," said the head convertible trader at a sellside shop.

"There are a lot of folks talking about the cap structure trade, and a lot of folks are trying to do it. But we're not there yet" in terms of finding a great deal of opportunity to make money.

"Yet" is a key phrase, he added, in that any uptick in default rates would incredibly increase opportunity in the capital structure trade. And he expects that to happen as the typical pattern seen in the markets following a surge in issuance, such as the recent record level of new deals in the high-yield market.

Meanwhile, perhaps as much due to the maturity of the convertible market as anything else, traders said "the trade" is evermore the result of a name-by-name scouring of the convertible universe.

Sybase bid 0.5 point over par

Sybase Inc.'s $400 million new deal - talked with a 1.75% to 2.0% coupon and 32.5% to 37.5% initial conversion premium, and being sold on swap - was seen in the gray market before pricing as high as 0.75 point over issue price. It ended a bit softer, though, with a bid of 0.5 point over and offer at 0.875 point over.

A source on the buyside, who was not planning to participate in the deal, said he was watching the Sybase pricing along with the rest of the market for any sign of capitulation. But, he admitted that he's not very hopeful, "because at 1.875%, up 35 it doesn't even look close."

Sybase's competition is "brutal," he said, so the company seems "too risky for my taste." Also, he considers the convertible sale "as a last resort to bail this company out of deep water." While the company posted better-than-expected results in the latest quarter, the profit level was still 36% below year-before levels amid a major restructuring, he said.

The producer of wireless software for mobile and Wi-Fi technologies said that, after using up to $125 million of proceeds to buy back stock from short-selling note buyers, it would use proceeds for working capital and general corporate purposes, including acquisitions. Sybase, which is also a Linux server platform play, saw its shares close Tuesday off 77 cents, or 3.96%, at $18.68.

Saks up on Circuit City news

Saks Inc. has gyrated on speculation that it will separate its upscale department stores from the more moderately priced department stores and Tuesday convertible traders were seeing buyers on renewed hope that there might be acquirers for retail companies after Circuit City Stores Inc. announced a private investment firm had made it a $3.25 billion acquisition offer.

Saks' 2% convert was quoted up 1.5 points at 101.5 bid, 102 offered Tuesday, with the stock gaining 42 cents, or 2.71%, to $15.89 amid heavy volume.

The Saks convert initially gained on the news last week of a possible split as investors cheered the move as a means to lop off the less profitable upscale stores amid an ever-increasing competitive pricing climate in apparel sales. Then, as the market digested the news, the Saks convert eased as low as 98 in ensuing sessions due to concern about where the debt would end up in the event of a split-up.

Boston investment firm Highfields Capital Management, which holds roughly a 7% stake in the electronics retailer, said Tuesday that it had made a $3.25 billion unsolicited offer to take Circuit City private. The bid represented a premium of nearly 20% to Circuit City's share price of $14.23 at Monday's close.

"This [a buyout to go private] seems like something that would make sense for the Saks upscale stores," a convertible trader on the buyside said. "There's some hope today, anyway."

SCI 3s gain on tender for zeros

Sanmina-SCI Corp. said Tuesday it would launched a tender for its 0% convertibles on Feb. 17, plus a $300 million junk bond deal to fund the refinancing, and the old SCI Systems Inc. 3% convertible due 2007 shot up 2 to 3 points on the news.

The zeros edged up about 0.125 point to around the tender price of 54.375 on Tuesday but guidance for the eight-year junk bond deal, which will cover the redemption cost, had not yet emerged. Timing of the junk bond sale also was still a matter to be decided. The San Jose, Calif. contract manufacturer of electronic components such as circuitry boards said the tender for the converts would expire 20 days after commencing.

On the news, the old SCI converts, assumed in an acquisition, shot up to 96.5 bid, 97.25 offered.

Sanmina shares ended Tuesday up 9 cents on the day, or 1.5%, to close at $6.11.

Amkor bought on cheapening

The capital structure trade hinges on finding some inefficiency in the bonds at various levels of the capital structure of a company and it has become a focal point for lots of hedge funds playing convertibles. A couple of names mentioned along those lines Tuesday by traders were Amkor Technology Inc. and Primus Telecommunications Group Inc. Also mentioned recently were Level 3 Communications Inc. and Charter Communications Inc.

"The Amkor converts have cracked," leading some to believe the weakness was an entry opportunity, a sellside trader said.

Amkor's converts have dropped probably 10 points in the last week or so, he noted, but gained 0.75 to 1 point Tuesday on some buying, chiefly by crossover players. Yet, he added that the situation provides some impetus for "convertible guys to start looking again too."

The slippage began last week with Amkor's warning of a weaker-than-expected first quarter results, which was blamed on "still poor demand visibility." Further pressure came from a Moody's change in the company's credit rating outlook to negative from stable, directly as a result of the guidance news and compounded by the company saying it would boost its capital spending budget in 2005 by 50%.

"A continuation of these negative operating trends, consisting of sub-par sales well short of break-even utilization, resultant strains on profitability and continued free cash flow burn could lead to a ratings downgrade," Moody's said in a statement Tuesday.

Primus considered vulnerable

Primus has been active this week, both in selling because of concern about takeover risk and buying on a capital structure trade on some widening in the credit spreads, another trader said.

"A buyout is in the future of PRTL," said the sellside trader. "Management history and the news coming out [about mergers in the telecom sector] sure looks like someone is painting a picture to sell."

But some crossover buying of the converts was seen Tuesday, another sellside dealer said, as spreads recently widened in the name. He said pricing of the company's new $100 million bank loan was a major factor in the paper cheapening, plus some anxiety about the pending earnings results due to be reported before the market opens next Tuesday, Feb. 22.

"One number everyone will be watching for is the total earnings increase in '04. They [Primus] were looking for around 15% growth in '04 way back in '03, which seems like an eternity now," the trader said, adding that many buyers are actually somewhat optimistic.

"So far, it is tracking at 7% through third quarter, so that's going be a disappointment in some people's eyes. If they can show a 3% increase in fourth quarter, bringing the total '04 increase to a collective 10%, then I think it is good."

On Tuesday, a source in the bank loan market told Prospect News that the Primus $100 million senior secured term loan (B3/B-) book was overfilled by the Monday afternoon commitment deadline, aided by a series of accommodations by the company.

The term loan is now priced at Libor plus 650 basis points, flexed up from the Libor plus 550 basis points price talk. Additional call protection was provided and, furthermore, some covenants were reworked and a secured debt incurrence test was added to the credit agreement, the source said.

Tower Automotive off a point

Tower Automotive Inc.'s 5.75% convertible bonds come in about 1 point in quiet trade Tuesday as its bankruptcy slowly progresses. A trader pegged the issue at the end of the day at 17.5 bid, 18.5 offered, but then added, the bid might be as high as 17.75. Meanwhile, the Tower Automotive convertible preferreds were at 1.65, just ahead of the stock at 27 cents.

"They [convertibles] have gotten very quiet," a sellside trader said. "The real issue in there's a meaningful diversion of opinions. On the bid side, those people believe the intercompany claims will give them some standing. There's just as many on the other side who disagree."

Tower, the Novi, Mich.,-based maker of auto parts, filed bankruptcy on Feb. 2, and the event stilled much of the activity in the company's bonds.

The U.S. Trustee has named a committee of unsecured creditors for Tower Automotive, Inc.'s Chapter 11 case, according to a filing in the U.S. Bankruptcy Court Southern District of New York. The committee includes representatives of MST Steel Corp., Bank of New York, HSBC Bank USA, Quantum Partners, Worthington Steel Co., Wells Fargo Bank and Pension Benefit Guaranty Corp.

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