United Industrial bid up in gray market; Delta lower; SPX slides; McKesson falls

By Ronda Fears

Nashville, Sept. 8 - After a nearly month-long sabbatical for the primary market, United Industrial Corp. launched a small $100 million new deal before Wednesday's open. And while it was not overly active in the gray market, the deal was bid slightly over par.

Elsewhere, the secondary market came to life as many traders predicted following the long holiday weekend, with the likes of restructuring plans, asset sales and earnings warnings pressuring some issues. Yet, with Citigroup hosting a technology conference and Lehman Brothers holding its noteworthy energy conference, traders said there was some bargain-hunting in both those sectors, which were weaker overall.

Delta Air Lines Inc. convertibles were sold off and dropped up to 1 point on the airline's mention that it may not be able to avoid bankruptcy, despite about $5 billion in savings targeted by 2006, although there were a few contrarian buyers along with special situation funds snapping up the paper.

SPX Corp. fell also in response to headlines that it was auctioning off its German unit, Bomag, which traders said was perceived as a "forced sale."

McKesson Corp., the drug wholesaler, warned that it would not meet analysts' projections for earnings for the first half of the current fiscal year, although it expects to remain in line with full-year expectations. On the news, the company's convertible trust preferred plummeted sharply along with the underlying stock.

Tyco International Ltd. convertibles were a tad lower again Wednesday following news late Tuesday that it had bought back about 10% of its 2.75% issue. The purchase of the 2.75s was from a single holder, a Chicago-based hedge fund, according to market buzz. The Tyco 3.125% issue as well as the 2.75s were off by about 1 point each on Wednesday, following a 1 to 2 point drop Tuesday.

In one of the few gainers of the day, Calpine Corp., the San Jose, Calif.-based independent power producer that is a major player in the California power grid, was higher on news that California saw record- breaking demand for power on Tuesday but the threat of a blackout in the wine country north of San Francisco was allayed by the restoration of key power lines which had been affected by a wildfire.

United bid plus 0.5 point in gray

United Industrial launched before the open Wednesday $100 million of 20-year convertible notes talked to yield 3.75% to 4.25% with a 27.5% to 32.5% initial conversion premium, with pricing slated for Thursday's business.

The issue was not extremely active in the gray market but was bid 0.5 point over issue price while the common stock dropped $1.35, or 4.59%, to $28.05 on the event.

A buyside convertible trader said the mention of using proceeds for acquisitions was a "little disturbing. Looking at the company, I think most people would see it as an acquisition target rather than as a suitor."

The Hunt Valley, Md.-based aerospace and defense electronics firm said it would use up to $25 million of proceeds to repurchase stock from note purchasers. Remaining proceeds will be used for acquisitions and general corporate purposes.

Moreover, he said participation in the United Industrial deal, which he plans to do, will require one to be patient "probably at least for the next six to nine months," following the U.S. presidential election and whatever impact that will have on military activities in the Middle East.

Delta convertibles lose ground

Delta chief executive Gerald Grinstein on Wednesday said about 10% of the Atlanta-based airline's workforce will be cut - roughly 6,000 to 7,000 jobs - and even with that and other measures targeting more than $5 billion in annual cash savings by 2006, including $2.3 billion by the end of this year, "bankruptcy is a real possibility."

"We're working hard and fast to avoid it [bankruptcy]," Grinstein said, "but if the pilot early retirement issue is not resolved before the end of the month, or if all of the pieces don't come together in the near term, we will have to restructure through the courts."

Unsuccessful negotiations with union pilots on wage concessions - $1 billion requested by the airline, compared with around $750 million offered by the pilots - has been a major obstacle in Delta's efforts to reduce costs, along with the refusal from holders of notes secured with plane assets to agree to consents that would allow out-of-court restructurings of specific bond debt.

Mostly because of the lingering bankruptcy threat, traders said the Delta convertibles were sold off by more traditional convertible investors, but there were a few mavericks jumping in along with the standard special situation funds when bankruptcy is a possibility.

"There are still some buyers for the converts," one sellside trader said, but he added that there are some fixed-income funds that play a lot of convertibles switching out of the Delta converts into the more senior paper in JunkLand.

"You can tell they are picking carefully because of the coupons and, to some degree, the pecking order if it comes down to a bankruptcy."

Delta's 8% convertibles due 2023 ended Wednesday at 36.75 bid, 37.25 offered, down from the 38 area on Tuesday, while the 2.875% convertibles due 2024 closed at 39.75 bid, 40.25 offered, off from 40.25 bid, 40.75 offered.

Delta shares on Wednesday dropped 44 cents on the day, or 9.82%, to $4.04.

In contrast, Delta's shorter-dated junk bonds gained ground. The 7.7% notes due 2005 rose 2 points to 49 bid, 50 offered while the long-dated 8.3% notes due 2929 remaining in the high 20s to low 30s.

Delta chief executive Grinstein described an overhaul plan to "reinvent" the airline as a simpler, more efficient one with more than 51% of its network restructured by Jan. 31, 2005, resulting in "the largest single-day schedule transformation in Delta's history."

In that, Delta is "dehubbing" its Dallas/Ft. Worth operation and redeploying those assets to grow hub operations in Atlanta, Cincinnati and Salt Lake City. Also, the airline's Song flights will add initially 12 aircraft while the overall fleet will be reduced by retiring at least four fleet types within four years.

McKesson plunges 1.65 points

McKesson's warning about its next earnings report sent its 5% convertible preferred reeling alongside the stock, and several of its peers in the pharmaceutical field, such as AmerisourceBergen Corp., were lower in sympathy.

The McKesson 5% convertible trust preferred plummeted 1.65 points on the day to 49.7 on the New York Stock Exchange amid heavy volume. Dealers quoted the issue bid at 49.125 with an offer at 49.5. McKesson shares, meanwhile, fell $4.85, or 15.24%, to $26.98.

The San Francisco-based drug wholesaler announced after Tuesday's close that its earnings will miss analysts' estimates for fiscal second quarter and the first half of the fiscal full year, blaming a slower-than-expected rate of passing along drug price increases to customers.

McKesson expects fiscal first half earnings per share of between $0.75 and $0.80 but maintained its full-year earnings per share guidance of $2.20 to $2.35.

The company said second-half earnings should resume an upward pace and the company would meet 2004 expectations if the majority of price increases are realized during the remainder of the fiscal year ending March 2005. McKesson said its revenue growth is strong from new and existing customers but the number of U.S. pharmaceutical price increases in the September quarter to date is at the lowest level since September 2000.

SPX trades off on sale news

Reports that Charlotte, N.C.-based industrial equipment maker SPX Corp. was auctioning off its German compaction technology group Bomag was perceived as a measure of last resort, convertible traders said. Thus, the stock dropped 8% and its zero-coupon convertible due in February 2020 traded down by about a half-point.

The SPX 0% convertible was bid down to 62.5 from 63 on Tuesday while the stock fell $2.94 on the day to $33.30.

Private equity firms and trade buyers submitted first round bids for Bomag earlier this week, Reuters reported Wednesday, saying that SPX is aiming raise up to $500 million from the sale.

"The perception is that they are not doing this by choice," said a buyside trader. "In the last earnings report, they [SPX] talked about margins getting hurt 'by rising raw material costs, higher pension expense and the expensing of restricted stock.' The stock options and huge executive pay packages were a fiasco."

Also, the trader said recent analyst reports panned SPX because of more downside risk as the former "sweetheart" as a capital goods item in portfolios is becoming out of favor as fund managers search for relative value.

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