Armor slips to 99; Quicksilver, Option Care at bat; Delta rises; techs mixed

By Ronda Fears

Nashville, Oct. 26 - New deal flow continued to trickle along at a slow clip, but out of the gate, new paper from Armor Holdings Inc. headed lower and gray market levels were dim to non-existent for the Quicksilver Resources Inc. and Option Care Inc. deals on tap after the close. But, sales staffers insisted orders were running heavy on the fresh paper.

"The books are fine [on the new deals]. The market is starved for new paper," said a salesman working on one of the issues. "There will be a lot of flipping and that will make them trade funny."

A hedge fund manager, however, said the buyside is not overly enthusiastic about the terms on this new crop of issues. "It's more of the same," he said. "The sectors [of the issuers] are more appealing than the deal terms - oil, defense, biotech; that's what is drawing buyers."

Armor Holdings' overnight $300 million cash-to-zero convertible - talked to yield 2.0% with a 37.5% initial conversion premium - priced at that spot with a full book, according to market sources, and went directly south out of the chute - south from the par issue price and south of the gray market bid of 0.5 point under the issue price before pricing. Bookrunner Goldman Sachs & Co. closed the issue at 99 bid, 99.25 offered; the stock lost $2.07 on the day, or 5.27%, to end at $37.21.

Quicksilver's $130 million issue - talked to yield 1.375% to 1.875% with a 42.5% to 47.5% initial conversion premium - was seen in the gray market with an offer at one-quarter point over issue price but with no bids. And, nothing was seen on Option Care's deal - $75 million of convertibles talked to yield 1.75% to 2.25% with a 35% to 40% initial conversion premium - buyside traders said.

Otherwise in trading, Delta Air Lines Inc. spiked again Tuesday but traders said the convert market overall was widely mixed. Allied Waste Industries Ltd. continued to trade lower while Terra Industries Inc. was a tad higher. In the technology group, Novell Inc. was higher while Flextronics International Ltd. dropped. Also noteworthy, financial and insurance issues, namely Countrywide Financial Corp. and Aon Corp., were recovering from big losses last week.

Delta convertibles rise 7-8 points

Delta's convertible paper got another lift Tuesday as the Atlanta airline announced late Tuesday afternoon that it had reached a tentative contract with union leaders for its 185 flight superintendents.

That news fueled some optimism that it would encourage union pilots to ink a deal with the airline. The late afternoon announcement came before the closing bell, and traders reported a couple of late trades that propelled the Delta convertibles sharply higher on the day.

Delta's 8% convertible traded at 41.5 at the bell, up from 34 on Monday, and the 2.875% convertible gained about 7 points to 43.5. Delta shares also were sharply higher, adding 88 cents on the day, or 23.28%, to close Tuesday at $4.66.

Analysts also noted Tuesday that Delta's credit default spreads reversed course last week, expanding by a whopping 1,119 basis points over Libor to 6,371 basis points over Libor. That, too, could have accounted for the weakness in Delta paper last week, when the converts dropped collectively by about 10 points, one analyst said.

The contract with ground support comes on the heels of Delta announcing Monday that it had secured $600 million in financing from American Express Travel Related Services. Traders said again Tuesday, though, that "the majority" of onlookers still expect Delta will file bankruptcy.

Delta also had announced Monday that it had reached an agreement with holders of its 7.7% straight notes to defer $135 million in maturities coming in 2005, and on Tuesday those notes flew. The issue added 7 to 8 points to the 62 bid, 64 offered area.

Still pending is Delta's $680 million debt exchange and about $1 billion in wage cuts sought from pilots.

Flextronics off on weak outlook

Flextronics plunged Tuesday after the electronics contract manufacturer warned that fiscal third and fourth quarter results would fall below analysts' estimates, although it posted a turnaround into profits for fiscal second quarter.

For fiscal second quarter, Flextronics reported a profit of $92.6 million, or 16 cents a share, versus a net loss of $100 million, or 19 cents a share, a year prior with revenues gaining to $4.14 billion from $3.5 billion. Although it was a turnaround in bottom-line results, traders pointed out that the revenue score fell short of analysts' forecast of $4.2 billion.

"End market [demand] is not as robust as we anticipated in both the consumer and communications segments," Flextronics chief executive Michael Marks said in the company's conference call. "This maybe is a result of some inventory reductions, or it could be nothing more than caution based on oil prices, the election and so on. In either case, we see that as not that big a deal."

The market did, however.

The Flextronics 1% convertible dropped 2 to 3 points to 104.5 bid, 105.5 offered, traders said, while the stock lost 87 cents, or 6.94%, to $11.67.

Flextronics said it expects to report a fiscal third-quarter profit, excluding charges, of between 18 cents and 21 cents a share on revenue of $4.1 billion to $4.4 billion, compared with analysts' forecast for 22 cents a share. For fiscal fourth quarter, the company expects to earn 15 cents to 18 cents a share on sales between $3.8 billion and $4.2 billion, versus analysts' projections for 17 cents a share.

But elsewhere in the tech area, Novell Inc.'s 0.5% convertible was up 1 to 2 points to 96.25 bid.

Aon trades up 5.5 points

Among the worst credit spread performers over the past week was insurance broker Aon Corp. (Baa2/BBB+), according to a Merrill Lynch convertible research report Tuesday. Trading has slowed in the convertible paper, though traders said there are watchers keeping a close eye on it, looking to get involved on the cheapening. Credit analysts, meanwhile, suggest steering clear of the paper even with the weakness.

Yet, one sellside shop traded a small piece of the Aon 3.5% convert due 2012 early Tuesday at 116.25 with the stock at $21.10. It got better as the day wore on, with the issue closing at 117.5 bid, up roughly 6 points from Monday, and the stock continued to climb through Tuesday's session. Aon shares closed Tuesday at $21.54, up $1.90 on the day, or 9.67%.

At the root of the insurance broker's trouble is the possibility of pending charges stemming from N.Y. attorney general Eliot Spitzer's investigation into insurance brokering practices, which last week pinpointed charges against Marsh & McLennan and a handful of insurance firms.

Last week, Aon's five-year CDS spread blew out by 127 basis points over Libor to 247 basis points over Libor, the Merrill report shows, and its 7.375% straight notes due 2012 widened by 121 basis points to 297 basis points over.

As for the Aon convertible, Merrill shows an implied option adjusted spread of about 410 basis points over Treasuries, using a stock volatility input of 36.4% with the stock at $19.64 and the convertible at 108. At the current levels from Tuesday, the implied spread would be considerably tighter at 291 basis points, Merrill convertible analyst Marc Malloy said.

Merrill's credit strategy team reported that despite the recent rise in volatility and wider spreads in some areas like autos and auto parts, the investment-grade index is only 5 basis points wider than the narrowest point in September and just 4.5 basis points tighter than the start of September. Thus, with little change overall, Merrill's credit strategists say high-grade paper valuations are still unattractive.

Analyst: Take profits in Arrow

One of the best spread performers over the past week was Arrow Electronics Corp. (Baa3/BBB-) with its five-year credit default swaps contracting by 7 basis points over Libor to 92 basis points over Libor, according to Merrill research. On tightening in the credit, analysts suggest selling the paper.

Arrow has excellent liquidity with roughly $240 million in cash plus $1 billion available on its bank facility and asset securitization program. Furthermore, debt maturities are manageable for the next few years and capital expenditures are running low, said Dave Novosel, GimmeCredit analyst, said in a report Tuesday.

"Yet considering the relatively high leverage [adjusted debt to EBITDA of 3.6 times], the cyclicality and uncertain future of the distribution business, and the meaningful spread tightening this year, we recommend investors sell these bonds," Novosel said.

Arrow's 0% convertible due 2021 was quoted closing Tuesday flat at 54 bid, 54.25 offered while the stock dropped 18 cents, or 0.76%, to $23.54.

Countrywide lends well to arbs

By some accounts the mortgage lending group, particularly Countrywide Financial Corp., suffered severely on its earnings and outlook curtailment last week. But, as is often the case, when outright convertible holders suffer, the convertible arbitrageurs are profiting. Such was the case with Countrywide, sources said, both from a premium expansion standpoint and as a volatility play.

The convertible as well as Countrywide shares were rebounding sharply on Tuesday.

Countrywide's 0% convert last week fell severely on an outright basis - as much as 25 points over the entire week - after the huge mortgage company posted a 47% drop in quarterly earnings and cut its outlook as refinancings fell amid a rising interest rate climate.

"By the sounds of [the outright quotes on the convertible] Countrywide did terribly. For arbs, this was not the case," said a fixed-income fund manager who holds the convertible. "Some quirky language inserted into the prospectus at the time of exchange into the new note causes parity to reset based on the stock's average move, which created value as the stock fell.

"The CFC premium expansion was one of the big talking points last week. Unfortunately I was not clued in fast enough to gain," the fund manager continued.

The conversion premium on the issue expanded by nearly 10 percentage points, according to a sellside convertible analyst. He also noted that the implied volatility spiked by around 20 percentage points.

On Tuesday, the Countrywide convertible was quoted up about 3 points or better to 159.75 bid, 160.25 offered. The stock shot up $1.23, or 3.92%, to close at $32.62.

Countrywide is scheduled to discuss its outlook in a conference call scheduled for noon ET Nov. 3.

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