Computer Associates heads lower amid uncertainty; Quanta Services prices, gains in trading

By Sara Rosenberg

New York, Oct. 10 - Computer Associates International Ltd. was probably the most active and most followed name in the convertible market on Friday as uncertainty surrounding the company led to volatility, according to market sources.

"What we're seeing here is a lot of interest in Computer Associates. The credit default swap markets on all Computer Associates paper are being pushed out," a sell-side source said.

The company's 5% convertible closed lower at 121¼ bid, 121¾ offered, down around seven points on the session, and the 1.625s closed lower at 137¾ bid, 138¼ offered, down 10 points. The stock closed at $23.50, down $2.45 or 9.44% on the day.

The five-year credit default swap on Computer Associates was at 140-160 basis points, out about 25 basis points from Thursday's close and out about 40 basis points over two sessions, a trader said. He noted Thursday's close was 105-115 basis points and Wednesday's 70-80 bps.

"There's outright selling given all the uncertainty and there's a fair amount of hedge buying. Valuation-wise they were all over the place," the trader continued.

On Thursday, Computer Associates International Ltd. plummeted sharply with the 5% convertibles losing 8.5 points to 128.5 bid, 129 offered and the 1.625s dropping 12 points to 148 bid, 148.5 offered following the resignation of three top finance executives as the result of an internal audit into questionable accounting matters raised by federal regulators and New York state attorneys.

These executives were Ira Zar, chief financial officer, Lloyd Silverstein, senior vice president, finance and David Rivard, vice president of finance.

The joint investigation by the U.S. Attorney's Office in New York and the Securities and Exchange Commission primarily relates to the timing of revenue recognition in the fiscal year ending March 31, 2000.

Computer Associates said its internal investigation is ongoing but added that it had already determined that some revenue was recognized prematurely in fiscal 2000, with a number of software contracts in that fiscal year signed after the end of the quarter in which revenues associated with the contracts was recognized.

On those findings, the resignations of those who oversaw sales accounting during the relevant time were requested.

Adding to the troubles, Moody's Investors Service downgraded the software firm's senior debt to Baa3 from Baa2 and kept the rating on review for a possible further downgrade. And Standard & Poor's put the company's BBB+ credit rating on negative watch.

Besides, Computer Associates, there was some trading activity in airline names, as well as in some of this week's new issues.

"People still like the airlines stocks," the sell-side source said. "Quite a few people out there, myself included, feel like these things have been fully valued for some time. It's hard to justify buying them based on current valuations. Morgan Stanley upgraded AMR and Continental yesterday from underweight to equal weight, which is kind of like a left-handed compliment. [But maybe] the thinking is that the situations are improving."

"We're still trading the new Kodak issue and the new Placer Dome is trading as well," the sell-side source said.

ExpressJet Holdings Inc. traded at 111 versus a stock price of around $14¾ during the first half of the day, according to a sell-side source. The 4.25% convertible closed at 111.51 bid, 112.26 offered, up 0.41 on the day, according to a trader. The stock closed at $14.95, up $0.10 or 0.67%.

AMR Corp. traded at 108½ versus a stock price of around $14¾ during the first half of the day as well, according to the sell-side source. The 4.25% 2023 convertible closed at 105.56 bid, 106.56 offered, down 1.06 points on the day, according to a trader. The stock closed at $14.64, down $0.21 or 1.41%.

Continental Airlines Inc. 5% bonds traded around 136¼ with the stock at $21¼ on Friday morning, according to the sell-side source. The convertible closed at 131.45 bid, 132.45 offered, down 1.93 points on the day, according to a trader. The stock closed at $20.77, down $0.48 or 2.26%.

In the primary, Quanta Services Inc. priced an upsized $225 million of convertible senior debentures due 2023 to yield 4.5% with a 45% initial conversion premium after the close on Thursday. The offering priced at the cheap end of yield talk of 4.0% to 4.5% but more aggressively than premium talk of 35% to 40%. The deal was increased from $175 million.

The new convertible moved up to close at 104.25 on Friday, according to a trader. The stock ended at $7.36, down $0.32 or 4.17%.

Banc of America Securities and JPMorgan are joint bookrunners of the Rule 144A deal.

Houston-based Quanta, a power contractor, plans to using proceeds to repay $97.4 million principal amount of its senior secured notes and to pay $15.4 million of associated make-whole prepayment premiums. The company will use $15 million of the net proceeds for general corporate purposes and remaining net proceeds of the offering will be used to cash collateralize letters of credit outstanding under the facility. The facility is otherwise unused.

Among recent issues, Eastman Kodak Co.'s 3.375%, up 47% convert - which priced at the tight end of guidance - traded at around 104 1/8 with the stock at $22 Friday, according to the sell-side source. The convertible closed at 104.75 bid, 105 offered, up 1.6 on the day, according to a trader. The stock closed at $22.35, up $0.71 or 3.28%.

Placer Dome Inc.'s $2.75%, up 55% convert - which sold at the aggressive end of price talk - traded around 103½ versus a stock price of $18.80, according to the sell-side source. The convertible closed at 103.625 bid, 103.875 offered, up 0.688 on the day, according to a trader. The stock closed at $13.79, up $0.10 or 0.73%.

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