AmEx edges up on spinoff plans; Kodak new deal buzz circulates; OMI, Scientific Games better bid

By Ronda Fears

Nashville, Feb.1 - Despite a firmer feel to the convertible market Tuesday, taking cover was a theme resonating among traders, who commented that many players are feeling "over-exposed" for a variety of reasons - default risk, takeover risk, interest rate risk, call risk, along with several other hazards.

"The market firmed up a bit overall, but there was still some weakness in the mid-range credits and low vol [volatility] names," said a sellside source. "So, nobody's willing to step up here and pick a bottom."

Contrary to the image of a flight to quality stampede given by some traders, however, not everyone was on the run.

"I never run for cover," said one savvy veteran of the convertible market. "It takes courage to win. No pain, no gain!"

Some convertibles were getting better bids included OMI Corp. and Scientific Games Corp. Activity in those issues was not overly enthusiastic, traders said, but the Scientific Games 0.75% convert rose about a quarter-point on swap while OMI's 2.875% convertible added 1 to 2 points.

The surge in merger and acquisition activity thus far and the impact on convertibles was the subject of a Merrill Lynch conference call Tuesday and, among other convertible names mentioned as potential takeover targets were Toys R Us Inc., ExpressJet Holdings Inc., Roper Industries Inc. and Electronics for Imaging Inc.

Call threats resurfaced in the market, too, with Tyco International Ltd.'s issue getting another 5 to 6 points knocked off, traders said. Tyco disclosed in its earnings results that it had bought back about $461 million of convertibles since the start of the first fiscal quarter.

"Risk tolerance is virtually nil," said a buyside trader. "We're sort of at a stalemate over it. We need some new deals to take the edge off."

Kodak new deal chatted up

Although considerable anxiety has stricken convertible players over the elevated pace of M&A activity, it is hoped to be a source of new deals this year. And, indeed there was some noise in the market Tuesday that Eastman Kodak Co. was considering returning to tap convertible investors with a new deal to finance its $980 million cash acquisition of Creo Inc.

Kodak's 3.375% convertible on Tuesday was pegged in the 125 area, unchanged on the day, as the stock gained 6 cents at $33.15.

"There has been a lot of talk about a new Kodak deal," said a sellside market source. "It would be more near term, and probably a good sized deal."

Kodak, which has not confirmed consideration of a new convertible offering, announced Monday that it would buy the Canadian printer software manufacturer for $16.50 per share - a buyout premium of 14.9% over Friday's closing price - as part of its strategy of focusing on digital imaging products while moving away from the traditional film market.

Kodak said the purchase will have a "modestly dilutive" effect on 2005 results, but it expects Creo will boost 2006 earnings per share by at least 5 cents. Rochester, N.Y.-based Kodak said Creo has no debt and $85 million in cash with 2004 sales of an estimated $636 million.

In September 2003 Kodak targeted $3 billion in acquisitions to transform into a digital imaging company, which has pressured its credit ratings.

On Tuesday, in fact, Fitch Ratings cut Kodak to junk, downgrading the senior unsecured debt to BB+ from BBB- with a negative outlook. Among other matters of concern like earnings uncertainty, Fitch said it believes Kodak is susceptible to integration and execution risks related to acquisitions, continued pricing pressure and restructuring efforts.

MetLife jumbo deal for grabs

With a good four to six months of lead time, convertible players aren't too preoccupied with a new issue from MetLife Inc., though it is probably more certain than a new issue from Kodak. Banker types, however, are trying to elbow in on MetLife's plans to finance the $11.5 billion purchase of Travelers Life & Annuity Co. from Citigroup Inc.

MetLife said it will use cash on hand, issue new debt - including a mandatory convertible - and liquidate up to $3 billion in assets to pay for the acquisition. Onlookers expect MetLife will issue about $1 billion to $3 billion in straight debt and $3 billion to $5 billion in convertibles.

"Convertible underwriting fees certainly have been in a slump and a jumbo deal like this is something everyone will be competing for," said a top originator.

Divestiture candidates include MetLife's 52% stake in Reinsurance Group of America, and other real estate assets.

But any new deal will likely not be far in advance of, or perhaps coincide with, the acquisition closing, which is now expected sometime this summer.

Allied Waste to refinance, too

Another matter for convertible investors to consider might be the broad debt refinancing plans discussed Tuesday by Allied Waste Industries Inc. when it announced earnings. Market watchers said it could impact convertible players both in relation to its existing convertibles and a possible new deal.

Allied Waste's 4.25% convertible bonds - a $260 million issue - were put in the context of 87 bid, 88 offered at Tuesday's close. The 6.25% mandatory due 2006 - a $390 million issue - rose about 0.375 points to 48.375, a dealer said, while Allied Waste shares ended up 17 cents on the day, or 2%, at $8.48.

The Scottsdale, Ariz.-based trash hauler reported after the market closed Tuesday profits that beat analysts' expectations and announced that it is reviewing opportunities in the credit and capital markets to refinance its credit facility and "other fixed-rate notes."

Objectives of a refinancing plan, the company said, would be to extend near-term maturities, reduce interest rates and improve financial flexibility. In addition, the company is examining opportunities to retire certain high cost debt to improve cash flow and reduce financial leverage, and accessing both the debt and equity markets is under evaluation in this respect. (See full story elsewhere in this edition.)

Looking ahead, Allied Waste projected operating income before depreciation and amortization in a range of $1.425 billion to $1.5 billion for 2005.

AmEx edges up on spinoff

American Express Co.'s convertibles were "a touch better" Tuesday on the news that it would totally spin off its financial advisory arm. A dealer said there were still plenty of hedge fund holders scrambling to cover short positions as the stock rose more than 6%, but he said there also was a lot of outright interest in the convertibles.

The AmEx 1.85% convertible due 2006 was quoted at 107.5 bid, 107.75 offered. AmEx shares, however, shot up sharply, gaining $3.40 on the day, or 6.37%, to close Tuesday at $56.75 on heavy volume.

AmEx announced a plan to shed American Express Financial Corp., which generated $7 billion in revenue last year, by third quarter. On the news, Moody's Investors Service cut the financial unit credit ratings and kept the unit on review for possible further downgrades, saying additional cuts would likely be no more than one notch.

Navistar quiet on another delay

Navistar International Corp. again delayed it financial filings at the Securities and Exchange Commission, but market sources said there was no immediate reaction to the news in the convertible market.

"As far as I know, the company's management missed their deadline to file their 10-K report so they said they'd file it by the end of January. Then, they missed that deadline, too," he said.

"We had been active in the name for a while but we haven't traded any of either NAV issue in the past week or two."

Roughly, he said, the Navistar 4.75% convertibles are trading at 100.75, about 1.5 points below the April call price. The 2.5% convertible due 2007, which is non-callable for life, he said, is trading close to 130.

Navistar shares closed Tuesday off 36 cents, or 0.982%, at $38.56.

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