Vornado repriced at 97; Cal Dive, PNM at bat; Beverly buckles; oil issues decline big on profit taking

By Ronda Fears

Nashville, March 23 - A spattering of new deals provided some work for the convertibles market, but many buyside sources said that's about all it amounted to as they largely turned up their noses to the small crop on the table.

In fact, buyside traders said the Vornado Realty Trust deal, which was reoffered at 97, didn't land a bid until around noon, and then at 96.

At the other end of the spectrum, however, Cal Dive International Inc.'s deal was considered very cheap, and many thought the indicative terms would be tightened, but several lookers passed on it because of its focus on servicing the deepwater drilling industry. Cal Dive was on tap after the closing bell, along with PNM Resources Inc.

Chatter also re-emerged Wednesday that Delta Air Lines Inc. was considering another convertible offering to ease its liquidity crunch, but this time from the company itself as opposed to speculation from within the market. There was nothing in the way of firm plans discussed, however.

Drillers, oilfield services and Big Oil issues, in fact, were sharply lower Wednesday on heavy profit taking as oil prices plunged $2.22 to $53.81 a barrel amid higher supplies, traders said. Diamond Offshore Drilling Inc., Nabors Industries Ltd., Cooper Cameron Corp., Schlumberger Ltd., Halliburton Co., Amerada Hess Corp. and ChevronTexaco Corp. all took huge hits.

General Motors Corp. on Wednesday was still a source of heavy traffic in convertibles, with its 4.5% and 6.25% issues continuing to soften while the 5.25% issue gained a tad, all with the stock off another 88 cents, or 3%, at $28.66. Ford Motor Co. also continued to respond in sympathy, with its 6.5% convertible trust preferred off about 0.25 point to 45.5 as the stock lost 18 cents, or 1.61%, to $10.99.

XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc., however, both shot up as each reported a number of new deals with automakers to install their products in new cars. XM's 1.75% issue gained 3 points to 93 bid with the stock up more than 8.5%, while Sirius' convertibles were described as 2 points better with a 2.5% rise in the stock.

Sirius' converts had retreated initially on news of its new $250 million junk bond, which was on a roadshow Wednesday, as proceeds were earmarked to take out its 15% and 14.5% bonds. Still, convertible holders like the reduction in interest expense and many think the company will still be looking to take out the tiny bit of its 3.5% issue soon.

On a more skeptical tone, Beverly Enterprises Inc.'s convertibles lost 2 to 3 points on its decision to put the company on the auction block as the Fort Smith, Ark.-based nursing home operator battles a hostile bid.

Cal Dive deal seen 5.6% cheap

Cal Dive's $240 million issue, talked with a 2.875% to 3.375% handle and 41.5% to 46.5% initial conversion premium, was viewed as having "compelling deal terms" and even probably cheap enough that the price talk would get tightened before it priced. But a source working on the deal said the guidance was not changed and final terms would be set on those parameters after the closing bell.

At the middle of price talk, Merrill Lynch analysts put the deal 5.6% cheap, using a 30% volatility and credit spread of 150 basis points over Treasuries, or in a range of 3.6% cheap to 7.5% cheap, with the stock at $47.25.

Cal Dive shares on Wednesday dropped $4.289, or 8.69%, to close at $45.10.

The Houston-based deepwater drilling oilfield services company said proceeds would be used for general corporate purposes including a contribution to its 50/50 joint venture Deepwater Gateway LLC for early debt retirement, capital expenditures and potential acquisitions.

The industry sector was the biggest drawback to the deal, said a source at a big convertible fund in Boston. Another, from a New York hedge fund, added, "I don't think CDIS is, in fact, that cheap. But we'll see how it goes."

Vornado lands a bid at 96.75

New York-based Vornado, a player in the bid for Toys 'R' Us Inc., sold $500 million of convertibles at 3.875%, up 30% and then sole bookrunner Citigroup Global Markets Inc. reoffered the issue at 97, versus the expected reoffer price of 98 to 98.5 when the deal emerged late Tuesday.

Buyside sources said the first bid came across at 96.5 and finally edged up in the late afternoon to 96.75 right before the close. Sellside sources put the issue ending the day at 97.5, however.

But several buyside sources thought the deal should have been priced in the 95 neighborhood to lure real buyers.

"We gladly missed VNO...a disaster waiting to happen," said a convertible trader at a huge hedge fund.

Vornado is part of the consortium of bidders, along with Kohlberg Kravis Roberts and Bain Capital, to buy Toys 'R' Us in an estimated $6.6 billion deal. Proceeds from the offering are expected by many onlookers to be used for the funding of Vornado's commitment to the Toys 'R' Us transaction.

The Toys deal has sparked mixed reactions in the credit markets, with Fitch affirming Vornado's BBB ratings with a stable outlook yet saying it has concerns about the Toys 'R' Us acquisition because of what it views as "considerable risk surrounding the successful operation of the new Toys 'R' Us as a retailer given the level of leverage needed to finance the acquisition."

Toys convertibles, bonds bounce

Meanwhile, though, the Toys 'R' Us 6.25% mandatory, which matures this August, shot up another 0.25 point to 62.375, and its straight bonds were better Wednesday on the possibility that there may be a debt tender as part of the leveraged buyout.

The Toys 'R' Us 7.875% bonds due 2013 were seen climbing a whopping 5 points Wednesday to the 98 area; those bonds were seen in the 93 area on Monday, according to a convertible trader. Toys 'R' Us shares, however, lost 18 cents on the day, or 0.69%, to close at $25.91.

"I agree that those bonds, and even the converts, look like a decent value right here," said one holder of the convertibles. "Even with the expected leveraging of the company, I think the risk is more than compensated by the yield. TOY bonds across the board today are catching a major bid."

Toys 'R' Us also has a 7.625 bond due 2011, which also is trading below par.

Drillers, oil services sink

Following a series of analyst downgrades in the oil sector due to the run-up in those stocks as oil futures continued to skyrocket, a selling spree was finally sparked Wednesday as crude oil took a dramatic dive on a bigger-than-expected build-up in supplies.

Convertibles of Diamond Offshore, Halliburton, Amerada Hess and the ChevronTexaco-linked issue of Devon Energy Corp. saw the biggest volume of selling, one sellside trader said. But there also was heavy selling in the convertibles of Schlumberger, Cooper Cameron and Nabors.

Also a factor in the sell-off, a buyside trader said, was a downgrade to a slew of oilfield services stocks by Ehrenkrantz King Nussbaum on Wednesday, saying the risk/reward ratio has turned to negative "because of an appreciation of as much as 29% in some of these stocks."

The trader said Ehrenkrantz analyst Prabhas Panigrahi downgraded the group, recommending investors sell into strength, projecting that oil prices will fall to $40 to $45 a barrel over the next several months.

Earlier in the week, Smith Barney also recommended clients trim back from a full overweight position to a more moderate overweight position in the energy sector.

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