Convertibles activity stifled by mixed stocks, no gangbuster new deals

By Ronda Fears

Nashville, Tenn., Jan. 8 - Convertible traders said the market was somewhat quiet Tuesday as stocks were mixed and the first new deals of the year were not considered to be gangbusters. Williams Cos. advanced its deal to price alongside the Radian Group's overnighter, but both closed just slightly above issue price.

"Of course, everyone was watching what happened with the new issues," said Yaw Debrah, head of convertible research at Bear Stearns & Co. Otherwise, he added, "The market is taking a breather. After shooting up in the first few days of the year, people were positioning and there was some profit taking but, on whole, people are waiting to see what happens."

Overall, stocks were mixed with the Nasdaq edging up 18.64, or 0.92%, to 2055.74 while the Dow Jones Industrial Average slipped 46.50, or 0.46%, to 10150.55.

Even the new deals were not a great source of diversion for convertibles players. Williams' deal got done largely by targeting fundamental equity investors and Radian Group's overnight deal was thought to be rather rich for the market right now.

A syndicate source working on the Williams deal said there was heavy participation - somewhere in the neighborhood of 60% - in the deal by fundamental equity players who were enticed by the 9% yield versus the common stock dividend of about 3%. The issue is expected to trade briskly and higher in the secondary market also because of the lure to stock players, even though there is no downside protection and the upside participation is capped at 65% of the appreciation in the stock price.

Williams sold the $1 billion three-year mandatory convertible at par of 25 to yield 9.0% with the appreciation capped at 65%, pricing at the midpoint of guidance that put the yield between 8.75% and 9.25% with appreciation capped at 60% to 70%. It priced at the midpoint of guidance.

"We haven't seen any issues of that size in that structure in roughly five years," said a market source, referring to the Williams deal. But, the source added that given the modest 10% to 12% outlook for price gains in stocks this year, investors appeared to be happy to own the Williams convertible with it paying a 9% dividend.

The new Williams convert closed just above issue price at 25.9625 bid, 25.625 offered as the stock ended up 47c to $25.47.

Radian's $200 million of 20-year convertible senior notes sold at par to yield 2.25% with a 40% initial conversion premium - at the cheap end of price talk. "It wasn't a slam dunk," said a market source. The new Radian convert gained slightly in the immediate aftermarket to 100.625 bid, 101 offered as the stock rose 41c to $41.66.

With stocks mixed, traders said profit taking continued somewhat, but many convertible players were sitting out the session, aside from hedge funds that were busy in the stock market.

"Conflicting speculations have stifled a lot of folks as to where they turn now," said a trader at a convertible fund in Connecticut. "Most of the bets have been placed, outside of something extraordinary taking place. Now it's a matter of sitting back, watching and crossing your fingers in hopes that you've made the right decisions."

Tech and telecom have taken up a great deal of the focus, given that while those industries are shrinking as a portion of the convertible market, they still are a major component of the market's profile. News out Tuesday, sources said, did not help clear up the confusion. While Ciena's chief executive said he sees no sign of a recovery in telecom equipment, Corning said it expects to see signs of a recovery in the second half of the year.

Ciena's 3.75% convertible due 2008 (Ba3/B+) was flat at 66.75 bid, 67.75 offered with the common stock falling $1.05 to $15.70. Corning's zero-coupon convert due 2015 (Baa1/BBB) added 0.875 point to 55.375 bid and the 3.75% convert due 2008 slipped 0.125 point to 127.875 bid while he underlying stock closed off 3c to $10.48.

Software issues were firming, traders said, on good news. Veritas rose after the company said its pipeline is as strong as it has ever been, but the converts are deep in the money and have little liquidity. Wind River Systems Inc.'s new convert gained on the company's announced early redemption of its convert coming due in August. The new 3.75% convert due 2006 (B-) added 2.625 points to 106.375 bid, 106.875 offered with the stock up 72c to $19.10.

Earnings news, forecasts and warnings were driving most of the price changes, which traders said mostly consisted of markups or markdowns with very little actual trading. Again, much like the broader stock markets, the results were widely mixed. There were a couple of noteworthy situations, however, traders said.

Emmis Communications Corp., a radio broadcaster, reported results better than anticipated, albeit lower than prior periods and the 6.25% convertible preferred shot up 1.5 point to 41 but the stock lost $1.29 to $24.31. And, Genesco had a sharp gain after the footwear maker said it had corrected its previous earnings over the past year, reducing net earnings from continuing operations by about $35,000 and revenues by about $183,000 for the nine-month period results reported on Nov. 27. But the company also reaffirmed its 2002 guidance of $1.47 to $1.52 a share, with sales in the range of $744 million to $751 million. The 5.5% convertible due 2005 (B2/B-) added 4.625 points to 113 bid, 114 offered with the stock up $1.38 to $21.35.

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