Delta forces peer group lower; Mandalay, floaters bid higher; Epix, Beazer new deals emerge

By Ronda Fears

Nashville, June 1 - Elevated bankruptcy concerns at Delta Air Lines Inc., combined with rising fuel costs, forced all the airline paper to take a dive Tuesday. Fuel prices rose in tandem with crude oil, which hit a new record of $42.33 a barrel, on heightened terrorist fears in the wake of violence in Saudi Arabia over the holiday weekend.

Cruise ship and other travel-related paper was lower in the session, too, on the higher fuel prices as well as recent warnings from U.S. government officials about possible terrorist strikes over the summer.

Mandalay Resort Group's floating-rate cash-to-zero convertible, however, was a standout gainer in the leisure group, edging 0.5 point higher to 135 bid, 135.5 offered.

Traders noted, though, that all the convertible floaters were higher Tuesday as Treasury yields backed up again following some steep gains in May that caused severe pain to lots of hedge fund players.

"It's a double whammy for the hedge guys in convertibles," said a convertible trader at a hedge fund in New York.

It may get worse before it gets better, he added. "Rates have backed up so dramatically on the long end; then, on the short end, when [interest] rates go up., the carrying costs short up and it's murder."

New deal terms where issues are coming to market with premium levels that "back in the day" were considered busted will aggravate the situation, another convertible trader at a hedge fund in New Jersey said.

"Legitimate convertibles come at 4 to 5%, up 20 to 25%," the buyside trader said, "not 1¼%, up 60% or 2½%, up 45%."

Epix, Beazer deals surface

Much as expected, the new month began with a couple of new deals as issuers try to beat the ticking clock that will chime in higher interest rates - sometime later this year. The block-buster deal many players anticipate did not surface, however, but Epix Medical Inc. and Beazer Homes USA Inc. launched small deals that together total $225 million.

Epix Medical was pitching an overnight offering of $75 million of 20-year convertible notes talked to yield 2.5% to 3.0% with a 17.5% to 22.5% initial conversion premium.

Cambridge, Mass.-based Epix Medical, which develops contrast agents for magnetic resonance imaging, said it would use proceeds for general corporate purposes, including working capital, capital expenditures, research and commercialization of products, as well as acquisitions and to repay debt.

Beazer is going for a full day of marketing with $150 million of 20-year convertible notes talked to yield 4.375% to 4.875% with a 53% to 58% initial conversion premium. It will price after Wednesday's close.

A buyside convertible trader in New York said Beazer could benefit from positive data in the housing industry. The U.S. Commerce Department reported on Tuesday that construction spending rose 1.3% in April to a record $970.4 billion. In March, construction spending rose a revised 2.4% after the department initially estimated a 1.5% gain.

Coeur d'Alene rises

Coeur d'Alene Mines Corp. stock weakened on a $1.8 billion acquisition announcement by the company, but convertible dealers said the credit got a leg-up from a positive watch for the ratings by Standard & Poor's as well as higher gold prices.

The 1.25% convertible was pegged 1.5 points higher at 86.5 bid, 87.5 offered while the stock ended off 18 cents, or 3.84% lower, at $4.51.

S&P placed Coeur d'Alene's ratings on positive watch, saying the purchase of Wheaton River Minerals would help dramatically increase its size and scope of operations that had looked limited.

Gold futures closed at $395.50 an ounce on the New York Mercantile Exchange, up 60 cents for the session after hitting $399.80 at one point during the day - just shy of the key $400 level.

Media paper mixed on Viacom

Viacom Inc. led most of the media paper lower Tuesday following the abrupt resignation of Mel Karmazin as president and chief operating officer. Walt Disney Co. was the exception, although sellside market sources say the Disney convertibles are due a correction after the stock has pulled back on the cancelled takeover attempt by Comcast Corp.

Viacom-linked convertibles were down about 0.5 point along with similar declines in Time Warner Inc. and News Corp. convertible paper, traders said.

Disney's 2.125% convertible, however, added 0.5 point to 105.25 bid, 105.5 offered with the stock up 37 cents on the day, or 1.58%, to $23.84.

Merrill Lynch equity analyst Jessica Reif Cohen said in a report that Karmazin's resignation is a "very significant negative" for Viacom, but she kept a buy rating on the stock due to what she referred to as "very attractive" valuation and strong operating fundamentals.

Viacom chief executive Sumner Redstone said on a conference call that Karmazin left for professional and personal reasons. The company's board has named Tom Freston and Leslie Moonves co-presidents and co-chief operating officers, effective immediately.

Cruise ship paper dips

Travel concerns this summer put pressure on virtually all the leisure paper, traders said.

Carnival Corp.'s convertibles were all down by about 0.5 point with the cash-to-zeros at 73 bid, the zeros at 74.25 bid and the 2s at 122.25 bid. The stock ended off 26 cents, or 0.61%, to $42.35.

Royal Caribbean Cruises Ltd.'s convertibles were off similarly. The 0% due February 2021 dropped 0.375 point to 50.875 bid, and the 0% due May 2021 dipped 0.125 point to 64.25 bid. The stock slipped 8 cents, or 0.2%, to close at $39.04.

But, Lehman Brothers equity analyst Felicia Rae Kantor said in a report that the recent weakness in cruise ship stock is unwarranted as both of the companies have strong fundamentals. Noting concerns over rising fuel costs and interest rates, plus concern about second quarter shortfalls, she noted that since the end of March, Carnival's stock has lost 6.3% and Royal Caribbean's stock has fallen 12% versus a 0.9% decline in the S&P 500 index.

While Kantor said fourth quarter expectations may be too high, she thinks second quarter results will be at the high end of forecasts and the first half of fiscal 2005 is tracking ahead of plan.

Airline paper takes a dive

In addition to fuel costs, the airline group was suffering from the spill-over of worries about the financial health of Delta Air Lines Inc.

"All the airline paper was getting crushed," said a high-yield trader who traffics a good deal of airline convertibles.

"Over the next couple of months, this stuff will probably lose a lot more ground," he said, noting that in addition to the summer travel uncertainty and fuel prices, Delta's fate hinges on an agreement with pilots by Aug. 3.

Delta was still "free-falling," as one dealer put it, in the wake of hiring New York-based law firm Davis Polk & Wardwell and the high-profile restructuring specialist firm The Blackstone Group last week. That news renewed, and escalated, bankruptcy fears surrounding the carrier.

On Tuesday, the Delta 8% convertibles fell another 3.25 points and the 2.875% converts another 2.75 points, while the stock plunged 41 cents, or 6.72%, to close at $5.69.

Continental Airlines Corp. convertibles were down 2 to 3 points, dealers said, and the AMR Corp. converts lost 1 to 2 points.

Nortel up ahead of update

Nortel Networks Corp. was slightly higher ahead of an update from the company scheduled shortly after the opening bell on Wednesday, which will feature the new top executives of the company.

"This is really the market's first chance to get a feel for the new talent, if there is any," a dealer said. He said the Nortel convertibles were benefiting Tuesday from the company getting a waiver last Friday to keep a $750 million credit facility in tact with Export Development Canada.

Ontario-based Nortel shocked the markets a month ago when it fired three top executives, including chief executive Frank Dunn, after learning of overstated profits in 2003 and understated losses in prior years.

The company's new chief executive and chief financial officer will report on the upcoming financial restatements and the status of Nortel's business. The report is required by the Ontario Securities Commission due to the company missing deadlines to report financial results. As a result, Nortel is required to provide biweekly updates until it files the results.

The call is slated to begin Wednesday at 8:45 a.m. ET.

The Nortel 4.25% convertible gained 0.75 point Tuesday to 92.25 bid, 92.75 offered, while the stock climbed a quarter, or 6.5%, to close at $4.08.

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