Convertibles lower in slow session, but homebuilders rise

By Ronda Fears

Nashville, Tenn., April 3 - Convertibles were marked lower, sharply in the tech sector, during what was described as another slow session. Chips led the techs downward despite upgrades to several stocks in that group. Credit pressures sent telecoms lower, with Corning falling on a possible credit cut by Moody's.

Homebuilders, however, bucked the downdraft, getting a lift from the mild winter and strong construction patterns in advance of a rising interest climate.

"It was really slow today, but that was good in the sense that there was not an onslaught of selling," said a convertible trader at an investment bank in New York.

New issues also were mostly lower, succumbing to the negative pressures in stocks as the Nasdaq and Dow both sank by more than 1%.

"We are hoping that the new issue pace will pick up, and it's been amazingly strong in convertibles despite the really tough conditions facing the credit markets and equities. But what we really need are some really big, liquid names," said a portfolio manager at a convertible fund in New York.

"There are lots of deals in the wings, we're told, but with stocks so low a lot of the issuers are looking elsewhere to raise big money. If they feel like their stock is really undervalued, they don't want to give it away with a convertible.

"Like the AOL deal," the fund manager continued. "We would've been so glad to see an AOL deal. They could've gotten better rates, too. The yields on that deal were a lot higher than we are seeing in convertibles, so it's had to come down to stock price. That pushed the envelope the other direction, away from the convertible market."

AOL Time Warner Inc.sold $6 billion of global bonds on Wednesday, boosting the deal from $4 billion. Proceeds were earmarked to pay down short-term debt, much like many of the new convertible deals seen for most of 2002. AOL is paying down some $4 billion of bank loans and $3 billion of commercial paper that was borrowed to buy back a 49.5% stake in AOL Europe from Bertelsmann AG for $6.75 billion in cash.

AOL sold $1 billion of three-year notes to yield 5.738%, $1 billion of five-year notes to yield 6.222%, $2 billion of 10-year notes to yield 7.007% and $2 billion of 30-year bonds to yield 7.753%.

AOL shares dropped 42c to $23.20 on Wednesday, about half of where it was a year ago. The 52-week range on the stock is $22.10 to $58.51.

The AOL 0% convertible due 2019 (Baa2/BBB), which was issued at 55.13 in December 1999, added 0.375 point on Wednesday, however, to 53.5 bid, 53.875 offered. The Reliant 2% discount exchangeable note due 2029 (Baa2/BBB) that converts into AOL shares, which was issued at 58.25 in September 1999, lost 0.5 point, though, to 37 bid, 37.5 offered.

New convertibles were lower Wednesday, traders said, for a variety of reasons.

The GenCorp 5.75% convertible subordinated notes due 2007 dropped 2.5 points to 99.5 bid, 100 offered. The Sacramento, Calif.-based aerospace and defense company's shares closed down 10c to $13.63. One dealer said the defense sector was mixed, however, with L-3 Communications and Raytheon lower and EDO Corp. higher.

"Raytheon confirmed its guidance today that projects growth, but there seemed to be some shifting that didn't have anything to do with fundamentals," said a dealer.

"The defense group was very mixed."

Raytheon confirmed its 2002 guidance of $2.10 to $2.20 per diluted share earnings from continuing operations and the company said it expects to grow economic EPS, which includes pension income, by 10% to 15% per year on average over five years beginning in 2003. The company said operating cash flow is forecast at $4 billion during that period.

But Raytheon's convertible trust preferred dropped 2 points to 67 and the stock fell $1.50 to $40.25.

L-3's 4% convertible due 2011 (Ba3/B+) dropped 1.25 to 123.75 bid, 124.25 offered and the 5.25% convertible due 2009 was down 0.75 to 157 bid as the stock lost $1.03 to $117.69.

EDO, a New York-based capital goods company that makes electronic and other products for the aerospace and defense industry, saw its shares add 65c to $29.01, though, and the new 5.25% convertible note due 2007 added 1.75 points to 115.25 bid, 116 offered.

Documentum's 4.5% convertible senior notes due 2007 was quoted at 96.25 bid, 96.75 offered by a dealer, who said the issue was getting pressure from the stock that was falling in the tech slide. Documentum shares ended down $1.91 to $20.59.

Other new issues suffered similarly.

DDi Corp.'s new 6.25s of 2007 (Caa1/B-) lost 2.5 to 97.125 bid, 97.875 offered with the stock down 32c to $8.24. The Computer Associates 5s of 2007 (Baa2/BBB+) were down 1.75 points to 111.5 bid, 111.75 offered with the stock down 54c to $20.16.

Adelphia Communications continued to slide, as the company confirmed the SEC is conducting an informal inquiry into its previously disclosed co-borrowing agreements and has asked the company to provide clarification and related documentation.

Adelphia's 6% convertible notes due 2006 (B3/B) were down 1.5 to 71 bid, 72 offered and the 3.25% convertible notes due 2021, which are putable in May 2003 at par, were down 0.5 to 84 bid, 85 offered. Adelphia shares closed down $79c to $11.04.

Credit pressures were rampant, traders said.

Corning's 3.5% convertible due 2008 (Baa1/BBB) lost 2.25 points to 94.5 bid, 94.875 offered after Moody's put the credit on review for downgrade. Corning shares lost 31c to $7.06.

Moody's said, with little revelation, that the possible downgrade reflects growing concern that the recovery in telecom operations will be delayed until well into 2003, as end users scale back capital expenditures dramatically.

The telecom sector was much lower, though, due to such concerns, which have plagued the group for some time.

"Telecoms are hit on a number of fronts every day, it seems," said a convertible trader at a hedge fund in New York.

"The NTL default weighed telecoms down today, along with Corning."

Standard & Poor's cut U.K.-based cable TV, consumer telephony and Internet access provider NTL Inc. and related entities, to D - indicating default - following NTL Communications Corp.'s failure to make an April 1 interest payment on its 9.5%, 11.5% and 11.875% senior notes.

Although the terms of the notes include a 30-day grace period, S&P said it believes that NTL will not meet the coupon payment by May 1, which would equate to a default.

NTL's convertibles have not traded in a while, one dealer said. The 5.75s of 2009 were quoted at 16.25 bid, 18.5 offered, the 6.75s of 2008 at 32 bid, 34 offered and the 7s of 2008 at 15.5 bid, 18.5 offered. The stock last traded on March 26 at 20c.

Lucent Technologies' newest 7.75% convertible trust preferred fell 3.25 points to 94.5 bid, 95 offered with the stock down 22c t $4.60.

Calpine, too, was feeling pressure on credit concerns, but a day after Moody's downgraded the 4% senior unsecured convertible notes due 2006 to B1 from Ba1 and the three convertible trust preferred issues to B2 from Ba2.

The Calpine 4s of 2006 dropped 3.125 points to 93.5 bid, 93.875 offered with the stock down 82c to $12.28.

For the upside, however, the market looked to homebuilders.

Homebuilders were getting a lift from the mild winter and strong construction orders.

"There was some buying in Lennar and D.R. Horton," said a convertible trader at a hedge fund in New Jersey.

"Orders are still very strong, because apparently people want to get out ahead of rising interest rates, get the low rates we're seeing now locked in."

The D.R. Horton 0% convertible due 2021 (Ba1/BB) added 1.75 points to 70.375 bid, 70.875 offered while the stock gained $1.16 to $37.61.

Lennar's 0% convertible due 2021 (Ba3/BB-) gained 0.5 to 42 bid, 42.25 offered and the 0% convertible due 2018 (Ba1/BB+) was up 1 to 70.625 bid, 71 offered with the stock up $1.08 to $52.38.

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