SFBC bid up 1.25 points in gray; Goodyear earnings push up bonds; Schering-Plough, new issues gain

By Ronda Fears

Nashville, Aug. 5 - Fresh paper was a focal point in the convertibles market Thursday, including anything put into circulation in recent months, like Goodyear Tire & Rubber Co.'s new 4% convertible bonds, which were pumped up 2-3 points on its earnings.

In the immediate aftermarket, Schering-Plough Corp.'s jumbo $1.25 billion mandatory, which priced aggressively as expected at 6%, up 24%, was extremely active and gained around 0.75 point from par. It was well-received, sellside sources said, with the books oversubscribed by four times or more.

SFBC International Inc. was at bat with a $100 million convertible bond - expected to show a 2.25% to 2.75% coupon and 30% to 35% initial conversion premium - and was bid 1.25 points over issue price in the gray market, while the stock lost another 70 cents, or 2.25%, to $30.43.

Outside of the primary market, oil prices and earnings continued to influence players. After a day's reprieve, crude oil futures resumed an astronomical climb, settling at yet another fresh record high of $44.41 a barrel, up $1.58.

Despite the implications of crude oil on gasoline prices, refining concerns like Valero Energy Corp. plunged Thursday after Sunoco Inc.'s guidance indicated that profit margins for refining are expected to drop. The Valero 2% mandatory due 2006 plunged about 2 points to 34 bid, 34.25 offered as the stock fell $4.83, or 6.68%, to $67.50.

"All the refiners fell on the news," one trader said, adding, "even though Valero is really not a peer to Sunoco. Sunoco refines sweet crude oil and Valero refines sour crude, which is priced at a discount to sweet. So its not really apples-to-apples, but apples-to-oranges."

Independent power producer Calpine Corp.'s earnings were not impressive, but convertible players bid up its bonds on buybacks of its convertible preferreds for cash and stock. The Calpine convertible bonds were up 1 to 1.25 points, while its straight debt and stock plunged. The straight paper and stock also were heavily weighed down by the earnings - although towards the end of the day the straight debt recovered some of its losses.

In a similar development, as anticipated by the market, School Specialty Inc. formally called its 6% convertible, which had been tracking higher on speculation that the Greenville, Wis.-based maker of classroom furniture and playground equipment was looking to flush out the $149.5 million issue. (See the full story elsewhere in this issue.)

Market applauds jumbo deal

There was the equivalent of a standing ovation to pharmaceutical giant Schering-Plough's new jumbo $1.25 billion three-year mandatory convertible. The quick-sale deal was sold at the rich end of price talk, as expected.

"This [Schering-Plough] was really a reasonable pricing," one buyside source said. "What we really needed was a big, liquid deal."

Schering-Plough priced the mandatory with a dividend of 6% and a 24% initial conversion premium. At the middle of indicative terms, sellside analysts had put the Schering-Plough mandatory anywhere from 0.7% to 4.8% cheap. Talk had been for a 6% to 6.5% dividend and a 20% to 24% conversion premium.

It traded heavily sellside traders said, and was last heard in late afternoon trade with bids running about 0.75 points over par, which was $50. Schering-Plough stock edged up 4 cents, or 0.22%, to $18.

"Schering-Plough was about four times oversubscribed and traded up right out of the gate, I think the first trades were around 0.30 to 0.35 over par," said a sellside source close to the deal. "People seemed to like it. It's an out-of-favor name in an out-of-favor sector, pretty good credit and the [mandatory] has a nice yield."

Goodyear bounces to 117

Goodyear's new convertible, sold about five weeks ago at 4%, up 30%, gained 2 to 3 points to 117 bid, 117.375 offered on the tiremaker's earnings, which showed even the controversial chemical unit in the black. Last month, Goodyear said it had given up looking for a buyer for its chemical unit.

In the junk bond market, traders reported that Goodyear paper was trading about 40 basis points tighter on the earnings numbers with the 2006 bonds in the 102 area.

Goodyear shares gained a nickel on the day, or 0.46%, to $10.90.

"Them deciding to hang onto the chemical unit rather than sell it was initially viewed as something that would be a drag on the credit. Now, with all the units, including chemicals, showing profits, we are thinking that maybe there could be some credit upgrades to follow the earnings," said a convert trader at a hedge fund in New Jersey.

"The only worry now, and it's diminished form six months ago, is debt servicing. Free cash flow had better stay good in order to fund a portion of the debt maturities or we may see more equity and/or debt issues in the next 12 months."

Indeed, Goodyear recently announced plans to refinance and lengthen the maturity of one of its credit facilities. In addition to further refinancing to lengthen debt maturities, Goodyear said it will explore potential asset sales and will ultimately seek increased equity funding to improve its credit profile.

Goodyear pointed out in its earnings that all of its seven business units were profitable in second quarter, though, including the chemical unit.

The Akron company reported net income of $25.1 million, or 14 cents per diluted share, reversing the net loss of $53.0 million, or 30 cents per diluted share, in second quarter 2003. Sales of $4.5 billion were a record and up 20.1% from $3.8 billion during the 2003 period, reflecting increased prices as well as higher unit volume, plus a positive currency impact.

Robert J. Keegan, Goodyear chief executive, gave some credit to employees for the results, and said further improvement is yet to come. Last November, Goodyear was forced to commit to issue new bonds, equity or equity-linked securities and to refinance its term loan and revolving credit facilities by the United Steelworkers of America.

In the union's new contract, if the company hadn't followed through, those workers would go on strike. 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.

"This quarter's profitable results are a direct reflection of the ongoing efforts of our associates and demonstrate that we are on the right track," Keegan said. "While we still have work to do, we are pleased by the success we have achieved to date."

Calpine fired up on buybacks

While straight bondholders and Calpine shareholders balked at the power producer's earnings, the convertibles were stronger on the debt-laden company's efforts to buyback its convertible debt. The company said it bought back some $115 million of its convertible preferreds, and $181 million in debt in all, during second quarter.

"The Calpine converts were better by 1 to 1¼ points, then the market fell apart and they came off the highs of the session," said a convert trader at a sellside shop.

In its earnings, Calpine revealed that it had bought back some $180 million of convertible preferreds during second quarter. But the quarterly numbers otherwise were "atrocious," according to a buyside convert trader.

Calpine on Thursday reported a wider second-quarter net loss as a combination of charges, lower spark spreads - the difference between what it costs to generate electricity and the price at which it can be sold in the market - and costs associated with bringing new power plants on line hurt results. In the quarter, Calpine added five plants to its power portfolio.

The net loss was $28.7 million, or 7 cents a share, compared with a net loss of $23.4 million, or 6 cents a share, a year before. Gross profit fell 61% to $67.7 million. Revenue, though, rose about 7%, exceeding $2.31 billion.

Calpine said it still expects to breakeven on a per-share basis in 2004.

Also Thursday, Calpine said it secured a $250 million letter of credit facility with Deutsche Bank that matures October 2005 to guarantee power and gas obligations of Calpine Energy Management, a new financing entity, secured with power sales receivables as collateral.

Calpine stressed a strong liquidity position, but convertible players were not all convinced that debt service would be solid.

"Yeah, the liquidity is positive, but it is starting to look more and more like they'll need it to cover the operating losses, operating expenses," the buyside trader said. "They talk a good game, but the actions are lacking. The big problem is simply that they have got to sell more power. Their utilization rate is crap. It was crap last year and it's still crap. They need to sell more power."

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