Xerox emerges as a mandatory; Mirant in freefall; Tyco gains on unit sale talk; airlines fly high

By Ronda Fears

Nashville, June 11 - Xerox Corp.'s long-abuzz convertible deal surfaced as a mandatory for next week's business, but most players were too busy with deals at hand to really evaluate it. Four were at bat after the close and another slated before Thursday's open.

"Depending on the terms it may not look so bad, I haven't had a chance to look at it yet," said a convertible fund manager, who had been hoping the Xerox convert would be a bond.

Mesa Air Group and Guitar Center Inc. both put new paper into circulation and both were reported north of par out of the gate.

Mesa Air's discount cash-to-zero convert was sweetened to yield 6.25% with a 46% initial conversion premium, versus guidance that put the yield at 6.0% and initial conversion premium between 52.5% and 55%.

All airline paper was better bid, traders said, as convert players extended a reach for yield.

"Airlines were bid up by as much as 3 to 5 points," said one dealer.

"People are reaching for yield - AirTran [7%], Delta [8%], Northwest [6.625%] - and nothing has gotten so rich that it's off the charts yet."

Traders also were talking about Mirant Corp., Calpine Corp. and Tyco International Ltd., along with new issues from FEI Co. and Cephalon Inc., both of which were still getting pressured lower.

Several oil and gas names - Cheasapeake Energy Corp., St. Mary Land & Exploration Co. and Grey Wolf Inc. - also were mentioned as a spot where players are looking to pick up yield.

News reports citing hedge fund managers that Tyco may be on the verge of selling its U.S. Surgical business, possibly to Johnson & Johnson, boosted the converts of both interests.

Tyco's 2.75s gained 2.625 points to 111.25 bid and the 3.125s rose 3.5 points to 114.75 bid with the stock added 98c, or 5.4%, to 19.12.

The J&J zero of 2014 gained 1 point to 135 bid, 135.5 offer with the stock closing up 36c, or 0.68%, to $53.

Mirant, however, continued to "freefall," as one buyside trader put it. The 2.5s, at 59.5 bid, were down another 2.5 points and the 5.75s, at 57.75 bid, lost another 2 points. Mirant shares closed up 9c, or 3.88%, to $2.41.

As had been rumored, a group of Mirant Americas Generation LLC bondholders filed suit to block Mirant's exchange offer for its 2.5% convertible and 7.4% junk bonds. The MAG unit also has made an exchange offer for some of its bonds, but the holders assert the Mirant offer unfairly subordinates the subsidiary debt.

Mirant's converts were being dumped for other power issues like Calpine, AES Corp. CMS Energy Corp. and The Williams Cos. Inc., one distressed trader said. He noted that AES and CMS paper was also firmer, each by about 2 points, in "junkland."

Calpine's 4% converts gained 3 points to 86.5 bid, 87.5 offer with the stock adding 59c, or 10.81%, to $6.05.

After the close, Xerox's $650 million mandatory was launched but immediately at bat were small deals from RealNetworks Inc., Tekelec, Duract Corp., and Guilford Pharmaceuticals Inc. Together the four issues total $325 million.

RealNetworks was pitching $100 million of seven-year convertible subordinated notes with guidance for a yield 0% with a 28% to 33% initial conversion premium. Merrill Lynch analysts put it 1.9% cheap, using a credit spread of 740 basis points over Treasuries and a 55% stock volatility. Another sellside shop put it 2.5% rich, using 800 bps over Treasuries and a 55% volatility.

RealNetworks shares closed down 44c, or 5.92%, to $6.99.

The Tekelec deal - talked to yield 2.25% to 2.75% with a 50% to 55% initial conversion premium - was put at 4.3% cheap by Merrill Lynch, using a credit spread of 600 bps over Treasuries and a 50% stock volatility. Lehman Brothers put it 0.4% cheap, using 700 bps over Treasuries and a 50% volatility. Deutsche Bank Securities put it 4.85% cheap, using 500 bps over Libor and a 50% volatility.

Ahead of the market open Thursday, NPS Pharmaceuticals Inc. is pricing a five-year convert that was boosted even before the close. It was launched early Wednesday at $125 million and bumped to $170 million by late afternoon in a sign of strong demand.

The NPS convert is talked to yield 3.0% to 3.5% with a 30% to 35% initial conversion premium. NPS shares closed up 27c, or 1%, to $27.10.

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