GenCorp steadily higher amid better bid market; Cleveland-Cliffs advances; towers slide

By Ronda Fears

Nashville, Jan. 14 - Bids continue to keep the convertible market rather lop-sided, traders said, as offers are few and far between. For the most part, the market was higher, but there were situations like satellite tower names where a downdraft in the associated stocks forced convertibles lower.

On the new issue front, after the closing bell GrafTech International Ltd. tossed another small deal into the market. The graphite and carbon producer is pitching $125 million of notes with guidance for a 1.75% to 2.25% coupon and a 20% to 25% initial conversion premium. The issue is expected to price Thursday.

Also, Cleveland-Cliffs Inc. advanced its $100 million of perpetual convertible preferreds to price after the close Wednesday, a day early. Talk was not amended, however, despite raging demand for new paper. The deal was still talked to yield 3.25% to 3.75% with a 17.5% to 22.5% initial conversion premium.

New issues that have been in the market for three months or shorter are seeing more two-way action than most of the convertible universe, one trader said. Otherwise, there are not a lot of sellers even with bids moving price levels higher.

"On the secondary side, we're not trading much," said a market source.

"The reason is we're not seeing right sides on anything; there are no offers, just bids."

New paper is trading very actively, though, along with some of the "old standards" in the convertible universe - Tyco International Ltd. and the like - said a convertible trader at one of the bigger shops.

"No doubt, the market is shy of offers," the trader said. "But we're managing to stay busy, you know, pretty busy, in fact."

Airline paper was mixed, he said, with Continental Airlines Inc. higher and Delta Air Lines Inc. losing ground along with ExpressJet Holdings Inc. He said there were sellers in the Northwest Air Lines Corp.'s 6.625% converts, while buyers looking for more coupon to clip showed up for the newer Northwest 7.625% convertibles.

Still, the trader acknowledged that the market is eager for a strong new issue calendar to get under way.

New paper, new deals hot

Market sources said the Cleveland-Cliffs deal was rumored to be oversubscribed by as much as 20 times, but bookrunner Morgan Stanley & Co. Inc. did not confirm that figure.

"It could be true, because if there is $20 billion of demand or more to sop up, then a $100 million deal could easily be 20 times [oversubscribed]," said a buyside convertible trader at a hedge fund in New Jersey.

Price talk on the Cleveland-Cliffs deal was not amended or tightened as a result of the demand, however, which could be due to some valuations that put the terms rather aggressive. Deutsche Bank Securities analysts put the deal, at the middle of price talk, 3.32% rich to 2.61% cheap, using a credit spread of 800 basis points over Libor and a 50% stock volatility.

There also was not a gray market level in the Cleveland-Cliffs deal, according to a market source. That is not unusual in the case of a preferred, though.

Cleveland-Cliffs stock fell $3.70, or 6.82%, to $50.55, which some players said may have been another factor in the deal getting moved up to price ahead of schedule.

GenCorp Inc.'s new 4%, up 45% convertible added 0.875 point to 102.875 bid, 103.375 offered. GenCorp shares rose 17 cents, or 1.59%, to $10.89.

Red Hat Inc.'s 0.5% convertible due 2024, which priced last week, was up 0.75 point to 108.125 bid, 108.625 offered while the stock edged up 4 cents, or 0.21%, to $20.04.

Towers slide on M&A buzz

Most of the satellite tower names - many of which have been active in the convertible market at one time or another - were pressured Wednesday by the renewed buzz that again Cingular Wireless LLC was in talks to acquire AT&T Wireless Services Inc.

American Tower Corp. and Crown Castle International Inc. were both hit as a result.

"You saw all the towers lower today because of the AWE/Cingular merger talk starting up again," said a market source.

However, he said the situation appears overblown because it would not seem logical to presume a merger would mean suddenly less communications towers would be needed, since there would still be just as many cell phone users.

Another positive, at least for American Tower, was a Standard & Poor's report Wednesday on the tower industry.

"Given the good business fundamentals of the wireless tower industry and actions taken by several operators to modestly improve their financial risk profiles in 2003, it appears that the industry is on the road to recovery," said S&P credit analyst Michael M. Tsao in the report.

S&P estimated that tower revenues are poised to grow by at least 6% annually over the next several years.

Thus, S&P on Wednesday revised the outlook on American Tower to positive from stable. The agency also upgraded SpectraSite Inc.'s outlook to positive from stable, but since exiting bankruptcy that company no longer has a convertible in play.

For Crown Castle, however, S&P let the negative outlook remain, due to higher leverage levels. That also was the case with SBA Communications Inc.

The four rated tower operators control or manage more than 50% of the estimated 150,000 cell sites in the United States and derive a substantial portion of their revenues from the Big 6 wireless carriers - AT&T Wireless, Cingular, Nextel Communications Inc., Sprint PCS, T-Mobile and Verizon Wireless.

For the most part, the tower convertibles are rich.

American Tower's new 3.25% convertible due 2010 on Wednesday dropped about 1.5 points to 130.25 bid, 130.75 offered while the stock fell 57 cents, or 4.49%, to $12.13.

Crown Castle's new 4% convertible due 2010 dropped 2.25 points to 146.75 bid, 147.25 offered as the stock lost 38 cents, or 2.93%, to $12.60. The Crown Castle 6.25% convertible preferred fell 1 point to 44.

That said, he added, there might be some upside in Crown Castle from the credit angle.

Some market watchers have speculated that if there is a merger in the wireless carrier space, that could cause spreads to widen on the tower bonds, which they say would be a buying opportunity.

Look for short-dated paper

With the convertible market getting bid up, rising from levels already considered rich, one market source said an area where he is steering clients to is the short end of the market.

"We're taking a pretty cautious view of the whole market," the analyst said.

"That's why we're recommending people look at shorter dated paper - 36 months and in. Then, even in a rising interest rate situation you're not going to get hurt too bad because you're going to be rolling down the yield curve.

"With the average credit - one that's just going to be average - if we are in a rising interest rate environment [then] they are going to trade off. They have to go down."

As for out-performers, he likes CNET Networks Inc., Manugistics Group Inc., Triquint Semiconductor Inc., Aether Systems Inc. and Quanta Services Inc.

CNET's 5% convertible due 2006 was pegged at 98.75 bid, 100.75. The stock closed Wednesday up 9 cents, or 1%, to $9.02. The issue, the analyst figures, has "a 100% chance of getting refinanced soon."

Manugistics' 5% convertible due 2007 was quoted off 0.25 point to 92.75 bid, 93.75 offered with the stock down 16 cents, or 2%, to $7.61.

Triquint's 4% convertible due 2007 was quoted at one of the big convertible shops at 98 bid, 98.5 offered. The stock added 4 cents to $8.30.

Aether's 6% convertible due 2005 was quoted at 98 bid, 100 offered. The stock slipped 5 cents, or 0.95%, to $5.19.

The Quanta Services 4% convertibles due 2007 were pegged at 89.75 bid, 90.75 offered with the stock up 5 cents, or 0.61%, to $8.26. The analyst noted that, perhaps surprisingly, the Quanta convertible bond is still trading at "a little bit of a discount."

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