Financials gain outright; Six Flags crumples on dividend halt; Huntington hit on debut; Cypress comes in

By Kenneth Lim

Boston, April 17 - Six Flags Inc.'s convertible preferreds tanked on Thursday after the company said it would not pay a dividend for the current quarter, raising concerns of default.

Huntington Bancshares Inc.'s new convertibles slipped on their debut as a lack of confidence in credit kept investors at bay.

Cypress Semiconductor Corp. also came in on a dollar-neutral basis after the company reported lower-than-expected profits but said it was closer to selling off its stake in SunPower Corp.

Overall market activity picked up from Wednesday, but traders continued to see uncertainty.

"It's so hard to figure out the market," one sellside convertible trader said. "It just seems like things whip back and forth, one day everyone's a buyer, the next day everyone's a seller. High yield improved today, but I thought things were better for sale. To borrow a line from Seinfeld, it's a bizzaro world in which we live."

Financial names improved outright as their common stocks gained.

Cleveland-based commercial bank National City Corp.'s 4% convertible senior note due 2011 traded at 84 against a stock price of $8.25. National City common stock (NYSE: NCC) jumped 8.15% or $0.64 to close at $8.49.

New York-based bank Merrill Lynch & Co. Inc.'s zero-coupon Exchange Liquid Yield Options (LYON) notes due 2032 also gained to trade at 110 against a stock price of $45.50. Merrill Lynch common stock (NYSE: MER) rose 4.05% or $1.82 to close at $46.71.

Six Flags skips dividend

Six Flags' 7.25% convertible preferred income equity redeemable securities (PIERS) due 2009 lost almost a fifth of their value on Thursday after the company said it would not pay a dividend for the current quarter.

The PIERS, which have par of $25, closed at 10 versus a common stock price of $1.66, down by 2.16 points or 17.76%. Six Flags common stock (NYSE: SIX) gained 7.79% or $0.12 to close at $1.66.

"Under the terms of the PIERS, dividends are not required to be paid currently and any unpaid dividends accumulate without interest," Six Flags said in a statement. "The board's decision not to declare and pay the May 15, 2008 dividend does not violate any covenants under any of the company's debt agreements. The company's deficit in stockholders' equity, the overall state of the credit markets and the fact that unpaid dividends accumulate on an interest-free basis, were factors that the board considered in reaching its decision not to declare and pay the quarterly dividend. The board will continue to evaluate all facts and circumstances, including relevant legal restrictions, prior to any future PIERS payments."

Six Flags, a New York-based theme park operator, said it has "ample cash and liquidity to fund its current operating needs and is comfortably in compliance with the one financial covenant included in its $275 million revolving credit facility."

The move by Six Flags came as a surprise to the market, especially after the company reported a 35% increase in first-quarter revenue.

"They're down?" a sellside convertible trader asked when told about Six Flags. "But the common is up 13 cents. Wow. It's trading at $10.09, down $2."

Although the interest owed will continue to accumulate, the market was worried about whether Six Flags will be able to meet its obligations when it was time to pay up, the trader said.

"They owe you, but that doesn't mean you'll get it," the trader said. "They may try to make this good by offering a common or something in the interim, so you just don't know what's going to happen. But you have a whole big credit structure there that's going to be a problem if they don't deal with it by maturity."

Six Flags' move was a "double pain" for holders because it hit the price of the PIERS and took away any comfort in holding on to the preferreds, the trader added.

"You could see this as a negotiating ploy," the trader said.

A convertible analyst said the current prices suggest that the market does not have much confidence in Six Flags at the moment.

"The implied spread is something like 10,777 basis points," the analyst said. "They're clearly trading like they're going bankrupt... The problem with the preferreds is if they really have a problem they go to the bottom of the heap."

The split between the common and the PIERS was notable, the analyst said.

"This is what's interesting - the first quarter has always been kind of an insignificant quarter, but there are some positive signs in their results and the stock's up 13 cents. This kind of tells you the market's kind of discounting this bearish news."

The analyst said whether Thursday's plunge was overdone will become clearer when Six Flags' meets with analysts on April 29.

"At this point they really need to execute," the analyst said. "Once you get to June and the third quarter, the market really needs to see something happen. They need to see some discussion as to how they're going to handle the preferreds...They're going to refinance it, but we're in a credit crisis and it's a weak market."

Six Flags may still pull a surprise on critics, the analyst said.

"I just think there's still some underlying value to this company," the analyst said. "I think it takes a while to execute a turnaround, but that's against the backdrop of a weak economy, although I've wondered, if the economy is weak, instead of taking your family to Hawaii, do you take them to Six Flags?"

"Somebody would have to have a lot of guts to get into the name right now," the analyst said. "And if they're wrong management would say are you're an idiot, but if they pull it off it's going to be a home run."

Huntington slips at start

Huntington Bancshares' new 8.5% perpetual convertible preferreds were seen about 97.5 to 98 against a stock price of $94 on their first day of trading on Thursday.

"We traded some of that, it was ugly," a sellside desk analyst said.

Huntington priced the $500 million at par of $1,000 with an initial conversion premium of 20% late Wednesday. The deal arrived at the cheap end of talk, which guided for a dividend of 8% to 8.5% and an initial conversion premium of 20% to 25%.

Morgan Stanley & Co. and Lehman Brothers Inc. were the bookrunners of the deal. There is a greenshoe for an additional $75 million.

Huntington common stock (Nasdaq: HBAN) was in the red for most of the morning on Thursday, but closed at $10.04, up by 0.8% or $0.08.

Huntington is a Columbus, Ohio-based bank.

The poor performance of the new convertibles puzzled some on the Street.

"It's down two cents," a sellside trader said. "The stuff is in 2.5 points. I don't know what the issues are. The pricing was fine, but there's maybe a borrow difficulty, not enough demand, maybe."

Another trader said "it was interesting to see where that priced and where it traded."

"Looks like those bonds just came in," the second trader said. "The question that we were wondering was why when it's one of those big banks like Lehman...they all appear to be doing well when it comes to financing. This was a preferred that priced fairly cheaply, optically. I think that's a reflection of people, (A) having too much of these kinds of paper on their pads aleady, or (B) not being comfortable with the credit risk of these small finance companies or not willing to take on that extra risk."

A convertible analyst said: "I think we've seen a lot of issuance from finance companies. Wachovia did well, Lehman did well, but this is a much smaller company, so it's not on the scale of Lehman or Wachovia, so people I think were not as willing to pay for the credit."

Cypress eases dollar-neutral

Cypress Semiconductor saw its 1% convertible senior note due 2009 come in about 2.5 points on a dollar-neutral basis on Thursday after the company reported earnings and said it could sell its stake in solar energy company SunPower.

The Cypress convertible was last seen at about 130.75 versus a stock price of $28.50. Cypress common stock (NYSE: CY) closed at $27.37, lower by 2.46% or $0.69.

"The stock had a wild ride today," a sellside trader said. "That to me was not a muting of volatility. The bonds came in and the reason why they did was because people think the credit is going to improve."

Cypress, a San Jose, Calif.-based semiconductor company, reported on Thursday that first-quarter revenue rose to $442.1 million from $342.9 million. The company had a net loss of $18.4 million, or 12 cents per share, from a $2 million loss in the year ago period. But excluding items, Cypress earned 12 cents per share for the quarter.

Cypress also said it got a tax ruling in its favor that could allow it to sell its 56% stake in SunPower by 2009.

"They own a considerable amount of SunPower, and there was news out today that I think suggests that Cypress will sooner or later pare its investment in SunPower, thereby improving the credit of Cypress," the trader said.

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