American Tower repriced at 97.75, ends at 99; Mills deal surfaces; oil issues soften

By Ronda Fears

Nashville, Aug. 17 - New deals continued to trickle along at a lazy summer pace with The Mills Corp. launching a $275 million convertible preferred offering after Tuesday's close. It was another bought deal but not heard to be reoffered below par like American Tower Corp.'s.

The Mills deal was pricing off the Morgan Stanley desk with a 6.75% dividend and 33% initial conversion premium. The Arlington, Va.-based real estate investment trust was using proceeds toward its $1 billion acquisition of managing interests in nine malls from General Motors Asset Management, which also was announced Tuesday.

"It's a small deal; [it] shouldn't be hard to move," said a multi-strategy fund manager in New York, who hadn't heard of the deal getting reoffered below par. "It's not for me, though. It actually doesn't model out that terrible, just boring and not all that cheap."

American Tower's new $300 million convertible bond was first getting remarketed at 98.5 by underwriter Goldman Sachs & Co. when it launched after Monday's close, and buyside sources thought it would have to be cheapened to move it. The 3%, up 38.5% paper finally was reoffered at 97.75, a buyside source said, but gained to 99 by Tuesday's close.

Aquila Inc.'s deal, set to price after Wednesday's close, still was not moving in the gray market. But, market sources said the $300 million mandatory issue - talked at 6.75% to 7.25%, up 18% to 22% - was seeing some nice interest.

Elsewhere, in the secondary market, trading was lackluster, dealers said.

Oil was again a headline maker with the September contract hitting an intraday high of $46.95 a barrel before settling up 70 cents at $46.75 - a new high. But most of the oilfield convertibles were getting marked lower as stocks in that sector trended lower, with Nabors Industries Ltd. and Chesapeake Energy Corp. mentioned on a couple of desks.

Still, traders said, there was not a lot of buying in oil and gas paper because it had gotten so expensive over the past month during oil's surge.

Amerada Hess Corp.'s convertible plummeted 2.25 points amid a selloff, actually, on reports of its New Jersey refinery getting shut down because of lightning damage. Gasoline prices leveled off Tuesday, edging up 0.1 cent to $1.3055 a gallon, but are still at record levels.

Elsewhere in energy, independent power producer Calpine Corp.'s paper was higher after the company announced it will rake in $625 million from the sale of some natural gas assets in Canada. The Calpine 4.75% convert traded as high as 74, a sellside trader said, before settling back to close at 73 bid, 73.5 offered, a 1.25-point gain from Monday. Calpine's junk bonds were up a half-point to a point as well, with the 7.75% notes due 2009 at 61 bid.

American Tower deal teeters

American Tower's overnighter indeed had to be cheapened to move it, as buyside market sources had expected. The 3%, up 38.5% convertible was repriced at 97.75 and then opened with a bid at that level but traded as low as 97 out of the gate, one buyside trader said, before it closed out the session at 99.

American Tower shares on Tuesday lost 44 cents, or 2.97%, to $14.36, which traders said pressured its other convertibles down about 2 to 2.5 points.

Reactions were mixed to the deal.

"Thankfully, I did not get involved in [the new American Tower convertible], although years ago I had always done well with their converts," said a convertible fund manager in New York. "As you know, they must have been priced wrong today, as they traded straight down."

But there were "bottom-feeders" buying the paper at the sub-par levels.

"It is cheap money for the company and they are reducing annual interest expense by something like $20 million," said a buyside trader. "This name has been a money-maker for us. The need for [towers] is not going away, if anything it's just going to get bigger and bigger."

Aquila deal quietly sees action

Aquila Inc.'s mandatory was still quiet in the gray market, but market sources said it was getting a lot of interest and the books are filling up quickly, if not already booked full at the close Tuesday. Pricing is not scheduled until after Wednesday, though.

"Obviously, the market likes this deal," said an outright fund manager, noting Aquila shares were on the rebound Tuesday. "Looks like the deal is already oversold [over-subscribed], and Aquila bonds are at par and the Quibs [quarterly income bonds] have rallied, too. The Quibs are a steal."

Aquila's 7.875% quarterly income bonds, which trade on the New York Stock Exchange, gained 0.29 on Tuesday to 21.83 on heavy volume. The stock added 16 cents, or 6.84%, to $2.50.

A source familiar with the deal said the big draw to Aquila is that it is a turnaround story following the Kansas City-based utility's decline to junk territory in mid 2002. Since then, the company has been trying to shed all its merchant energy exposure and said Monday that it has terminated 75% of its prepaid natural gas supply contracts.

"Aquila has some very valuable utility properties. Of course, things don't look too good right now when the stock is at or near the bottom," the capital markets source said. "But when a utility goes back to the basics of running their business, they come back and become very profitable. There are a lot of utilities that are coming back."

But some fear that bankruptcy may be looming for Aquila, a buyside trader said, who remarked that he is passing on the deal.

"Obviously they are backed into a corner and this is a Hail Mary pass," the trader said. "So if they can complete this offering, they can survive another year. Then what? If they don't [complete the offerings], they said they would be required to seek other means of restructuring."

Slippage seen in oil names

Several oil and gas issues were easier Tuesday as the sector back-tracked, but it wasn't enough to lure a lot of buyers into the market. In fact, there was "a slew" of selling in Amerada Hess on its refinery shutdown headlines.

"So many of the [oil] converts have such high premiums, that although I would like to get involved, so few offer opportunities," said a convertible hedge fund manager in New York.

Reuters reported that Amerada Hess was forced to shut a 62,000 barrel per day fluid catalytic cracking unit at its Port Reading, N.J., refinery last Wednesday due to a lightning strike that damaged a motor, and the gasoline-making unit was expected to be out of service until sometime later this week.

Amerada Hess' 7% mandatory due 2006 fell 2.26 points, or 3.17%, to 69.14 with volume at double the average.

Nabors and Chesapeake Energy also were under pressure, which one sellside trader said was borne out of anxiety about natural gas prices vis-à-vis storage levels. Natural gas for September delivery settled up 0.26 million British thermal units at $5.373.

Chesapeake's three perpetual convertible preferreds were all down by a point or more, a sellside trader said. The 6% issue was at 108, the 5% issue at 73.875 and 4.125% issue at 90. Chesapeake shares closed down 36 cents, or 2.55%, to $13.75.

Nabors, a drilling company that mostly searches for natural gas, had its stock drop $1.72, or 3.94%, to $41.90. Its 0% convertible due 2023 dropped about 1 point to around 92.

"As natural gas storage builds up, which is usual for the summer months, prices get a little soft. There's nothing new on Chesapeake. The whole sector is correcting and waiting on winter to move [natural gas] prices back up," the trader said.

Because of a mild summer throughout the United States, he said natural gas usage levels have not been as high as normal and, thus, storage levels are higher than normal. So, prices will weaken.

Natural gas demand depends on weather. Summer has not arrived in a lot of places.

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