Buying wanes, activity recedes but overall market gains ground

By Ronda Fears

Nashville, Tenn., Oct. 11 - Flow moderated somewhat in traditional Friday fashion and traders said buyers retreated although the convertibles market in general was marked up as stocks gained nicely for the second day.

Lucent Technologies Inc. was one of the big losers of the day on its warnings and yet another restructuring plan, as fears resurfaced that the put on the converts is in jeopardy. Lucent junk bonds were seen higher right after the headlines hit the tape, but retreated into negative territory by the close.

Participants were anticipating a slow Monday as well since the bond market will be closed for Columbus Day and many buyside firms will take off for the holiday even though stocks will be trading.

"We were not overly busy today, just a pretty steady flow," said a convertible dealer.

"In general everything was higher. In terms of paper actually changing hands we didn't see nearly as many buyers [as Thursday]. I'd say selling probably picked up a little, selling to take a little profit."

Short covering probably still accounted for some of the move in stocks, traders said, as few believe the rally will be extended by much or for very long.

Credit spreads tightened a bit too but traders said credit strategists were not overly enthusiastic about it.

"Our strategists are more focused on the fact that junk bonds had one of the worst weeks in a long, long time," said a dealer at one of the major investment banks.

"From a credit perspective, there has been an enormous amount of damage and it keeps mounting. This sort of thing doesn't get erased just because there's a spike in the stock."

Indeed, Banc of America Securities senior high yield credit strategist Ali Balali said the junk bond market suffered broad-based losses in the second worst week since January 1999.

And while credit spreads improved somewhat toward the end of this week, with the earnings season coming up credit strategists remain cautious.

"After a fairly negative week for credit markets, markets will probably remain on tenterhooks for a while longer, especially in the context of headline risk from the financial sector," said Banc of America's head of global markets group research David Goldman and head of credit strategy research Jeffrey Rosenberg in a report Friday.

"We believe the bull case can be strengthened, but only if next week's financial results season is auspicious and remains unhindered by nasty downside revelations. Our credit analysts have remained cautious on this score, particularly given the lack of pricing power being faced across major industries."

Lucent was a punctuation mark on that sentiment, announcing another in a long series of restructurings on Friday. The news spurred many convertible investors to bail out, as they fear the $1.9 billion put on the 8% preferreds in August 2004 may not be paid as Lucent might not meet the surplus capital test under Delaware law.

The 8s dropped 1.5 points to 22 bid, 23 asked.

Lucent shares fell 12c to 58c.

The 6.45% junk bonds due 2029 of Lucent were quoted down 2.5 points to 26.

Lucent's peer, Nortel Networks Corp., however, gained ground as it reiterated its forecast, although one buyside trader said Nortel seemed to be ready to make more job cuts itself.

Nortel said third quarter sales will be $2.36 billion, in line with expectations that have been lowered twice over the past couple of months. But the company also cut its quarterly break-even target to below $2.4 billion in revenues from under $2.6 billion, which onlookers said suggests it will make more job cuts.

The Nortel 4.25% due 2008 was quoted up 0.375 point to 28.75 bid, 29.75 asked as the shares gained 2c to 46c.

In another troubled industry, satellite TV, S&P put tower operators Crown Castle International Inc. and American Tower Corp. on negative watch.

But EchoStar Communications Corp. as well as General Motors Corp. were faring pretty well following the major kink put into EchoStar's hopes to buy Hughes Electronics Corp. from the automaker.

Traders said there were a few trades on EchoStar's credit structure, based on a discrepancy in the spreads of the convertibles and junk bonds.

The 4.875% convertible due 2007 was quoted up 0.5 point to 77 bid, 77.75 asked and the 5.75% convertible due 2008 up 0.625 point to 76.5 bid, 77.5 asked. EchoStar shares closed up 30.2c to $17.28.

The FCC decision to block the proposed merger of Echostar and Hughes is clearly a setback to GM, but it's not a huge concern as the divestiture is seen taking place sometime to someone.

Indeed, press reports and analysts put Rupert Murdoch of News Corp. back in the picture with a potential bid for Hughes as he wants DirecTV.

Fitch Ratings said it has incorporated the eventual sale of Hughes into the ratings for GM in that it would boost GM's net liquidity and capacity for funding pension obligations.

"Although a short-term setback, the potential for lower proceeds [far less than original $4.2 billion] and the extended timeframe for the Hughes divestiture do not necessarily create immediate issues for GM," Fitch said in a statement Friday.

"Given GM's strong 2002 North American market share performance, Fitch believes that GM continues to be positioned to sustain on a near-term basis the improved levels of production it has demonstrated through the first three quarters of this year."

Some convertible analysts expect a pullback in GM paper and the stock, although the securities have risen with the broader market Thursday and Friday.

The GM 4.5% convertible due 2032 gained 0.625 point to 22.65 and the 5.25% due 2032 added 0.66 point to 20.95.

GM shares closed up $1.70 to $34.82.

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