Convertibles market weaker, including GM, Micron Technology; EDO, The Pantry launch offers

By Rebecca Melvin

Princeton, N.J., Nov. 14 - The convertibles market remained weak on Monday, and despite two new deals being added to the calendar to price this week - bringing the total to three - it was definitely a gearing up day following a three-day weekend, convertibles players said.

"It was a slow day after the three-day weekend, and weaker with the bond market," a New York-based sellside trader said.

A sellside desk analyst quipped that it was a gearing up day, but also a transition to tapering off for the Thanksgiving holiday next week. "Well, maybe, not yet," he added.

New deals for this week were launched by convenience store operator The Pantry Inc. and defense contractor EDO Corp. They join New York City-based E*Trade Financial Corp. for pricing by Wednesday.

General Motors Corp. saw its $25 convertible bonds resume their downward slide amid continuing nervousness about the financial health of the No. 1 automaker and after the Detroit-based company announced a new round of car and truck price discounts to spur sales of its 2006 models hanging around dealer lots from Nov. 13 to Jan. 3.

Market sources noted with concern GM's widening credit default swaps that are trading in points now, with more upfront and slightly higher costs demanded from sellers of protection, implying greater risk short term.

Last week, GM stock and bonds tumbled for two consecutive days before regaining their footing on Friday amid speculation about what a possible strike at its No. 1 parts supplier, Delphi Corp., would mean for the car maker.

Back on Monday, the convertibles of Micron Technology Inc. also traded lower after AG Edwards downgraded the Boise, Idaho, semiconductor company to "hold" from "buy," citing potential further pricing pressures on memory chips. And San Carlos, Calif.-based biotechnology company Nektar Therapeutics Inc. was lower, or in a little, on no particular news.

But San Jose, Calif.-based Cypress Semiconductor Corp. gained about 0.5 point in line with its shares. Also in the news Monday were Starwood Hotels and Resorts Worldwide Inc. of White Plains, N.Y., and Host Marriott Corp., with Host Marriott agreeing to buy 38 hotels from Starwood for about $3.4 billion in cash and stock.

Bethesda, Md.-based Host will also take on $700 million of debt as part of the deal. But the news didn't seem to spur the convertibles of either company, sources said.

"It was not a huge surprise," a buysider said.

Starwood's 3.5% convertible due 2023 were seen little changed at 120 bid, 121 offered. And no trades of Host Marriott's 3.5% convertibles were reported. The 3.5% issue, which is non-callable until 2009, was last seen at 108.5. Host Marriot also has a 6.75% convertible preferred that's callable and trades narrowly around the call price, sources said.

In news after the closing bell, Community Health Systems Inc. announced a partial call of its 4.25% convertibles.

The Brentwood, Tenn., hospital operator said that it has called for redemption $150 million of $287.5 million outstanding of the convertible subordinated notes due 2008. The call is effective Dec.14.

The redemption price is 101.821% of the principal amount of the convertibles, plus accrued and unpaid interest to the redemption date.

The convertibles became redeemable in full on Oct. 15; however, a restricted payment covenant in the indenture for the company's 6.5% senior notes due 2012 limits the amount of cash available to redeem the convertibles, the company said in a news release.

EDO to price Tuesday

EDO said it will price $175 million of 20-year convertibles via bookrunner Citigroup Global Markets Inc. and joint lead manager Wachovia Capital Markets LLC.

A syndicate source said that the deal was expected to price Tuesday after the close. Price talk on the convertible senior subordinated notes was for a coupon of 3.5% to 4% with an initial conversion premium of 28% to 32%.

EDO is also calling for the redemption of all $137.8 million of its 5.25% convertible subordinated notes due 2007, at the call price of 102.1% of the principal amount, plus accrued interest, the company said in a news release.

Proceeds from the new notes will be used to pay for the redemption, with remaining proceeds earmarked for general corporate purposes.

There is an over-allotment option as part of the offering for $26.25 million.

The offering is being made pursuant to a previously filed shelf registration statement.

New York City-based EDO is a defense contractor that provides products and services in areas including electronics, communications and aircraft armament systems.

The Pantry shares sink 7.6%

The Pantry Inc. launched a $130 million offering of seven-year convertibles, which were expected to price Wednesday after the close, according to a syndicate source.

The Rule 144A deal via bookrunner Merrill Lynch was talked to price at 2.5% to 3% for the coupon and at 27.5% to 32.5% for the initial conversion premium.

Shares for the company sank 7.6% after the convertible bond launch news and the company's 8-K financial filing that followed.

Reaction to the deal was lackluster. "Right after they announced the deal, they said the SEC is investigating them," a New York-based sellside trader said, referring to the financial filing.

In the filing the company attached information about risk factors related to its proposed convertibles offering, including information about "risks faced by the company in connection with its ongoing evaluation and testing activities under Section 404 of the Sarbanes-Oxley Act of 2002 and risks faced by the company in connection with its compliance with a request from the SEC for certain information in connection with the company's recent restatement of certain historical financial statements to reflect a change in the accounting for certain sale-leaseback transactions."

The sellsider said that after the filing he widened his credit spread in valuing the deal to 400 basis points over Libor and a 32% volatility, from 350 bps over Libor using the same volatility, making the deal about 0.5 point cheap.

A second source said that both 350 and 400 bps over Libor seemed high given the company's other bonds. He said he was not aware of the SEC investigation.

Proceeds of The Pantry convertibles were expected to be used to pay down existing senior debt and for general corporate purposes, including acquisitions. Additionally, the company intends to use a portion of proceeds for the net cost of a convertible bond hedge and separate warrant transactions in connection with the notes.

Sanford, N.C.-based The Pantry operates a chain of convenience stores in the southeastern United States.

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