Scottish Life, Cablevision blow up; Gap active as volatility sparks profit-taking; Nortel flattish

By Ronda Fears

Nashville, Oct. 24 - During the early part of Friday's session there was some excitement that drew hoards of sellers for Scottish Life & Annuity and Cablevision Systems Corp. Nortel Networks Corp. was whipsawed with buyers, then sellers but closed little changed.

There were some volatility trades in Gap Inc. of note, also.

"Some of these vol trades have worked out recently," said a hedge fund manager in New York.

Gap's 5.75% convertible's implied volatility spiked around 5 points and that was a catalyst for some convert arbs to take profits. In dollar points, the issue came in 1 point to 129.375 bid, 129.875 offered, while the stock closed down 12c, or 0.66%, to $18.15.

In addition, with several recent high-profile calls by convertible issuers, players were again looking at more call risk to get priced into the market.

"Call risk is back," said a fund manager in New York, who specifically mentioned Amazon.com Inc.'s lottery call for $200 million of its 4.75% convertible due 2009.

"But this should keep a lid on premium losses."

Amazon's convert had been offered at 98, but when the call headline came across the tape it shot up to par. The issue is being called at 102, but by lot, so a couple of points of risk are factored in. The Amazon 4.75s closed at 100.625 bid, 101.625 offered, while the stock ended up 19.8c, or 0.35%, to $54.509.

On the new issue front, however, there was very little excitement and market players and onlookers are beginning to believe the bears who have been saying the year for convertible issuance is virtually over.

"All the origination guys have back-peddled since the first of September to the point that I'm beginning to think this is as good as it's going to get this year," said a hedge fund manager in New York.

"There's only another three or four weeks and then we're into full holiday mode."

Grey Global Group priced the lone deal this week, a small but upsized $125 million offering of 30-year paper, and next week one other firmly sits on the calendar. Sources say there could be another one or two deals pop up next week in addition to PMI Group Inc.'s $250 million mandatory.

PMI's three-year mandatory, talked to yield 6.0% to 6.5% with a 20% to 24% initial conversion premium, is set to price after the close Tuesday.

At the middle of guidance, Merrill Lynch & Co. analysts put the new PMI convert 7.24% cheap, using a credit spread of 100 basis points over the five-year Treasury and a 20% stock volatility.

The new convertible deal is pricing concurrently with a public offering of approximately $150 million in common stock.

Scottish Re Group Ltd., parent to Scottish Life & Annuity, is eyeing the convertible market for funds to help pay for its $151 million cash acquisition of ERC Life Reinsurance Corp., though. The company specifically mentioned that on its earnings call.

But the earnings, a miss by the Street's expectations, and claims charges sparked a sell-off in the stock.

Scottish shares plunged $3.60, or 15%, to $20.26.

The Scottish Life & Annuity 4.5% due 2022 dropped 10.25 dollar points on the stock move to 116.875 bid, 117.875 offered, but a trader noted the issue came in only about 2 points on swap.

"Scottish missed and the stock sold off pretty good, but the bonds held up," a sellside market source said.

"On the conference call, they specifically mentioned a mandatory convert to pay for the acquisition."

Scottish Re said it plans to buy 95% of ERC Life Reinsurance Corp. for $151 million in cash and also reported a significant drop in third-quarter earnings to $1.8 million, or 5c per share, from $7.1 million, or 25c, a year earlier.

Cablevision Systems Corp. came under fire after announcing a revised spin-off plan for its satellite business.

The revised plan eliminates the $450 million cash contribution to the satellite venture at the time of the spin-off, but also includes the spin-off of programming assets, including debt at those entities and Rainbow Media Holdings Inc. Credit analysts estimated the debt to be transferred at $571 million at Sept. 30.

Yet Cablevision will lose operating cash flows from these programming entities, which total about $200 million annually based on last six months performance through June 30.

All told, the reaction to the news at Cablevision was negative.

The AT&T Corp. 6.25% mandatory exchangeable, which converts into Cablevision shares, fell 2 points on the day to 21 bid, 21.125 offered while Cablevision shares plunged $1.94, or 9.4%, to $18.70.

Activity in Nortel Networks Corp., on the heels of the company's earnings and announcement it will restate financials for three years past, also followed a seesaw path on Friday.

"Nortel was trading this morning, they were up but now, this afternoon, they are marginally lower," a sellside market source said.

"On the earnings, the top line was a little disappointing but the bottom line was good."

Yet, another sellside source added that the restatement made some people nervous even though Nortel said the impact would be to narrow the losses recorded in 2000, 2001 and 2002.

Nortel's 4.25% convertible due 2008 came in 0.375 point on the day to 93.125 bid, 93.5 offered while the stock dropped 29c, or 6.53%, to $4.15.

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