Massey Energy, Arch Coal slide; Celanese, Huntsman fall; buyers for Six Flags as Snyder rethinks

By Ronda Fears

Nashville, April 27 - Convertibles were still feeling heavy amid a selling theme, traders said, even as crude oil took a gigantic dive Wednesday and stocks reacted positively en masse. Ongoing liquidations still overshadow the market but there are some bulls roaming around, ready to pounce on the weakness.

Oil futures fell $2.59 to $51.61 a barrel on the New York Mercantile Exchange after U.S. government data showed a large build up of inventories and president Bush urged construction of new oil refineries and advocated increased use of coal and other alternative fuels.

Yet, coal mining concerns slid hard, as did chemical names. Chemical concerns took a hit, a buyside trader said, because even with the dramatic pullback in crude, high oil prices have put extreme pressure on their profit margins.

Airline paper didn't benefit from the retreat in oil prices, either. Delta Air Lines Inc. and Northwest Airlines Corp. were the subject of a market rumor that pitted the two flagging carriers as merger candidates, which was passed on by a sellside trader. Delta and Northwest convertibles were described as 2 to 5 points lower, dragging the rest of the pack of airlines lower.

Calpine Corp.'s debt crashed again Wednesday, too, amid heavy selling, according to another sellside trader, who pegged the convertibles in anywhere from 3 to 5 points. The independent power producer's junk bonds also took another fall, losing 5 to 6 points, sources in the high-yield market told Prospect News. Credit analysts pointed out earlier this week that short interest in Calpine remains among the highest in the utility and power sector, and despite a 25% decline in the stock over the past month, nobody closed their short position.

Bulls lurk amid rubble

Sellside analysts from several of the big bulge bracket firms have expressed views recently that the convertible market may have reached capitulation - a bottoming out point, or nadir, where buying might make sense.

For the most part, those remarks have fallen on deaf ears, some traders - even on the sellside - argue, because so many funds are preoccupied with selling out their portfolios as they close up shop.

But there are some with a bullish view, waiting for the right time to seize upon opportunities that arise from the meltdown.

"There are some potential wins and it is not all crap being sold," said a veteran convertible portfolio manager.

"I am a bullish but you have to respect the tape."

He used two "quasi quotes" to illustrate his position. From renowned economist John Maynard Keynes: "The markets can remain liquid far longer than you." And from the legendary investor Warren Buffett: "Markets are the only place where most sell at the lows and buy at the tops."

"Leverage has to come off with short rates rising. This money is forced and knows no pain," the fund manager said.

"I have been slowly adding positions - and I am starting to feel pretty foolish. Funds of funds with all their quant talk and risk controls ... Ultimately they are not afforded their sanguine disciplines, as they cannot control the lemmings who flocked to their funds in the first place."

Still, he is bullish on the market overall. Why? "1. A lot of leverage is out of the system. 2. Net issuance/redemptions means less supply of bonds. 3. Credit has blown out in most names - half way back to 2002 probabilities of default - yet fundamentals are much better than in 2002. 4. Credit volatility is at [the] highs of 2002. 5. Credit vol will seep into equities - so vega in converts should kick in, sometime. 6. Oil has done damage to [the] world economy and [the] Fed is closer to finished than otherwise."

Coal mines buried with oil

Oil and gas names, including producers and oilfield services as well as Big Oil, skidded on the huge drop in crude, but coal mining concerns - namely Arch Coal Inc. and Massey Energy Co. - were put down as well.

Arch Coal just reported strong earnings and the stock was upgraded at a couple of shops, but convert traders said there was a pretty dramatic sell-off in both the stock and convertibles Tuesday. One trader attributed the selling to profit taking.

The Arch Coal 5% convertible preferred fell 3 points to 110.25 bid, 110.5 offered while the stock plunged $1.28, or 2.8%, to $44.50.

Massey, the trader said, was hurt by a dispute brewing with Wheeling-Pittsburgh Steel Corp., which on Wednesday filed a multi-million dollar lawsuit against Central West Virginia Energy Co., a unit of Massey, over a long-term coal supply agreement to its railroads.

Wheeling-Pittsburgh alleges it was forced to purchase coal on the spot market at significantly higher prices than under its agreement with Central West as a result of the Massey unit not fulfilling its obligation.

Massey said in a statement after Wednesday's closing bell that it has "significant defenses" to the complaint and that it will continue to work diligently and in concert with the railroads and other transportation providers to remedy the issues and ship the required quantity and quality of coal under the terms of the contract.

The Massey 2.25% convertible also dropped 3 points to 128 bid, 130 offered, one sellside trader said. The stock lost $1.40 on the day, or 3.66%, to $36.85.

Chemicals suffer from high oil

Chemicals dropped in spite of the plunge in oil futures, too. A buyside trader said the decline in oil prices was tantamount to the adage "too little, too late" to help the earnings of chemical companies that have been burned by the run-up in oil. But he said the punishment may be overdone.

Huntsman Corp.'s 5% convertible plummeted 2.5 points to 45.25, he said, while the stock lost 68 cents on the day, or 3.24%, to close Wednesday at $20.32.

Celanese Corp.'s 4.25% convertible dropped 0.25 point to 22.25 bid, 22.75 offered, a sellside trader said. The stock fell 48 cents, or 3.25%, to end at $14.30.

"With oil at the price it is, it is extremely difficult for any chemical company to turn a profit when they can't pass on their increased manufacturing costs to their customers," the buyside trader said.

"The market has taken down a number of the commodity chemical companies on fears the economy is slowing. This seems overdone, and a rebound is imminent in my opinion. There doesn't seem to be anything to account for the severe sell-off. But it all will depend on the [earnings] numbers."

Huntsman is scheduled to report results next Wednesday. Celanese is due to report on May 10.

Six Flags bets back on

Six Flags Inc. once again was the source of some small speculative buying, a buyside trader said, for a couple of reasons. Foremost, he said, the 2005 recreation season is about to swing into full gear. Too, the amusement part operator in recent times is evermore seen as a real estate play and real estate names are hot right now.

The Six Flags 4.5% bonds have been lower by 1 or 2 points this week, he said, and were finding buying interest Wednesday with a bid of 91. The 7.25% preferreds were trading around 19.5, he said. Six Flags shares, meanwhile, were little changed Wednesday, slipping 2 cents on the day to $4.15.

"I agree on the real estate play and live near the Jackson, N.J., park, which is thought of as some of its more valuable real estate. Jackson real estate in the past 20 years has gone up significantly. That park alone might be worth more than the company (The market cap is just $386 million)," he said.

However, a big buying catalyst, the convertible trader said, was the apparent reversal of views on the company by major stockholder Daniel Snyder, owner of the Washington Redskins pro football team, who owns about 8.75% of Six Flags stock through his hedge fund Red Zone LLC.

In January, Red Zone and Snyder expressed "continued disappointment with the company's performance" and stated that in light of what they believed would be a disappointing future for the company, continued investment in Six Flags was not in their best interest.

"In other words, it was inferred that Snyder was selling out of Six Flags," the trader said. "Now, he is apparently rethinking everything. The rumors are endless, but I think it is a positive development."

According to documents filed at the SEC on Friday by Red Zone and Snyder, they "are currently reconsidering and evaluating all of their options with respect to their investment in the company." The finagling referred to possibilities such as a merger, asset sales, consolidation, business combination, recapitalization or refinancing, "including a possible acquisition of the company or its assets by the reporting person or its affiliates."

Six Flags' annual meeting is scheduled for June 28.

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