SFBC hits high mark of 104.125, while other new paper off a tad; GM, Ford pressured; Delta dives

By Ronda Fears

Nashville, Aug. 6 - Many convertible players were keeping a low profile Friday following the weak jobs report, ahead of the upcoming Federal Reserve meeting next week and a host of other factors that pressured stocks into a steep decline. Several sources remarked that it felt like a half-staffed day.

"I have just one comment - percent gains are smaller than percent declines. The Nasdaq Composite down 11% means we have retraced 50% of the up move last year. This, while the VIX, until recently, barely budged," said a veteran convertible professional in California.

"I am looking for nice credit spread widening and a bit more equity downside but feel that pressing the short side is a low-odds trade, with the caveat that you have a big payoff if we crash. Focus on liquid, good credit names."

On Friday, the Nasdaq lost 2.46% to close at 1,776.89, which is about 11% behind the 2,000 mark where it started 2004. The VIX market volatility index rose 5.57% on Friday but was still low at 19.34, versus a high spot in the mid-30s in mid 2001. The VXN Nasdaq volatility index gained 4.81% to 27.45.

Thus, ahead of next week's Fed event and general vexation with the economic signs, trading was thin in convertibles and generally swayed to a negative post.

"It's an incredibly slow day. We'll attribute it to the summer Friday syndrome. It's a beautiful day here in the New York metro area, actually one of the nicest days of the year, so my guess is that a lot of buyside guys are out golfing. Those of us on the sellside don't get to do that," said a sellside market contact.

"It's more interesting [here] in front of the building, watching the NYPD special operations guys," he added, referring to the heightened security due to the elevated terrorist alert in the financial districts.

SFBC International Inc.'s new deal, which hit a high spot of 104.125 right out of the chute, was about the only bright spot as even other new paper from earlier in the week was softer.

Along with the Fed next week, the market is anxious to hear from Charter Communications Inc. as it reports earnings Monday. Also, there could be some activity in Adelphia Communications Corp., as the cable company said Friday the bidding process to buy its assets out of bankruptcy will start with an auction process shortly after the Labor Day holiday, or roughly in a month.

New paper broadly mixed

SFBC International sold an upsized $125 million convertible, the first deal to get boosted in a while. And, it was printed with a 2.25% coupon and 35% initial conversion premium - at the aggressive end of price talk for a 2.25% to 2.75% coupon and 30% to 35% initial conversion premium.

Right out of the gate, it shot up, too. In the immediate aftermarket, the issue hit a high mark of 104.125, according to a sellside trader, after having been bid up 1.25 points in the gray market. The stock, however, was pressured on considerable weakness in the biotech sector and fell $2.58 on the day, or 8.48%, to $27.85.

Schering-Plough Corp. also slipped with the sector. The pharmaceutical giant's new jumbo 6% mandatory slipped back 0.25 points to par, or 50 bid, 50.125 offered, while the underlying stock lost 15 cents, or 0.83%, to $17.85. But dealers said the issue was heavily traded again in its second day of action since getting priced.

"It went well; it's a nice defensive name," said a convertible fund manager. "The equity is rich on perennial takeover rumors, and it's also a turnaround story that's still intact, for now."

Henry Schein Inc.'s new 3% contingent convertible also was said to have slipped back about 0.25 point at 102 bid, 102.5 offered as the stock lost 90 cents on the day, or 1.42%, to $62.66.

GM, Ford take the low road

Automakers took some blows in a head-on collision with several factors.

General Motors Corp. and Ford Motor Co. were both hurt by surging gasoline prices on the rise in crude oil, which many fear has already cut into gas-guzzling SUV sales. The jobs report didn't help the automakers, either. Those factors compound ongoing concern about high inventory levels, weak sales, and, at least for GM, dilution from the convertibles.

GM's convertible bonds were all softer with the 6.25% issue down about 0.25 while the stock fell $1.05, or 8.48%, to $27.85.

Ford's 6.5% convertible preferred also dropped about a quarter-point as the stock lost 13 cents, or 0.92%, to $14.07.

Crude oil futures hit yet another fresh high of $44.77 a barrel during the session before backing down to $43.95, or down 46 cents on the day - as Russia froze the assets of OAO Yukos Oil Co., which produces an estimated 2% of the world oil supply, and concern about civil disturbances in major OPEC member Venezuela, not to mention in the Middle East, where the bulk of OPEC members sit.

Gasoline futures were basically flat, however, with the September wholesale contract settling at $1.2347 a gallon.

In addition to industry pressures, there were elevated credit concerns.

One dealer noted that GM's bonds have been suffering from concerns ratings analysts expressed about rising inventories and declining market share. Speaking at a J.P. Morgan conference midweek, he said ratings analysts were so negative that the general feeling was downgrades may be looming.

Delta pilots should take a clue

Fuel costs also still weigh on the airline industry, and most of that paper was lower Friday. But a lot of the convertible market's eye is on Delta Air Lines Inc., with those convertibles weaker by 1 to 3 points. Onlookers fret that restructuring efforts will fall through, chiefly because of rough-going talks with union pilots.

"Delta's pilots would do well to take a clue from the Goodyear unions," noted one observer, who holds Delta's converts. "After all, it is the union who told them [Goodyear] how to do the turnover. Bottom line is they turned the corner without accounting ploys and luck, just good old fashioned hard work on the part of employees from the boardroom to the factory floor."

Last November, Goodyear committed to issue new bonds, equity or equity-linked securities and to refinance its term loan and revolving credit facilities - and the United Steelworkers of America has the right to go on strike if the transactions are not completed.

Goodyear had to postpone its part of the agreement because of accounting problems that caused a delay in its financial filings, but eventually it followed through with the debt offerings earlier this year.

Delta issues dive 1 to 3 points

Meanwhile, the Delta convertibles ticked lower Friday as the stock got slammed on a downgrade by Goldman Sachs airline analyst Glenn Engel, who reduced the stock to under-perform from in line, citing mounting losses as yields remain under pressure, fuel prices soar and negotiations with pilots appear stalled.

A sellside convertible trader said the last he saw of the Delta converts was mid-morning and at that time the 8% issue was 35 bid, 39 offered, adding "It was really a rough day" for Delta, along with the broader market.

Another sellside convertible trader pegged the Delta 2.875% issue in the 40 area.

Goldman's Engel said in a report, "Absent labor concessions, we are revising our full year 2004 loss to $13.65 from $10.90 [per share], and we believe the probability of a Delta bankruptcy filing is rising."

But, many Delta investors looking at the situation are outraged at the pilots' stubbornness.

"This is not like major league sports where they get to be free agents and name their price," the Delta convertible holder said. "The public will not accept these prima donnas taking all they can get."

Instead, earlier this week, the Delta pilots - the highest paid in the industry - lashed out at the airline's request that they take a 35% pay cut and other concessions, saying management is trying to "exploit the current situation."

The airline wants $1.02 billion in total concessions while the pilots have offered to give up between $655 million and $705 million.

"Has management decided to assault the profession because the opportunity exists - because they know the airline cannot be restructured outside Chapter 11 and they need a scapegoat?" said John Malone, chairman of Delta's pilots union committee, in a letter to rank-and-file union members Wednesday.

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