Walter seesaws out of gate but ends at 99.75; Conseco, Shuffle Master emerge; Delta nosedives

By Ronda Fears

Nashville, April 15 - Caution if not an all-out alarm regarding interest rates still set the tone on convertible desks Thursday, yet traders stopped short of saying there was a broad-based selloff or marked cheapening under way.

"We were a little soft today," said a sellside trader at one of the bulge bracket firms. "[There were] lots of sellers, not many buyers."

A couple of money managers commented that in addition to keeping up with the markets, they were fielding calls from frantic investors worried about rising interest rates.

The growing sentiment that rates will get hiked sooner rather than later this year caused a lot of sell buttons to get pushed in interest rate sensitive areas, in addition to convertibles with terms that won't perform well in such a climate. That included a lot of new paper put into circulation in recent months.

"If you are not hedged on interest rates, you don't want to be holding a low coupon, high premium bond," one sellside trader said.

In another quadrant of the market altogether - the boutiques that handle a good deal of busted and distressed converts - Delta Air Lines Inc. was on the move, in a nosedive, rather, when the beleaguered airline surprised the market with its chief financial officer's sudden departure on the heels of its earnings.

The primary arena was active, too, with a trio of new deals on the launching pad or breaking to trade.

Walter Industries Inc. - a Tampa, Fla.-based homebuilder as well as dealer in commodity price sensitive industrial products like steel pipe - came out of the gate with a bid at par but it was quickly tossed about and traded all over the map before ending the day under water at 99.75.

Meanwhile, a quick-sale deal from another gaming name, Shuffle Master Inc., emerged, and Conseco Inc. put a boosted mandatory deal on the calendar to price in a couple of weeks after a full road show.

Shuffle Master deal in the mix

Las Vegas based Shuffle Master, which supplies automatic card shufflers and special gaming tables to casinos, launched $100 million of 20-year convertible notes to price on swap with $50 million of proceeds earmarked to buy back stock sold short by convertible buyers.

Guidance put the coupon at 1.25% to 1.75% and initial conversion premium at 33% to 37%. At the middle of the price talk, Merrill Lynch analysts put it 2.3% cheap, using a credit spread of 310 basis points over Treasuries and a 25% stock volatility.

Deutsche Banc Securities - which has brought several issues from the hot gaming sector to the market in recent weeks - is sole bookrunner of the Rule 144A deal.

The popularity of Shuffle Master stems in part from the huge profits parlayed on gaming names in recent weeks, which has been growing even among new issues that were not initially popular - Caesars Entertainment Corp., for example. That Las Vegas casino operator's floater was thought to be too rich when it came to market a couple of weeks ago, but since the rate climate changed it has become a darling of sorts. The Caesars floater was pegged at 102.5 bid, 102.75 offered Thursday.

Walter traded as high as 100.5

Walter's deal was jerked around by a lot of flipping in the paper early on as it came out of the chute, but activity trailed off sharply in the afternoon and the issue closed under par. It was bid at 100 first thing and traded as high as 100.5, according to a participant in the deal, but closed out the session at 99.75.

Walter sold an upsized $150 million, from $125 million, issue to yield 3.75% with a 37.5% initial conversion premium. The issue priced in the middle of guidance for a 3.5% to 4.0% coupon, up 35% to 40%.

Market sources put the Walter deal 1.5% rich to 2% cheap at the midpoint of price talk.

Walter is using about $25 million of proceeds to buyback shares from Kohlberg Kravis Roberts & Co., which holds a 33.3% equity stake in the company, at an agreed price of $12.75 per share.

The company intends to use the bulk of proceeds, together with available cash or borrowings under its senior secured bank revolver, to prepay in full the $113.8 million outstanding term loan portion of its senior secured credit facilities plus fees and accrued interest on that loan. The company said it may use funds for additional share repurchases of up to $25 million from KKR.

In addition, Walter earmarked about $10 million of proceeds to purchase shares sold short by convertible note purchasers.

Walter sinks as hedgies bail

Hedge fund players, however, got frustrated with their Walter positions, or lack thereof, and began bailing out, flipping the paper.

One trader noted that a thin market in the stock hurt it insofar as hedge funds getting excited to play it; Walter's common stock dividend yield of 0.92% also weighed on it.

"People basically couldn't get a short on, so they just started dumping the bonds," one hedge fund trader said.

"It traded up early on but it traded down pretty quickly."

Another major point of contention on the Walter deal was where to put the credit. Analysts used credit spreads ranging from 375 to 500 basis points over Libor to model it.

Joint bookrunner Morgan Stanley & Co. took the Walter convertible out at 99.75 bid, 100.25 offered.

In the gray market Wednesday, the issue had a bid of 0.25 point over issue price in the Street but later, in the afternoon, it traded at plus 0.25 and the bid stuck there, with an offer at plus 1.25 points.

Walter shares closed Thursday off 36 cents, or 2.77%, to $12.62.

Conseco emerges

After filing a registration statement almost three months ago, Conseco on Thursday launched $500 million of three-year convertible mandatory units - considerably more than originally planned in the Securities and Exchange Commission filing.

The Carmel, Ind.-based insurance company is also selling $1 billion of common stock, which also is more than originally registered.

Conseco filed a registration statement on the offering in Jan. 30, estimating the mandatory at $350 million and stock at $800 million. The registration statement was amended in a filing Thursday.

Few market participants were spending much time on the deal, however, as pricing was tentatively set for April 28.

But one buyside source commented cursorily, "[I] love to see another mandatory, nice for yield, nice for upside."

Price talk was circulating already, however, putting the dividend at 5.75% to 6.25% and initial conversion premium between 18% and 22%.

Merrill Lynch analysts put the new Conseco convertible 2.2% cheap at the midpoint of guidance, using a credit spread of 1,000 basis points over Treasuries and a 25% stock volatility, noting that the existing Conseco convert is rated CCC-/Ca.

After emerging bankruptcy last September, Conseco is still striving to restructure its capital base, as part of the proceeds are earmarked to take out the $859.7 million of 10.5% step-up payable-in-kind convertible preferred that was issued to pay bondholder claims in the bankruptcy. The convertible would step up to 11% on Sept. 11, 2005 and are payable in kind until Sept. 11, 2005.

Proceeds also are slated to pay on its senior credit facility - which matures in 2009 and currently has a weighted average interest rate of 7.8% - contribute capital to subsidiaries and for general corporate purposes.

Delta tumbles on CFO's exit

Delta took a nosedive when - on top of profitability woes at the airline and concerns about the prospects of getting pilots to take wage concessions - its CFO resigned, effective at the end of this month.

M. Michele Burns is leaving Delta to take a position with another troubled convertible name, Mirant Corp., but there was nothing seen in the Mirant converts as a result.

Burns had just co-hosted a conference call Wednesday with Delta chief executive Gerald Grinstein to discuss the company's earnings, in which the two commented that continued losses are "unsustainable" and talked about a way-too-expensive cost structure - pilot costs being a particular sore spot.

Convertible traders at smaller boutiques described the Delta convertibles as very active, while the bigger bulge bracket firms do not traffic the bonds much.

Delta's newer 2.875% convertible lost around 3.5 points, and the 8% issue plunged more than 7 points.

The 2.875s, trading on full hedge, ended the day at a bid of 19 points over parity and an offer at 19.5 points over. The 8s also closed the day at a bid of 71with the offer at 71.5.

Delta stock plummeted 72 cents, or 9.35% on the day, to close at $6.98.

Delta concerns mount daily

Investors in Delta were already gravely concerned about its operations, not to mention a monster-sized debtload, so a key executive leaving was a huge red flag.

"This is not the time for the CFO to be leaving," a sellside trader said.

"Who's running the show is very important for the next six to nine months."

Delta reported a narrower first-quarter loss Wednesday than a year ago, but the air carrier's top executives grimly warned that its future in part hinges on getting a tighter grip on costs - particularly pilot pay.

With a debt burden of some $20.6 billion and debt-to-capitalization ratio of 104%, the Delta executives characterized the company's balance sheet as "has been severely damaged to the point of exhaustion."

On top of ongoing losses, Delta's cash balances fell by $500 million to $2.2 billion at year-end - primarily due paying pension fund obligations and some debt repayment.

It is imperative that Delta rein in costs, the executives said, to stay competitive, and that's were the battle with pilots comes in. In fact, you could drive a Boeing 747 between the points argued by the two as acceptable concessions - the airline wants to cut the pilots' benefits by 30% and the pilots are willing to give up 9%.

The CEO dismissed talk of bankruptcy but said suggestions for overhauling the company will be presented to its board of directors at a late-summer meeting.

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