Market slow, slower ahead of short week, anticipated earnings deluge

By Ronda Fears

Nashville, April 11 - A slow week in convertibles got even slower on Friday, with no one wanting to make a move ahead of the anticipated onslaught of earnings next week, which will be a short one.

Names associated with scandals - HealthSouth Corp. and Imclone Systems Inc. - were mentioned, but with riders noting that there was very little flow in those names.

Also mentioned were a few cable and media types, like EchoStar Communications Inc., and a couple of the new deals from this week - Walt Disney Co. and Photronics Inc. - which continued to see a little bit of action.

"We were trading like it was Good Friday," said a dealer.

But it wasn't Good Friday. Not for another week, and the markets will be closed that day.

So, ahead of a short week, not to mention the earnings season gaining steam next week, no one wanted to tinker much with their positions.

"It's so dead, I am going to be leaving early to beat traffic home," said a buyside trader.

"The weather is horrible....Hey, how about the Masters?"

Lots of convertible players were watching the golf match as two rounds of play were scheduled in Augusta, bemoaning Tiger Woods' showing in the first round, which was rained out.

The Associated Press reported only seven of the 93 players broke par in the first round on a soggy course beset by rain and nasty weather for the past week.

Few market participants were willing to tackle the female membership issue, however, as Martha Burk pursued efforts as the head of the National Council of Women's Organization to break the Augusta National club policy of "no women allowed."

Burk was getting down to business, although she was denied a permit to protest the event at the gates of Augusta National. A U.S. appeals court upheld the local ruling to limit the protest to a five-acre site about a half-mile from the course, according to news reports.

One trader noted that the chase for yield appears to be healthy, though, as AMG Data reported that high-yield funds saw inflows of another $1.2 billion while inflows into high-grade debt trickled in at $740 million over the past week.

That was no big surprise, but some onlookers were surprised to read that HealthSouth was finding support.

HealthSouth has procured a forbearance agreement through May 1 from its banks, which declared it in default on its $1.25 billion bank facility and froze those funds. That put paying the 3.25% convertibles, which matured April 1, into limbo.

"We saw a little bit of HealthSouth [converts] trade today at 24. They've been moving up gradually all this week," said a distressed trader.

The thinking is that with this breather from the forbearance, there might be a chance for the company to ferret out a funding source, and if they can manage to avoid bankruptcy, then the converts will be paid off.

"If they keep from filing [bankruptcy], then the converts would get paid, because they've already matured," the trader said.

"If they file, then the convert holders are screwed. There's too much senior paper ahead of them. It's a long shot. You may hit a home run, or you may crap out."

Analysts estimate convertible holders could see as much as a 30% recovery, but many are in the camp that they will get nothing.

Eight HealthSouth executives have pleaded guilty to criminal fraud and conspiracy charges in the accounting scandal that has swelled to $2.5 billion now.

Former chief executive Richard Scrushy is facing civil charges filed by the Securities and Exchange Commission and has been in court all week arguing for a fat personal budget, including $10 million in living expenses - although the time frame for how long he can survive on that amount was not specified - while the SEC is seeking to freeze all his assets.

Another name associated with scandal - Imclone - was heading south, however, as many see the prospect of it missing the extended deadline to file its 2002 financials with the SEC as perhaps a harbinger of more bad news.

ImClone stock already faces the possibility of being delisted from Nasdaq because the company failed to comply with filing requirements. ImClone disclosed Wednesday morning that it wouldn't file its fourth-quarter and 2002 results by an April 15 deadline.

The company said the delay stems from not being able to finalize audited financial statements pending the completion of an internal review.

"In other words, they aren't prepared to sign off on the report, so a lot of people think there may be more bad news than we thought," said a dealer.

On March 31, ImClone delayed its 2002 earnings and said it will restate prior financial results because former chief executive, Samuel Waksal, failed to pay income taxes on some stock options and warrants, requiring the company to pick up the tab.

Imclone said it will request a hearing before the Nasdaq Listing Qualifications Panel to appeal the initial determination by Nasdaq staff. These types of hearings are held within 45 days of the requests.

Meanwhile, the stock is trading over the counter and closed Friday down $1.89, or 11.5%, to $14.59.

The Imclone 5.5% convertible due 2005 lost about 5 points Friday, one dealer said, to 84 bid, 87 asked.

New paper was seeing a little action, but even that was very muted on Friday, traders said.

The new Photronics 2.25% convert added 0.75 point to 104.75 bid, 105.25 asked, while the stock closed up 15c, or 1.3%, to $11.35.

The new Manor Care 2.125% convert edged up 0.125 point to 104.5 bid, 105.5 asked as the stock ended up 38c, or 1.9%, to $20.21.

Disney's 2.125% gained 0.6875 point to 101.125 bid, 101.375 offered as the stock rose 50c, or 2.9%, to $17.84.

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