GenCorp advances, prices tight, but still bid 3.5 points over par; bidders follow bullish Nasdaq

By Ronda Fears

Nashville, Jan. 12 - Convertibles trading resumed at a heavy pace Monday as tech stocks zoomed and bullish convertible players continued in their recent bidding mode, particularly for new paper. In one example of the demand, the new GenCorp Inc. deal traded as high as 5.25 points over par.

There were some downdrafts among some big names like Eastman Kodak Co., but traders reported no heavy selling.

"We are not seeing any selling to speak of anywhere really," said a trader at a big sellside shop. "Everyone is still a buyer."

Most of the convertible market moved up, the trader said, but even those heading south were mostly a markdown related to moves in the stock. And, he added, the stock was likely moving on some concern about upcoming earnings.

Among those declining were Eastman Kodak Co. and Computer Associates Inc.

Buying, though, continued to be the main objective, another trader noted, as many convertible funds have a mandate to be fully invested, and now they have new money to put to work.

The technology area as well as telecom names were the hot spot.

Among tech issues trading - all higher - were Akamai Technology Inc., LSI Logic Corp., Credence Systems Inc. and Yahoo! Inc. In the telecom or telecom equipment area there was Nextel Partners Inc., UTStarcom Inc. and NII Holdings Inc.

Ret Hat Inc.'s new 0.5% convertible added another point to 109.625 bid, 110.125 offered while the underlying shares rose 30 cents, or 1.47%, to $20.60. Coeur d'Alene Mines Corp.'s new 1.25% convertible tacked on 0.125 point to 108.5 bid, 108.75 offered as the stock edged up 3 cents, or 0.47%%, to $6.40.

GenCorp new deal trades up

GenCorp's new deal is not all that has been launched recently with regard to its story. GenCorp is among several names in the convertible universe expected to benefit if President George Bush follows through as expected this week with the announcement of a plan to establish a manned station on the moon and to put a man on Mars.

On Friday, the Sacramento, Calif.-based maker of components and systems for the automotive and aerospace industries also said sales would gain "significantly" from the acquisition of Sequa Corp.'s Atlantic Research operations and General Dynamics Corp.'s space propulsion business.

For fiscal 2003, which ended Nov. 30, GenCorp sees earnings exceeding its prior earnings-per-share estimate of 41 to 46 cents. In 2002, the company earned $30 million or 69 cents per share on revenues of $806 million.

The new deal was definitely propelled in the gray market.

The deal was launched Monday morning to price after Tuesday's close with guidance for a yield of 4.75% to 5.25% and a 33% to 37% initial conversion premium.

At the middle of those terms, Lehman Brothers analysts put the new GenCorp issue 5.8% cheap using a credit spread of 575 basis points over Treasuries and a 36% stock volatility.

In the gray market, the new deal was seen about noon at 2.5 points over issue price on the bid side with no offers. And within a couple of hours it traded at 5.25 points over. At about that point, terms were tightened and the timing advanced.

Price talk on the $100 million of 20-year convertible notes was tightened to 4.25% to 4.75%, up 40% to 45%, and pricing was moved up to after Monday's close.

Shortly after the close, though, the final terms came in and were even more aggressive, at 4.0%, up 45%.

The bid had climbed to 5.5 points over issue price with an offer of 6.25 points over, but the issue pulled back sharply after the terms were squeezed.

At the close, the new issue was quoted at 3.5 points over on the bid side, 4.75 points over on the offer.

GenCorp's existing 5.75% convertible due 2007 lost 2.375 points on the day, traders said, mostly due to the hit the stock took from the new deal. GenCorp shares lost 57 cents, or 5.08%, to $10.64.

Moody's Investors Service rated the issue B3 with a negative outlook; Standard & Poor's assigned a B+ rating and placed the issue on negative watch; Fitch Ratings assigned a B rating with a stable outlook.

Concerns among the rating agencies revolve around performance at GenCorp's automotive unit and higher pension expense.

But the credit analysts are comfortable with solid performance at GenCorp's aerospace and defense position in the favorable defense spending environment.

Lockheed Martin Corp. and Spacehab Inc. are two other convertible names that could profit from a boosted NASA budget.

Silicon Graphics molds turnaround

Silicon Graphics Inc. is not a new name to the convertible world, but if you were checking at the major sellside shops you would think so.

The Mountain View, Calif.-based company has a new 6.5% issue in play, by virtue of the finally completed exchange of its old 5.25% convertible due 2004, but it is not a widely spouted name on the major trading desks yet.

The new 6.5s have been trading for less than three weeks and have already zoomed from par on Dec. 26, about when the issue began trading, to close Monday at - ready? - 241 bid, 243 offered while the stock added 58 cents, or 24.47%, to $2.95.

That puts the converts yielding about 3% with a conversion premium of around 4%, said Mark Steele, a principal in the convertible department at Thomas Weisel Partners LLC.

"It's been a phenomenal run," Steele said. "Last week alone the bonds were up 70 points."

Thomas Weisel has been making an outright, or fundamental, buy call on these bonds and has been pounding the table on the stock since it hit $1.

"It is a turnaround story," Steele said.

"At 3s, up 4%, I'd rather own this than the common. But I still think there's room for people to get in."

The stock, at $2.35 where it closed Friday, was trading at about 0.5 times estimated fiscal 2004 sales, he noted.

In the heyday of technology stocks, Silicon Graphics was trading at nearly $50 a share, around mid-1995. During the market slide, it struck a nadir of about 85 cents around October 2001.

The stock of Cray Inc., a close comparison to Silicon Graphics, is trading at about 3.2 times sales, he added. Other major competitors for Silicon Graphics, which makes servers and desktop workstations among other computer hardware, are International Business Machines Corp., Sun Microsystems Inc. and Hewlett-Packard Co.

So there could still be considerable upside.

Hedge funds might find it a little more difficult to get in, since the borrow on the stock is still a bit tight. Modeling the issue with a credit spread of 800 basis points to 1,000 basis points over Treasuries and a stock volatility of 55% to 75%, some hedge players get the issue about 4 to 14 points cheap.

The stock was getting a lift Monday from a new product launch, plus guidance that was released by the company on Friday.

Also, Merriman Curhan Ford initiated coverage on Silicon Graphics on Monday with a buy rating and price target of $5. The firm says the company has been winning new customers, plus declining sales trends and its money-losing history are turning a corner as the firm believes niche growth, aggressive cost-cutting and efficient working-capital management are taking the firm to profitability this quarter. Also, the specter of bankruptcy has been lifted with the recent convertible exchange.

On Monday, Silicon Graphics said in a news release that with the release of its Altix 350 Intel Itanium 2 and 64-bit Linux OS-based server, it fundamentally changed the price-performance landscape of the high-growth $2.6 billion midrange technical computing market.

The server delivers up to 50% price and up to 75% performance advantages over proprietary Unix SMP servers from Sun, IBM and Hewlett-Packard, according to Silicon Graphics.

Last week, Silicon Graphics said it anticipates revenue for its second fiscal quarter ended Dec. 26 to be roughly $235 million, within the guidance of $220 million to $240 million it projected in October.

Thus, the company expects to report an operating loss between $5 million and $10 million on a GAAP basis, including some $13 million in charges associated with restructuring announced in August and the ongoing consolidation of corporate headquarters announced in July. Without the charges, there would be an operating profit of between $5 million and $10 million.

Unrestricted cash, cash equivalents and marketable investments at Dec. 26 are expected to be about $105 million.

In mid-December, Silicon Graphics completed the exchange of $226.7 million or 98% of its 5.25% senior convertible notes due 2004 for $224 million of 6.5% convertible senior secured notes due 2009 - with a conversion price of $1.25 - and $2.3 million of 11.75% senior secured notes due 2009.

The company had been seeking an exchange since summer 2003.

Its initial exchange offer was pulled on Aug. 4 after failing to achieve the 85% participation threshold, despite revising terms.

The exchange effort was resumed in November and finally accepted in December. It offered holders an increase in yield, the benefits of a security interest and, in the case of the new convertible, a lower conversion price in return for a significant extension in maturity.

Terms of the latest exchange offer were similar to the revised terms of the initial offer, except that the conversion price for the proposed new convertibles was higher in the earlier offer and the earlier offer limited the number of new convertibles that could be issued.

In addition, Silicon Graphics has a 6.125% convertible due 2011 outstanding. That issue was pegged at 66 bid, 76 offered by a big sellside shop.

Silicon Graphics is scheduled to report fiscal second-quarter earnings and provide guidance for fiscal third quarter on Jan. 21.

Raging bulls buy techs

Upcoming earnings were fueling a lot of the enthusiasm for tech and telecom paper Monday, traders said.

USBancorp Piper Jaffray had a note out early Monday on Yahoo!, predicting the internet giant will report some upside in revenues and operating profits on Wednesday, driven by continued strength in both advertising and search engines.

That sparked a $1.62 spike in the stock, or a 3.37% gain, to $49.74.

Yahoo's convertible, the 0% due 2008, added more than 3 points or better to 137.375 bid, 137.875 offered.

UTStarcom, which has been a volatile name of late, shot up on reports that the Chinese Internet firm is about to sign $200 million or more in new contracts, a buyside convertible trader said.

"These Chinese firms, UTStarcom, Sohu.com, Netease.com, are all still pretty hot," the trader said. "They have ebbed and flowed, but they are back really hot right now."

Telecoms were another hot area, though a couple of buyside sources expressed some skepticism about the industry being in full-blown turnaround, at least on a widespread basis.

"We're taking these telecom names on a case-by-case basis because not all the equipment companies will live through this drought," said one buyside trader at a hedge fund in Connecticut.

Several telecom and networking stocks hit new 52-week highs on Monday, though, including Motorola Inc., Juniper Networks and Redback Networks.

Those converts were active, all heading north, along with the mainstays in convertibles trading - Lucent Technology Inc., Corning Inc., and Nortel Networks Corp.

In chips, there also was activity in LSI Logic Corp., with its new 4% convertible due 2010 up 2.5 points on the day to 122.25 bid, 122.5 offered. The stock closed up 47 cents, or 4.51%, to $10.90.

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