Market cheapens slightly as spreads tighten, but trading thin as new deal flow fizzles

By Ronda Fears

Nashville, Dec. 4 - The convertibles market cheapened a bit on tighter credit spreads Wednesday, but trading was thin as hopes of more new deal flow began to dwindle.

"It was very quiet today outside of some talk that there would be a new deal launched after the close, which obviously didn't happen," said a convertible trader at a hedge fund in New York.

"There still could be something launched before the open [Thursday], and we need it. There was a nice little run of new deals but we really need a jumbo deal to really get people fired up about convertibles."

Sell-side sources still believe there will be a decent amount of new deals this month, but admit the time is short due to the holidays.

Hope for an up-tick in issuance next year also has already gained momentum, illustrated by recent reports from Salomon Smith Barney and Merrill Lynch & Co.

Dealers said there still was a "fair amount" of profit taking as the decline in stocks leveled off, but selling trailed off sharply from Tuesday as tighter credit spreads helped support bond floors on convertibles.

"It seems a bit too quiet," said Michael Revy, manager of a convertible hedge fund for Froley Revy.

"I'm just seeing vega names coming in and hearing rumors of a positive pre-announcement by AMD [Advanced Micro Devices Inc.] to steal INTC's [Intel Corp.] thunder. But I'm not playing this rumor."

Nothing came from AMD, at least not right after the close.

AMD shares ended off 27c to $7.85. The new 4.5% convertible due 2007 was quoted down 2.75 points to 130.875 bid, 131.875 asked and the 4.75% due 2022 down by 1 point to 66.875 bid, 67.875 asked.

Dealers said trading was sloppy and thin, making it difficult to gauge what happened in the market overall. But more seemed to think the market was cheaper in general.

Retails issues especially were erratic, dealers said.

Kohl's Corp. dropped sharply, for example, while Lowe's Cos. Inc. gained sharply.

The Kohl's 0% convertible due 2020 was quoted down 1.875 point to 63 bid, 63.5 asked with the stock

One of the more prominent areas where profit taking was still taking place, dealers said, was in the recent new issues that have climbed nicely - Skyworks Solutions Inc. and Xcel Energy Inc.

Skyworks' 4.75% convertible due 2007 fell 5.25 points to 138.875 bid, 139.875 asked, suffering from uncertainty in the wireless telecom group by Nokia's warning. Skyworks shares ended off 44c to $10.34.

The Nokia headlines cast a pall on the hopes of a recovery in wireless phones, sending other names like Nextel Communications Inc. and Nortel Networks Corp. "spiraling downward."

Nortel's 4.25% convertible due 2008 was quoted down about 2.75 points to 54.75 bid, 56.75 asked. The stock closed off 15c to $2.09.

Agere Systems Inc. also gave back some recent gains. The 6.5% convertible due 2009 was quoted down 2.375 points to 72.75 bid, 75.25 asked as the stock ended off 8c to $1.33.

Lucent Technologies Inc. was also weaker on a dimmer view as the company disclosed the parameters of its plans for a reverse stock split - 1-for-10, 1-for-20, 1-for-30 or 1-for-40.

Nortel also is planning a reverse stock split.

Energy names softened, traders said, with Xcel Energy seeing lots of sellers while there were some buyers and "fairly decent two-way" action in El Paso Corp.

Xcel's new 7.5% convertible due 2007 was quoted down 4.5 points to 111.875 bid, 112.875 asked as the stock lost 17c to $10.14.

El Paso was suffering from a myriad of bad news.

One of its former energy traders was indicted Wednesday on criminal charges related to bogus natural gas trades. Also, the decision is still looming and expected to be mostly negative from a regulatory judge on the California power manipulation accusations. Then there were the recent downgrades of El Paso's credit rating to junk.

The El Paso 0% convertible due 2021 was quoted down about 1.5 points to 28.5 bid, 29.5 asked. The 9% mandatory was quoted down about 1 point to 26.5 bid, 27.125 asked.

El Paso shares closed down 29c to $7.05.

Other energy names were lower, like Calpine Corp. and Mirant Corp. as well as Duke Energy Corp. for similar reasons.

Calpine's 4% convertible due 2006 lost about 1 point to 48.625 bid, 49.625 asked with the stock off 48c to $3.73.

Mirant named a new CFO, but a negative tone in the group dragged it down. The stock closed off 16c to $2.04. The 5.75% due 2007 was quoted down about 2 points to 43.125 bid, 45.125 asked.

Duke announced several changes in its energy services group, but it also still lost ground although the converts held up rather well. The stock fell $1.50 to $19.70. The new 8% mandatory was quoted flat at 16.5 bid, 17 asked and the older 9.25% mandatory off by 0.25 point to 16.25 bid, 16.75 asked.

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