Convertibles plunge as stocks dive, Solutia nixes new deal

By Ronda Fears

Nashville, Tenn., Feb. 4 - Convertibles took a hard dive Monday, traders said, mirroring the sell-off and plunge in stocks as downgrades, talk of SEC investigations and accounting concerns continue to weigh on investors' minds. Tyco was back in the hot seat after announcing it would draw $4.5 billion from its bank lines to pay down commercial paper - and that signaled trouble accessing the credit makets to ratings agencies, which prompted a downgrade by S&P and Fitch. Elan's troubles mounted with a huge drop in profits, and infected the entire drug sector. The primary market was quiet in the wake of Solutia pulling its deal after Moody's cut the credit to junk.

"The market got slaughtered today. Selling was beyond a panicked state, and it's beginning to take a toll on the new issues because everyone is very suspicious right now. The mood is way beyond cautious, we're talking suspicious," said a convertible trader at one of the major investment banks.

"We still think there is a lot of buying opportunity out there, and we saw a tiny bit of that begin to take form late in the session. There's just no way some of these names won't bounce back because so many of them have been pounded just because they are in a certain sector."

Stocks fell sharply on very little current news, with the Dow Jones Industrial Average losing 220.17, or 2.22%, to 9687.09 while the Nasdaq fell 55.71, or 2.91%, to 1855.53. Amazon.com Inc. became the latest victim of the market's reaction to a news report, dropping after a column in The Wall Street Journal reported that the online retailer's assets might be worth less than thought. Amazon said its liquidity was not a concern, as did Moody's, which upgraded Amazon's ratings in January after the online retailer posted its first-ever profit. Amazon shares dropped $1.20 to $12.53 and the 4.75% convertible due 2009 (Caa2/CCC+) dropped 2.75 points to 57 bid, 58 offered.

Tyco came under fire again Monday as ratings agencies expressed concern about Tyco's ability to access the capital markets and heightened execution risk associated with its breakup plan. The company's announcement that it would draw down form its $5.9 billion bank lines to payoff some commercial paper debt prompted the ratings agencies' action. S&P cut Tyco senior unsecured debt to BBB form A, and placed the ratings on watch with developing implications, meaning the ratings could be raised, lowered or affirmed. Fitch also downgraded Tyco senior unsecured debt to A- from A and put all Tyco ratings on watch, negative. Moody's confirmed Tyco's short-term debt rating but said the long-term ratings remain on review with direction uncertain.

The Tyco 0% convertible due 2020 lost 3 points to 65 bid, 66 offered and the 0% convertible due 2021 dropped 1.75 points to 68 bid, 69 offered while the stock plunged $5.73 to $29.90.

"It's like a fire that won't go out, but the flames just keep getting fanned. We are holding on to Tyco because, so far, we believe the story and have yet to be convinced there's anything wrong there," said a convertible trader at a Boston-based fund. "This may entirely change the breakup plan, and that could be an event that really changes our position."

Elan Corp.'s slide due to accounting questions for drug partnership escalated Monday after the Irish drug company reported fourth quarter earnings fell 84% and warned 2002 profits could be as much as 34% lower than expected because of the delayed launch of its migraine drug Frova and its painkiller Prialt. The Elan 0% convertible due 2018 plummeted 10.5 points on the day to 48.5 bid, 49 offered as the stock fell $15.10 to $14.85.

The Elan scare spread like wildfire throughout the drug sector, with Cephalon, Medarex and Sepracor taking some hard knocks. Cephalon's 0% convertible due 2006 plunged 9.25 points to 99.75 bid, 100.5 offered and the 2.5% convert due 2006 dropped 8.5 points to 89.375 bid, 89.875 offered with the stock losing $8.63 to $55.99. Sepracor's 5s due 2007 lost 3.625 to 74.5 bid, 75 offered, the 5.75s due 2006 dropped 5.5 to 90 bid, 90.5 offered and the 7s due 2005 (CCC+) fell 5.375 to 89 bid, 89.75 offered with the stock down $4.20 to $42.80. Mederex's 4.5% convert due 2006 lost 4 to 81.5 bid, 82.5 offered as the stock dropped $1.62 to $14.05.

SPX Corp., which has been mum about the drop in its stock recently, announced Monday that it will release its fourth quarter and 2001 results early Feb. 12 and host a conference call at 9:00 a.m. ET that day. The SPX 0% convert due February 2021 lost 3 points to 63 bid, 63.5 and the 0% convertible due May 2021 dropped 2.625 to 60.25 bid, 60.625 offered as the stock plunged $8.70 to $105.

"There was a great deal of selling today, but it looks like everything could begin shifting the other way as bargain hunters emerge," said a convertible trader at one of the major investment banks. "The analysts are out there pretty aggressively telling people to buy on the weakness, and that will surely begin to sink in before long. So, there are some people out there trying to get ahead of that curve."

There was very little buying taking place, traders said, but worth noting was a rebound in Waste Connections Inc. after losing ground last week in sympathy with Waste Management Inc. The Waste Connection 5.5% convertible due 2006 (B2/B+) regained 2.375 points on the day to 98.375 bid, 99.375 offered with the stock up $1.33 to $25.24.

As for talk of new deals, it was very quiet, outside of Solutia's canceled deal.

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