Tower up on credit facility; Fannie Mae issue at 105.25; Six Flags off on profit taking; Gateway, Cray off on Dell

By Ronda Fears

Nashville, Jan. 4 - Technology issues continued to track lower Tuesday with Gateway Inc. and Cray Inc. both falling about 2 points in the wake of Dell Inc. shares getting downgraded on valuation concerns by Raymond James.

Airline paper also tumbled markedly as Continental Airlines Corp. reported a sharper-than-expected decline in unit revenues for December even while passenger demand rose. Delta Air Lines Inc.'s yet-unconfirmed plan to cut fares also was a source of pressure on the airline group.

Six Flags Inc.'s convertibles slid, too, as holders took profits on the heels of a surge Monday as the result of a plug for the stock.

On an upward track, Tower Automotive Inc. bonds were driven up on news that the Novi, Mich.-based auto parts and components maker had obtained a $50 million accounts receivable securitization facility through GE Commercial Finance.

There were few other gainers in Tuesday's session, however. Distressed traders, though, noted that Mirant Corp.'s bonds were still trading up on positive reactions to news last week that Marce Fuller, CEO for the Houston-based bankrupt power company, will be stepping down. The Mirant 2.5% convert added about 2 points to 76 bid, 78 offered, and its other junk paper was described higher by similar amounts.

The new issue front was making a slow start of the new year still, with nothing firmly on the forward calendar, but Fortis announced it would be selling a three-year mandatory convertible bond that will convert into roughly 23 million shares of the insurance firm Assurant Inc., along with its remaining 27.2 million shares of common stock. Celanese Corp. on Monday added a $200 million perpetual convertible preferred to its planned initial public offering.

Meanwhile, it was further clarified that while the new Federal National Mortgage Association, or Fannie Mae, issue is trading under the purviews of Rule 144A it was not an underwritten offering.

Fannie Mae deal like NRG's

Fannie Mae's new $2.5 billion of perpetual convertible preferred - issued last week with a 5.875% dividend and 34% initial conversion premium - was the last deal of 2004 for convertible buyers, but technically it wasn't the last deal of the year for underwriters because it was a private placement like the recent NRG Energy Inc. deal a couple of weeks prior, market sources said Monday.

Lehman Brothers was sole placement agent for the Fannie Mae convertible.

NRG Energy Inc. sold an upsized $420 million of perpetual convertible preferreds at par with a 4.0% dividend and 24.5% initial conversion premium under Section 4(2) via equal placement agents Citigroup Global Markets Inc. and Deutsche Bank Securities.

After a short one-day settlement, and even in the gray market before pricing, the Fannie Mae convertible traded as a Rule 144A issue - again, like NRG's convert, which traded off Monday to 110.25.

The big distinction, aside from inclusion in underwriter league tables, in the Fannie Mae deal is that there is no underwriter to take responsibility for due diligence and other liability issues surrounding the securities, a sellside market source pointed out.

Fannie lacking call protection

The Fannie Mae convertible traded up 4 to 4.5 points in the gray market before pricing and was pretty steady at that level for several days, buyside traders said. The issue, which priced at $100,000, was quoted Tuesday at 105.125 bid, 105.625 offered with the underlying stock falling $1.36, or 1.91%, to $69.91.

"There is a lot of hair on the name and the issue just doesn't have enough call protection for us," one buyside trader said, noting the perpetual preferred is non-callable for just three years.

But there were several enthusiasts for the Fannie Mae issue.

"The mortgage business isn't going away, and Fannie Mae isn't going away," a convertible fund manager in New York said. "We see this, this down period, as a buying opportunity."

The convertible sale was seen as an attempt to shore up capital after regulators forced the company to take a $9 billion loss in the wake of accounting irregularities, which also prompted the ousting of its CEO and chief finance officer in mid-December. The Securities and Exchange Commission found the company had misapplied accounting rules to "smooth out" its earnings, and that Fannie Mae will have to restate earnings for the past four years.

Fannie Mae's regulator has said that the giant mortgage firm is "significantly undercapitalized" with an estimated $3 billion capital shortfall for the third quarter ended Sept. 30, as it is required to maintain a capital surplus of 30% over minimum levels.

Tower secures credit facility

There had been worries that Tower Automotive wasn't going to be able to make the first interest payment on its new convertible, due Dec. 15, but that reportedly was paid although the company deferred the $4.4 million dividend payment on its 6.75% convertible trust preferreds that was due Dec. 31. The deferral came amidst a liquidity crunch caused by the termination of the early payment programs by most of its North American automotive OEM customers.

On Tuesday a little more relief wafted through the convertible market regarding Tower Automotive as it announced a liquidity injection of about $50 million that, while some 25% to 50% smaller than what the market speculated three months ago, was enough to drive up its converts.

The Tower 5.75% convertible due 2024 was quoted up 5.25 points to 73.5 bid, 75.5 offered and the 6.75% convertible preferred up 1.5 points to 11 with the underlying stock shooting up 32 cents, or 13.5%, to $2.69 on the event.

"They are probably still in trouble as far as liquidity goes, but this is some relief," a convertible dealer said.

Tower said it obtained a $50 million accounts receivable securitization facility through GE Commercial Finance., describing the facility, which it described as a critical component of its strategy to offset the adverse impact to its short-term liquidity shortfall. In October there had been market chatter that the company was hoping to increase its collateralization financing package to the neighborhood of $100 million or as high as $200 million.

"As part of that strategic plan, Tower Automotive has worked with its customers to find additional solutions to deal with the elimination of the early payment programs," Tower said in a statement. "Additionally, Tower Automotive will continue to pursue a European factoring facility, and expects to complete this later in the first quarter of 2005."

By deferring the preferred dividends and obtaining the new credit facility, Tower said it should be in line with its projections for Dec. 31 liquidity levels that was outlined in its third-quarter earnings review.

Standard & Poor's said Tuesday, however, that the new credit facility would have no impact on Tower's single-B ratings or the negative watch for the credit, which was initiated on the dividend deferral. S&P in fact cut Tower's ratings on the deferred interest, saying it viewed the event tantamount to a default even though the convertible indenture permits such a deferral of dividends for up to 20 quarters.

Delta, airline paper slides

Delta Air Lines had made a strong comeback from the troughs seen last year as it accomplished several prongs of the multi-layered restructure effort to lower its debtload of a whopping $20 billion by around $6 billion over the next couple of years. Rumored plans to cut fares was seen basically as another positive event in the airline's recovery efforts, traders said, but the converts were lower to steady as Delta shares fell and caused some repositioning for hedged players.

"For Delta, any means to boost revenues is good," one dealer said.

Yet, Lehman Brothers analyst Gary Chase said Tuesday that if Delta rolls out a new fare program aiming to shore up customer loyalty, it would further depress what is already expected to be weak revenue pattern for the airline industry in 2005.

Delta's 2.875% converts were up about 1.5 points with the 8% converts about flat, while Delta's straight bonds gained around 2 points across the board, as hedge fund players "tweaked" their positions, he said. The converts were both pegged at 67.25. A distressed trader put the short-dated 7.7% bonds at 94 bid, 96 offered and the long 8.3% bonds at 50 bid, 52 offered. On the bank desks, Delta's 2005 paper was seen at 93 bid, 94 offered, up from 91¼ bid, 92¼ offered on Monday.

Delta stock dropped 25 cents on the day, or 3.31%, to $7.31.

In addition to pressure from the prospect of Delta sparking an all-out fare war, airline paper dropped sharply Tuesday on Continental's flagging December revenue figures.

Continental off 3-7 points

Continental reported December mainline unit revenue decreased 4.5% to 5.5% from a year earlier, blaming shifts in outbound and return traffic for the Thanksgiving and Christmas holidays. That was much worse than some analysts anticipated. Merrill Lynch analysts, for instance, had anticipated a revenue decline of 2.5% to 3.5%. Other airlines also reported rising passenger demand but Continental is the only major U.S. carrier to disclose monthly unit revenue data.

However, Continental said revenue passenger miles increased 6.5% year over year with capacity up 6.1% on a 77.3% load factor. The load factor, which measures the percentage of seats filled on its planes, was up 0.2 points from a year earlier.

"Airline revenues are feeling pressure from a glut of capacity and fierce price competition. Continental's numbers suggest the situation isn't getting any better," a distressed trader said.

Continental's convertibles dropped anywhere from 3 to 7 points, while its straight bonds were described as about 3 points lower. Similar declines were mentioned in AMR and Northwest straight paper. AMR's converts were seen lower by about 4.5 points, and Northwest's two convertibles were said to have dropped 3 to 6 points on Tuesday.

Continental shares fell 12.6% on Tuesday, or by $1.76, to $12.20.

Six Flags panned by seller

Six Flags convertibles came down to earth Tuesday, also, after getting a lift from an upgrade to the underlying stock on Monday by Lehman analysts. The new 4.5% bonds ended off by about 3 points to 112.75 bid, a buyside trader said, and the 7.25% convertible preferred lost 0.15 point to 22.35. Six Flags shares also snapped back, ending lower by a quarter, or 4.45%, at $5.37 on Tuesday.

"Six Flags received one drubbing after another and then rebounded in line with the market late in the year [2004], but on the upgrade I think there was some profit taking, just to be on the safe side, with the broader market taking such a sharp turn for the worse as we get into the New Year," the trader said.

The retracing could be an opportunity to boost positions, though, he added.

"Not having read the Lehman report ... here is my attempt to find beauty in [Six Flags]," he said. "Number One, there is a lot of smart money invested here. Dan Snyder, the Washington Redskins owner, owns 9%, and Microsoft's Bill Gates has 10% in his private investment trust. Too, there is undeveloped property that could be sold without downsizing the company. Kmart sent its stock flying by exposing its real estate wealth. It is interesting, though, that Six Flags did not sell these assets before selling theme park properties. But, there is an ace here if the company needs to raise cash.

"The company appears to have reviewed 2004 and read the tea leaves correctly. It is bringing capital spending up to $130 million to $135 million for 2005's peak season. This is a positive catalyst on which to expect a recovery in attendance. [And], Six Flags is using lower interest rates to jettison higher-interest debt. This will help lower costs."

On Monday, Six Flag bonds edged up a little as Lehman Brothers upgraded the Oklahoma City-based theme park operator's stock to overweight from equal weight, boosting the price target to $7 from $4.

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