Delta convertibles a wallflower at the junk bond party; Playboy emerges; Magna better; Calpine selling seen

By Ronda Fears

Nashville, March 8 - Convertible players were somewhat unexcited about the Nash Finch Co. deal on tap to price after Wednesday's closing bell, but the Playboy Enterprises Inc. deal that surfaced shortly after Tuesday's close caught their eye if for no other reason than name recognition.

"I'm looking at NAFC," one market source said. "Early comments around here were basically a yawn."

Nash Finch Co. is pitching $150 million of discount cash-to-zero convertibles talked to yield at 2.75% to 3.25% with an initial conversion premium of 32.5% to 37.5%.

"Remember, sex always sells," said another market source, referring to the Playboy deal.

Playboy will be marketing $100 million of 20-year convertible notes with guidance for a 2.5% to 3.0% coupon and initial conversion premium of 30% to 35% all of Wednesday, with pricing slated after the close.

Otherwise, the market was described as very sloppy and traders grumbled about difficulty in matching up both sides of a trade with stocks trading sideways to slightly lower and bond yields backing up a bit, also amid sluggish activity.

"Getting anything done was just damn near impossible today, and yesterday," one trader remarked.

Snow in the Northeast also provided an excuse for many to evacuate trading desks earlier than they usually would. "The day is done," one said about a half-hour before the market closed.

Texas Instruments Inc.'s warning failed to stir any reaction among convertibles in the chip sector, traders said, and biotechs were quiet following a week of blow-ups in the group.

Delta Air Lines Inc. convertibles missed the party altogether that was going on with its bonds in the high-yield market. One convertible trader said Delta convertible holders were too heady on the airline's recent comeback. And the offers were too high to find hits as the straight junk bonds took off with oil, which topped $55 a barrel at one point in the session before settling at $54.58, up 70 cents on the day.

There was little to no buying interest in Calpine Corp., either, following a run-up in those convertibles over the past week. Rather, there were sellers of Calpine paper Tuesday pocketing some profit.

On the plus side, though, Magna Entertainment Corp. seemed to be getting good odds that Floridians will vote in approval of the much-coveted placement of slot machines on its racetracks. The converts were up 1.5 to 2 points.

Grey Global Group convertible holders, as well as others, were watching and waiting for the issue to be reset, favorably, following WPP's acquisition anticipated in a matter of days, which will allow those bonds to trade again.

Playboy deal turns heads

The regular session may have been sleepy Tuesday, but lots of convertible players perked up when the Playboy deal hit the tape. No less than 15 calls or e-mails were dispatched to Prospect News looking for the terms. There was no shortage of puns but on the face of the terms, several seriously said the deal looked solid.

"Relative to the other deals we've seen lately, this looks pretty decent," said the manager of a hedge fund based in Chicago. "There have been so few deals, just about anything would get mauled in this market. February was just atrocious for us [hedge funds] and March isn't starting out much different."

The use of proceeds - plus the fact that Playboy "is a real company with a real product and real revenues" - is a big plus for the convertible, said one market source.

Chicago-based Playboy said it expects to use proceeds in part to take out its 11% junk bonds.

The convert also may be sold on swap, with the company saying it may use up to $5 million of proceeds to buy back stock. Additionally, the company said the founder of Playboy, Hugh M. Hefner, has said he may purchase up to $5 million of Playboy stock in conjunction with the note sale.

Playboy shares closed Tuesday off 32 cents, or 2.24%, at $13.97. In after-hours trading, news of the convertible sent the stock down by another 59 cents, or 4.22%.

Delta convertibles miss the take-off

Delta's junk bonds, or at least the shorter dated 7.9s, took off in JunkLand but the Atlanta-based airline's convertibles missed the flight. Traders said the straight bonds were rising on the company's efforts to sell some regional operations as well as the spike in oil prices, but convertible holders were a bit too optimistic.

"There were some really high offers" on the 8% and 2.875% converts, "but the converts just never got traction," a sellside trader said.

Both convertibles were quoted basically unchanged with the 8s at 53 bid, 54 offered and the 2.875s at 50 bid, 50.5 offered, while Delta shares closed Tuesday off 18 cents on the day, or lower by 3.42%, at $5.09.

Reports on Tuesday identified SkyWest Inc. as a leading contender in Delta's search for a buyer or buyers for its Comair and Atlantic Southeast Airlines operations, which Delta bought for $2.9 billion.

SkyWest chief financial officer Bradford Rich was cited from a Raymond James conference for institutional investors on Monday saying that Delta had talked with SkyWest about a transaction for Comair and Atlantic Southeast Airlines. Rich was quoted saying that Delta was looking to "generate some capital somewhere and this is one way to do it."

Calpine sellers follow run-up

Calpine sellers were seen putting a bit of change in their pockets following a run-up of about 5 to 6 points over past week, a sellside trader said.

Nothing in the way of news was on the tape or in the rumor mill regarding the independent power producer, a buyside trader said. "This [Calpine trade] was basically like the rest of the market - there are more sellers than bidders right now," he said.

Calpine's 4.75% convertibles were quoted up a half-point at 78.5 bid, 79 offered and the 6% converts up about 0.75 point at 100.5 bid, 101 offered. The underlying stock ended Tuesday off by 6 cents, or 1.78%, at $3.32.

The second-lien bank debt for Calpine was down a little Tuesday as well, sources told Prospect News, also without any obvious catalyst.

Magna watchers see good odds

Notwithstanding a splash featuring Magna Entertainment's founder and the "racing fraternity" in the New York Times sports section, the horse racing enterprise's convertibles were finding interest on optimism that slot machines will soon be allowed at their racetracks in Florida.

"There is a referendum in Florida today that affects their chance of getting (much sought after) slot machines at their tracks (Gulfstream in Florida)," said one holder on the buyside. "If Florida and a few other states approve this, Magna's broader strategic vision of racetracks as entertainment/casino/racetrack complexes will move closer to realization."

A sellside trader quoted the Magna convertibles - both the 7.25% due 2009 and 8.55% due 2010 - up 1.5 to 2 points, then added, "People are anticipating the slot vote as positive."

Grey Global keenly watched

Grey Global's merger was finally approved with WPP, which will create an advertising endeavor to rival Omnicom Group Inc., the world's largest. And as the deal gets consummated this week, lots of convertible players are anxiously waiting for it to break to trade again. There have been several buyside sources interested in the convertibles jammed up by the controversial merger deal.

"The deal 'officially' closes this week, which will see the convertibles re-set (favorably) and holders (such as myself) will be free to trade again!" said one holder.

On Feb. 23, WPP and the Grey Global 5% convertible holders reached an accord on the post-merger treatment of the securities after having been at loggerheads for more than two months, with a committee of holders threatening litigation to block the merger. During the controversy, the convertibles have been held in limbo, unable to trade.

Through the process, convertible holders were able to force WPP to pony up nearly twice as much in compensation for the bonds as offered in the original $1.3 billion merger plan.

Included in the final agreement are a consent fee of $23.33 per bond, two additional par puts in 2008 and 2010, dividend protection, and post-merger conversion into a combination of cash and stock. The cash component will be $1,045.60 multiplied by one minus the pro-ration factor, which is the proportion of Grey shares converted into WPP stock in the merger, with a floor of 0.5. The remainder - $1,045.60 multiplied by the pro-ration factor - will convert into stock at $8.84 per WPP ordinary share.

WPP shares closed in London up 1.50p, or 0.24%, at 625.50p on heavy volume Tuesday.

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