Six Flags zooms out of chute; Charter bid at issue, Level 3 quiet; GenCorp talk emerges

By Ronda Fears

Nashville, Nov. 16 - Six Flags Inc.'s new issue was riding a wave of enthusiasm for new paper, with the upsized deal zooming up by more than 4 points in the immediate aftermarket. Meanwhile, the gray market was rather uneventful as Charter Communications Inc. was bid at issue and Level 3 Communications Inc. was not seen at all.

Elsewhere in primary activity, guidance emerged on the tiny $50 million deal from GenCorp Inc., which has been the subject of criticism from major stockholders like Steel Partners II LP and Gabelli Funds LLC, and it was proceeding as planned to price Wednesday.

Charter was at bat after the close with $750 million of five-year convertible senior notes with proceeds in part earmarked to take out its 5.75% convertibles due October 2005. Market sources were of the impression that the books were going very well.

In fact, Merrill Lynch convertible analyst Tatyana Hube said that given the extremely healthy appetite for new paper, it could price aggressively or terms be tightened before the final cover sheet is printed, despite the tough borrow on the stock outside of the 150 million shares subject to the stock loan agreement Charter is planning with Citigroup, the underwriter on the convert.

Charter's junk bonds were up 2 to 3 points on the convertible refinancing news, with the 8.625s of 2009 at 81.75 bid, 82.25 offered. Charter shares on Tuesday lost 55 cents, or 20.3%, to close at $2.16.

Charter books running heavy

Charter's new convertible was quiet in the when-issued market, buyside traders said, but orders were running "very heavy" on the deal.

"The gray market has been quiet, but the deal looks to be running well from what we are hearing from the sales guys," said a buyside trader, who said recent reoffering of new deals below par by bookrunners have "virtually killed the gray market."

Charter's deal was not expected to get discounted; rather, some thought the terms might be tightened before pricing.

The new Charter convert terms will be very similar to the 5.75s that are to be called with the proceeds, as the $750 million deal is talked to yield 5.5% to 6.0% with a 10% to 15% initial conversion premium. Three years of coupons will be collateralized with proceeds and the remainder used to call the 5.75s, which gained to around par on the news.

While the deal puts no new cash in Charter's coffers, but will essentially extend the maturity on its 2005 converts to 2009, another buyside trader said it seems that now Charter could use its $1 billion credit facility for operations. So, "maybe they make an acquisition," he said.

New deal 13% cheap: Merrill

At the middle of the price talk range, Merrill's Hube modeled the new Charter convertible roughly 13% cheap. She used a 45% volatility assumption and a credit spread she referred to as "conservative" at 1,300 basis points over the comparable Treasury note, with the underlying stock at $2.25.

Charter's 4.75% convertible notes due 2006 were recently seen trading at an implied spread of about 930-975 basis points over Treasuries, Hube said, while the five-year credit default swap spread for Charter was recently quoted at about 1,270 basis points over Libor and the 8.625% junk bonds of 2009 were seen trading at an implied spread of about 1100-1200 basis points over Treasuries.

Buyside traders had referred to the deal when it launched Monday as "priced to sell" and "a home run," but market sources said there remained concern about the lack of any float on Charter stock.

Charter borrow still a concern

In spite of the stock loan transaction, market sources said there was still concern about the lack of borrow on the Charter stock, which would be a barrier for hedge funds to set up the deal.

"There's some investor concern over the fact that you can't short the stock right now, [they'll] need to wait until the issue becomes registered, which could take anywhere from two weeks to four months from what I understand," said a desk analyst.

Merrill's Hube noted that the average daily volume for Charter shares is about 4 million shares, with virtually zero borrow available, and it would take about 341 million shares to hedge out the whole $862.5 million convertible deal, which includes the $112.5 million greenshoe, at a 395.0617 conversion ratio. That is more than the company's total float of about 240.5 million shares.

Using a parity delta of about 89%, it would take about 302 million shares to hedge the deal, or about 76 times the average daily volume, she said. Even accounting for the stock loan for another 150 million shares, she noted that it would still take the balance of 152 million shares to hedge the deal.

Six Flags ride takes off

Six Flags boosted its overnighter to $260 million from $225 million, and the 10.5-year convertible senior notes shot up out of the gate after pricing at par to yield 4.5% with a 20% initial conversion premium - at the cheap end of yield talk for a 4.0% to 4.5% coupon and at the middle of premium guidance of 18% to 22%.

Right out of the chute it went to 101 and steadily climbed during the session. It traded as high as 104.25, according to a buyside trader, then bookrunner Lehman Brothers Inc. closed out the new issue at 103.25 bid, 103.75 offered.

Six Flags shares lost 51 cents, or 9.64%, Tuesday to close at $4.78 and its 7.25% convertible preferred gained 0.83 points to 21.4 on the New York Stock Exchange amid heavy volume.

The Six Flags junk bonds also spiked, gaining nearly 3 points on the convertible offering with the 9.5s at 103 bid. Six Flags plans to repurchase a portion of the 9.5% senior notes due 2009 and 8.875% senior notes due 2010 with proceeds from the convertible offering.

Players in the new convert said it was a "classic refi play," and some see the New York-based theme park operator in the midst of a turnaround. Turmoil surrounding the amusement park operator's financial results this year climaxed during late summer when Microsoft Corp. chairman Bill Gates, who owns an 11.5% equity stake in Six Flags, and Washington Redskins owner Daniel Snyder, who bought about a 6% stake, aired plans to challenge company management to boost its performance.

Level 3 borrow a factor, too

Not a peep was heard or seen in the gray market on the pending Level 3 convertible, but buyside sources said it was finding a "good deal of interest." The biggest challenge, one fund manager said, was a limited borrow on the stock.

Another worrisome point is the credit, which was cut Tuesday by Fitch Ratings, followed by concerns about the Broomfield, Colo.-based internet access provider's expanding voice-over-internet business.

Level 3's $200 million deal, talked at 5.0% to 5.5% with a 17.5% to 22.5% initial conversion premium, is not scheduled to price until Wednesday or Thursday. The company also is marketing a $450 million term loan. Proceeds from both deals are to be used to take out the $200 million of 8% notes the company had tendered for.

There essentially is no borrow on the stock, the fund manager said, adding that he "does not believe the old transition from old cable modem to new VoIP [voice over internet] will be so easy, but LVLT has survived so far."

Another buyside source said he is leery of the VoIP business but basically thinks that if Level 3 can get through 2005 then it will be a survivor.

Level 3 growth pinned to VoIP

"I am highly skeptical about the first half of 2005. After that, the numbers could start looking better," the manager said. "That is the VoIP [voice over internet] numbers could start looking better. If Comcast, Cox and a few others start offering real VoIP products and AOL, MSN and a few other major players are offering VoIP products, they may begin to see some impact."

Meanwhile, he said, it seems that the VoIP business is "frighteningly reminiscent of all the ISPs [internet service providers] that started popping up in the 1990s," the majority of which are no longer in business.

According to a recent industry report, which a buyside trader cited, Level 3 has boosted its VoIp channel partner program to more than 120 providers since starting a little less than a year ago and plans to expand that to 300 by the end of 2005. The "VARBusiness.com" item quoted Level 3 channel development vice president Craig Schlagbaum saying, "The majority of our revenue growth will come from the channel in 2005. The end user now has more choices and they also want one point of contact, which is what the solution provider does."

Fitch downgraded Level 3's senior unsecured ratings to CCC- from CCC, although it upgraded the ratings at the financing unit level, with a stable outlook. While the senior priority of the new term loan was an issue, Fitch also said the company's focus on VoIP is an important issue that will influence its long-term competitive and financial position.

GenCorp price talk emerges

Guidance emerged Tuesday on GenCorp's $50 million of 20-year convertible notes putting the yield at 2.25% to 2.75% and initial conversion premium between 20% and 25%. It is slated to price as originally planned after the close Wednesday via bookrunner Wachovia Securities.

The fate of the deal came into question last week when major stockholder Steel Partners II LP criticized the convertible offering and made a bid of $17 a share, or roughly $770 million, to acquire all the shares of the company it does not already own.

On Monday, GenCorp rejected the offer, calling it "inadequate," and said it would go ahead with plans to sell 6.6 million common shares and the convertible debt.

Steel Partners said, after being rejected by GenCorp, that it was willing to raise its offer for the company, but was promptly turned down again.

"It looks like Steel Partners was just trying to shake things up," said a buyside convertible trader, who added that it appeared the new GenCorp convertible "was getting played very well."

GenCorp snubs stockholders bid

In a brusque statement in response to Steel Partners, GenCorp said, "We do not believe the Nov. 15 [Monday] letter has anything new in it and we are proceeding" with the convertible sale and concurrent stock offering.

Steel Partners said after being rejected by GenCorp that it would raise its offer for the company, and noted that it was supported by two other big GenCorp stockholders in its criticism of the company's financing strategy.

"Clearly, many of the company's stockholders are extremely disappointed by the board's decision to proceed with its dilutive financing plan. The sentiments publicly expressed by Steel Partners and two (other) of your largest institutional stockholders, Gabelli Securities and Pirate Capital, appear to have been ignored by the board," Steel Partners said in the letter to GenCorp.

"From the numerous telephone calls we have received, we believe these opinions regarding the ill conceived and dilutive financing plan are consistent with the views held by most of GenCorp's institutional stockholder base, as well as many of its individual stockholders."

Steel Partners said its offer was serious as it was actively working with a financial adviser, Imperial Capital. "We are highly confident that all necessary financing to consummate our proposal can be readily obtained."

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