Sirius goes to 105, eases; Reliant converts slip amid refi buzz; retail paper mixed

By Ronda Fears

Nashville, Oct. 8 - Sirius Satellite Radio Inc.'s new convertible was a hit on the charts, as many expected after the New York-based broadcaster inked a deal with shock jock Howard Stern. The new deal traded 5 points over the par issuer price before easing back slightly at the close.

The book on the $200 million issue, which is likely to get bumped to $230 million with the greenshoe, was five times oversubscribed, according to a source close to the overnight deal.

Sirius sold the seven-year non-callable senior notes at par to yield 3.25% with a 32.8% initial conversion premium - at the cheaper end of guidance for a yield of 3.25% and 31.6% to 41.6% initial conversion premium. Bookrunner Morgan Stanley & Co. Inc. closed the new issue at 104.125 bid, 105.125 offered. The underlying stock ended Friday off 30 cents, or 7.5%, at $3.70.

XM Satellite Radio Holdings Inc., the only U.S. rival for Sirius, announced a payment on its 8.25% convertible preferreds and that issue shot up 1.25 points to 57, a dealer said, while the underlying stock dipped 18 cents, or 0.63%, to $28.17.

Players were watching convertible issuer refinancing activity in other capital markets arenas, as well, including Wynn Resorts Ltd.'s plans to bring $800 million of junk bonds soon and launch a new $1.65 billion credit facility in the week of Oct. 18. Wynn's 6% convertible due 2015 is deep in the money.

Reliant Energy Inc. also is reportedly busy with a $4 billion refinancing package but a convertible market source noted that the 5% convert was not mentioned as a refi target and the issue was seen off about 1 point on Friday whereas its two secured straight bonds that are targeted to be taken out of circulation were up about 1 point each.

Allied Waste Industries Inc. credit was downgraded late Friday by Moody's and put on negative outlook, but earlier an analyst said he is starting to see the trash hauler's bonds showing "a little value here. Not much, a little." Convertible players eyeing the story were holding the 4.25% bonds firm, although its mandatory dropped alongside the stock in a modest sell off.

Six Flags Inc.'s convert also was getting a fresh look, with buyers lining up to take the convertible, pushing the 7.25% issue up by about 0.125 point to 21, while the stock plunged 9 cents, or 1.64%, to $3.41 on Friday.

Reliant $4 billion refi 'nearing'

After Reliant nearly filing bankruptcy in March 2003 when its big syndicate of lenders struggled to agree on the terms of a $5.9 billion debt refinancing package, during the past week new chatter has heated up about a $4 billion refi effort in the works. The Houston power firm mentioned it in its second quarter conference call, and the topic popped up again recently in a trade publication.

"There has been a lot of talk [about a Reliant refinancing], but nothing shown up yet, about in the past week, I'd say, but no one has mentioned anything about the convert," a buyside convert trader said, who added that while the timing has not been part of the chatter, the "feeling is that the time is nearing."

"They [Reliant] supposedly have specifically mentioned the secured bonds [9.25s due 2010 and 9.5s due 2013]," the trader said. "So, it wouldn't be a big surprise to see them trading at a premium. The incentive to refinance those is to remove the security."

Sources said Friday the Reliant Resources deal is expected by year-end.

Reliant Energy intends to refinance about $4 billion of debt, comprised of $1.1 billion of junk bonds and $2.9 billion of bank paper, reported Power Finance & Risk, citing a banker close to the situation, in its Oct. 1 edition. Terms of the deal have yet to be determined, but the publication said Banc of America Securities, Barclays Capital and Deutsche Bank have been tapped to lead the refinancing, and Goldman Sachs may also join the syndicate.

Allied Waste worth picking up

After two recent warnings about earnings, lots of the Allied Waste paper has been dumped but there has been players scratching their heads about whether to get involved with the Scottsdale, Ariz.-based company's convertibles on the weakness or to leave the issues lying by the wayside.

In a report Friday, Friedman Billings Ramsey bond analyst David Marsh said some of the Allied Waste bonds are worth picking up, which piqued interest among convertible players.

Marsh upgraded Allied Waste's 7.375% senior unsecured notes due 2014 to market perform from underperform, and its 6.5% senior notes due 2010, 5.75% senior notes due 2011 and 6.375% senior notes due 2011 to outperform from market perform - "primarily based on valuation and secondarily based on our continued belief that AW is a solid, stable credit that will have little difficulty servicing its current debt burden."

All Allied Waste securities have dropped since mid-September when the company reduced its outlook for 2004 operating income by about 3% to 4%, which followed a 3% to 4% cut to its outlook for operating income in late July. The Allied Waste 6.25% mandatory due 2006 plummeted 4.5 points and the 4.5% convertible bonds fell 1.5 points on that event.

"I looked at the AW when the stock broke this last time, the second negative warning. It [the convertible bond] looked okay, but just not there yet to be interesting to me," said a sellside convert trader. "I thought there might be more downside to go."

The converts, indeed, have slipped another couple of points since then, with the 4.25% convertible bonds due 2034 steady Friday at 88 bid, 88.5 offered while the 6.25% mandatory lost 0.375 points to 51 and Allied Waste shares closed off 17 cents, or 1.91%, to $8.73.

"I don't officially cover converts, but a lot of folks ask me about them," Marsh said. "Given the long-dated nature, [the] option really has some value [and they are] interesting on a yield-to-put basis as well versus other bonds in the capital structure."

Allied spreads now reflect risk

Of importance, Marsh said the Allied Waste straight bonds properly reflect risks now.

That was even before the Moody's downgrade in Allied Waste senior ratings to B2 from Ba3, with a negative outlook. Moody's cited the recent decline in financial and operational performance because of reduced volumes and increased cash requirements to service its aging fleet. High leverage combined with weak cash flow generation were responsible for the outlook, Moody's said.

Marsh said in the report Friday that the Allied Waste 7.375s are now trading at a nominal spread of 355 basis points over comparable Treasuries and an option-adjusted spread of 362 bps over Treasuries, versus the lower rated bonds issued by Casella Waste that are trading at an option-adjusted spread of 344 bps over Treasuries. Thus, he sees the 7.375s fairly valued.

With regard to the 6.5s, 5.75s and 6.375s, Marsh said they represent outstanding relative value versus the remainder of Allied Waste's senior note credit curve. Those tranches of debt are trading at option-adjusted spreads of almost 300 bps over Treasuries, while several of the remaining senior notes in the capital structure are trading at option-adjusted spreads ranging from 256 to 275 bps over Treasuries.

Retail names mixed on comps

September retail comparable store sales figures were mixed but in general described as disappointing. Gap Inc. was a belated loser on the numbers, dropping 1.25 points Friday after holding steady Thursday when the numbers hit the tape. Yet, Saks Inc. was marked up after slipping on the initial news. And Men's Wearhouse rose Friday, again, as it was one of few showing positive sales figures.

"I knew I should have bought GPS stock when it cratered to $12 and change in March '03," said one market source, who added, "The question is, would I have been smart enough to sell it in the $20s."

Gap's 5.75% convertible due 2009 dropped to 124 bid Friday as the stock ended down by 26 cents, or 1.34%, to $19.15. Gap's securities initially weathered its 3% decline in September comps on a positive reaction to the company's new $500 million stock buyback authorization - its first since 2000.

Continuing on the trend that began late last year, though, high-end retailers outperformed the pack such as Saks, noted CreditSights analysts Suzanne Chamberlain and Edward Mui in a report Friday, while on the flip side, Gap was a disappointment for September.

"Looking ahead to the crucial holiday season, we are still faced with high oil prices, declining consumer confidence and higher interest rates, nevertheless we expect retailers will manage to hit their numbers for the third quarter and continue to generally meet lowered expectations for the fourth quarter," said Chamberlain and Mui in their report.

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