McMoRan gushes to 107.75; PMA exchange offer panned; Northwest up as CEO exits

By Ronda Fears

Nashville, Oct. 1 - McMoRan Exploration Co.'s new convertible shot up like a gusher right out of the gate, rising about 8 points from the par issue price by the closing bell Friday. It was a decidedly firmer market, traders said, as buying prevailed for the first day of the fourth quarter.

McMoRan sold an upsized $115 million of seven-year convertible senior notes, boosted from $75 million, to yield 5.25% with a 30% initial conversion premium - at the middle of yield talk for a 5.0% to 5.5% coupon and the aggressive end of premium guidance of 25% to 30%. Part of the deal's appeal, traders said, was the three years of collateralized coupons.

Merrill Lynch, a joint bookrunner on the McMoRan Exploration convertible sale, closed the issue Friday at 107.75 bid, 108.25 offered. The underlying stock rose 17 cents on the day, or 1.3%, to $13.20. And, McMoRan's existing 6% convertible bond was up by a quarter-point to 122.5 bid.

Calpine Corp.'s newest convert, the discount 6% notes, added 2.5 points, also, closing the week at 91.5 bid, 92.5 offered. A couple of other energy names were mentioned Friday, as well. TXU Corp. convertibles, all three the subject of a tender offer for nearly all $1.5 billion of paper, were higher along with CenterPoint Energy Inc.

Airline issues gained ground Friday after losing most of the week, although there was news from Northwest Airlines Corp. on the tape early that its chief executive had resigned. But traders said the new quarter and a general willingness to hold long positions over the weekend buoyed Northwest bonds as well as other carriers like troubled Delta Air Lines Inc.

PMA 4.25% issue at 97.5 bid

Elsewhere in the secondary market, PMA Capital Corp. aired the widely anticipated exchange offer for its 4.25% convertible but players said it was almost immediately batted down as failing to meet bondholders' expectations.

About a week ago, the PMA Capital convertibles shot up 5 points after the company polled bondholders about their institutional standing, mentioning that it wanted to seek an exchange, in a letter.

The Philadelphia-based insurance firm, which largely specializes in workers compensation policies, said the exchange is intended to refinance the existing $86.25 million issue with a later put date. In addition, PMA is aiming to improve its debt ratings and the financial strength ratings of The PMA Insurance Group. (See full terms of the exchange offer elsewhere in this edition.)

Banc of America Securities is the dealer manager for the exchange, but timing along with several specific details have yet to be established.

"Bondholders view the exchange offer that the company has outlined as a waste of time. There will be a major revision coming. [Banc of America], their banker, was out of touch with the marketplace," said one trader who makes a market in the PMA convertibles.

"PMACA will have to make major revisions, otherwise they won't get any and then no upgrade and then no recovery in insurance sales and then the company shrinks into oblivion. They [bondholders] strongly feel that the terms will be adjusted, the conversion ratio lowered to the 9.5% to 10% area and get call protection till 2009."

The PMA convertibles were pegged Friday at 97.5 bid, 100 offered, but the trader said there were really "no bonds around for sale" as the bondholders think it worth holding on for a more palatable exchange offer.

Northwest up as CEO resigns

Northwest Airlines' chief executive resigned, but traders said the news couldn't dissuade the positive tone for beaten down airline paper.

Northwest's convertibles rose about 1 to 1.5 points and the sector in general was on higher ground even as crude oil settled over the $50 a barrel mark for the first time in history, gaining 48 cents to $50.12.

Standard & Poor's said the management change at Northwest is expected to be smooth and the airline's strategy is expected to remain in tact. Thus, the rating agency was not overly concerned. Two months ago, S&P cut Northwest's ratings on worries that efforts to reduce labor costs may leave it at a competitive disadvantage in the long run.

"Securing concessionary agreements from the airline's labor unions, an area of responsibility for [Douglas] Steenland [replacement for Richard Anderson as CEO], continues to be the key challenge facing the company," S&P said, adding, however, "Anderson and Steenland have worked together in their current positions since 2001. Negotiations with the pilots to secure an initial round of concessions are believed to be well advanced."

Northwest has targeted $950 million in labor cost reductions, with about $300 million from pilots, while the pilots have countered with a $200 million wage cut.

Delta, AMR rise with sector

Like other U.S. airlines, Northwest is pressured by record high jet fuel prices and weak domestic ticket prices. But all were taking flight in Friday's session, again, as record crude oil prices were ignored.

Unlike Northwest, Delta is seen teetering on the edge of bankruptcy as it also strives for a huge wage concession package from its pilots. American Airlines Inc. parent AMR Corp. narrowly escaped a bankruptcy filing last year, too.

And, all have had trouble with steering the ship as CEOs of Delta, AMR Corp. and other major airlines have all exited within the past year, as well, amid major financing restructuring efforts.

"There wasn't what I'd call a huge amount of bids for the airline paper, but all of it was firmer," said a sellside dealer. "I suppose the thinking is partly that all this stuff has been beaten down pretty severely, and so the risk is a lot less."

Delta's convertibles were up slightly with the 8% issue at 29 bid, 30 offered and the 2.875% issue at 32 bid, 33 offered while the stock gained 16 cents on the day, or 4.86%, to close at $3.45. Delta's straight bonds were described as just "holding in there" Friday after a 2-point slide on Thursday by a distressed debt trader. He pegged the long-dated 8.3% issue at 23.5 bid, 24.5 offered. Delta's shorter paper, the 7.7s, and the equipment trust certificates, were heard lower by about a point, however.

AMR's convertibles were both about 1 point higher, with the stock up 24 cents, or 3.27%, to $7.57.

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