Calpine bounces on refi revival; Computer Associates mostly idle on getting junked; new deals soft

By Ronda Fears

Nashville, March 11 - Volatility in Treasuries wreaked havoc in the convertibles market Thursday, compounded by another slide in stocks. Even the new deals of Host Marriott LP and Apex Silver Mines Ltd. were soft out of the box, both closing underwater, although both were upsized on heavy orders.

Falling valuations and bond floors were the results of the wreckage in the broader markets, as stock prices tanked and bond yields sank on reports that al Qaeda was taking responsibility for the train bombings in Madrid.

Treasuries were extremely volatile during the session, however, causing pandemonium for convertible players hedging interest rate risk and the like. First, yields backed up on a selloff when the 10-year note auction flopped, dealers said, but the al Qaeda headlines sparked a flight to quality and the buying spree reined in yields.

"Bids were for higher-quality paper" in convertibles as well, one dealer noted.

"At the end of the day, bonds were not changed that dramatically, but the volatility in Treasuries just wreaked havoc."

Thin trading volume was the saving grace, though.

Or, perhaps it was a burr under the saddle of those left holding less desirable paper like that of Computer Associates International, since it was cut to junk Thursday. There were no bids for Computer Associates convertibles, but the 5s and 1.625s were marked 2.5 to 3 points lower.

"Not much was going on in the way of trading convertibles," said a buyside convertible trader at a hedge fund in New Jersey, who said the lack of conviction in the broader markets was weighing on the mood in convertibles.

Offers seemed to be more prevalent, he said, but bids hard to come by.

Paradox seen in pricings

Just as much mayhem was evident in the primary arena of the convertibles market.

"There is a paradox going on in the pricing of convertibles right now," said a portfolio manager at a huge hedge fund in New York.

"It makes you crazy to think about it for very long, because it's impossible to rationalize. First, there's nothing going on with any of the new deals in the gray market; that says something, and it's not good.

"Then, they are getting upsized, sometimes pricing at the tight end and sometimes at the wide end [of indicative terms], which suggests they are seeing at least good demand, and then immediately going underwater, which says they are too expensive at par."

Hedge funds are finding ways to make money on most of the deals, the portfolio manager acknowledged without proffering any specific strategies, but are still troubled by the outright performance of the bonds in the immediate aftermarket.

Outright convertible players also are disappointed with new deals of late, and investment bankers admit it has been a tough go of it selling new deals this week.

"We were at first excited to see yields creeping up, but then they killed us with the premiums," said an outright fund manager on the West Coast.

Silver, Marriott deals doze

Both the Silver and Marriott deals were upsized, as sellside sources said orders were healthy for final terms wide of yield talk. Yet, both ended the day under par as buyside sources again noted that the high premiums on both deals curbed enthusiasm.

Host Marriott sold an upsized $450 million of exchangeable notes, which convert into Host Marriott Corp. shares, to yield 3.25% with a 50% initial conversion premium. The notes priced at the cheap end of guidance for a 2.75% to 3.25% yield and a 50% to 55% initial conversion premium. The deal was bumped from $375 million.

Sellside analysts put the Marriott deal about 2% rich, at the midpoint of price talk, and several buyside sources put it at least 1% rich.

One of the co-managers of the Marriott deal closed it at 99 bid, 99 offered, but it traded much lower during the session.

"The bid was inside of par, 98, at the open and it slipped to trade at 97.75," said a buyside trader at an outright fund in New York.

"I was very surprised to find out it [the Marriott deal] wasn't repriced below par because of how it came out of the gate. Somebody got bagged on this one, I'm just glad it wasn't me."

Marriott shares closed off 7 cents, or 0.57% on the day, to $12.13.

Apex Silver Mines upsized its deal to $150 million from $125 million, selling it to yield 2.875% with a 31% initial conversion premium - at the wide end of yield talk for 2.375% to 2.875% and aggressively outside premium guidance of 25% to 30%.

Citigroup Global Markets Inc., bookrunner on the Silver deal, took it out at 99.75 bid, 100.75 offered, while the underlying stock closed down 34 cents, or 1.56%, to $21.50.

Calpine up on latest refi

Calpine Corp. got a nice bounce as it revived the $2.4 billion refinancings for its generation unit consisting of junk bonds and bank paper that was pulled about a month ago due to a buyer's strike of sorts, otherwise referred to by Calpine as unfavorable market conditions.

Although the refinancing package did not go well before, Calpine convertible holders were somewhat willing to bet the deals get done "because they have to, they're going to have to pay what the markets say they have to," as one dealer put it. Calpine Generating Co. LLC, or CalGen, is trying to refinance some $2.5 billion of credit lines that mature this coming November.

Calpine's 4.75% convertible was wrapped around 115 on the heels of the refi news, another dealer said. It was better by about 0.5 point on a delta-neutral hedge, he said.

Calpine shares closed up 34 cents, or 6.8%, at $5.34.

Sources in the high-yield market tell Prospect News the $2.405 billion package is in four parts. The five-year $800 million "super secured" floating-rate loans are talked at Libor plus 350-375 basis points. The six-year $855 million senior secured floating-rate loans or notes are talked at Libor plus 550-575 basis points. The seven-year $550 million secured floating-rate notes are talked at Libor plus 875-900 basis points. The seven-year $200 million secured fixed-rate notes are talked to yield 11.25% to 11.5%. There is also a new $250 million bank revolver on the table.

Previously, the refinancing package consisted of two $525 million tranches - seven-year fixed-rate notes talked at a yield in the 11.25% area and seven-year floating-rate notes talked at Libor plus 725 basis points - and a $1.3 billion non-recourse first priority secured institutional term loan with an interest rate of Libor plus 475 basis points, having been boosted by 50 basis points.

Computer Associates junked

Computer Associates did not see a lot of action as a result of the Moody's Investors Service downgrade that put the credit in junk territory, but the converts were marked about 2.5 to 3 points lower, outright, as the stock fell almost 3%.

Moody's cut Computer Associates senior debt to Ba1 from Baa3 with a stable outlook, citing ongoing uncertainty associated with the continuing government investigation into the company's revenue recognition practices, less financial flexibility in the face of near-term debt maturities and intensifying competition in IT vendors.

The Computer Associates 5% convertible was more active than the newer 1.625% convert, a dealer said, adding that he was "surprised there wasn't much traded." He said there were sellers but no hits for the offers.

Computer Associates' 5% issue was pegged at 122.625 bid, 123.375 offered, and the 1.625% issue was at 147 bid, 147.5 offered. The stock closed down 77 cents, or 2.88%, to $26.

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