Buyers stalled by market dip; GenCorp up to 102; Conseco luster weakens on strike price

By Ronda Fears

Nashville, Jan. 13 - Bidding in the convertibles market didn't come to a standstill, but traders said the dip in stocks made a big dent in the buying frenzy of late, particularly as players stepped back to reconsider whether they like the underlying stocks involved.

On the new issue front, Cleveland-Cliffs Inc. launched after the close $100 million of perpetual convertible preferreds talked to yield 3.25% to 3.75% with a 17.5% to 22.5% initial conversion premium. Pricing is scheduled for Thursday.

"Suddenly there's a case of nerves going on with regard to the upcoming earnings," said a head convertible trader at one of the major desks.

"The market is still better bid, though, the liquid part of the market. You have to be clear about that, because there are lots of issues on any given day that just track the stock lower. But a lot of those never trade, at least not on convertible desks."

Yahoo! Inc. was leading a pack of tech stocks lower in advance of reporting its earnings Wednesday. Xerox Corp. was among the crowd as well as Flextronics Inc. Convertibles of all three names were clipped by more than 2 points, traders said.

Juniper Networks Inc. also went south by about 2.5 to 3 points although it and Lucent Technology Inc. won $350 million worth of contracts with China Unicom, China Telecom. Also Motorola Inc. inked contracts with China Mobile and China United worth $1.1 billion.

Lucent and Motorola were both higher, with the two newest Lucent convertibles adding about 1.5 point each.

GenCorp Inc.'s new 4%, up 45% convertible was closed by bookrunner Deutsche Bank Securities at 102 bid, 102.5 offered, up from par. But the issue had traded as high as 5.25 points over par in the gray market with a bid as high as 5.5 points over and an offer at 6.5 points over; it ended in the gray market, however, at around 3.5 points over on the bid side, 4.75 points over on the offer.

GenCorp's existing 5.75% convertible due 2007 added back about 0.5 point to 102.625 bid, 103.625 offered as GenCorp shares regained 8 cents, or 0.75%, to $10.72.

Coltec draws interest

You might say some convertible investors have been kicking the tires of, or looking into, the Coltec Capital Trust 5.25% convertible preferred due April 2028, which converts into Goodrich Corp. and EnPro Industries Inc. stock, market sources said.

"They have been kicked around a lot. They were higher by about a half point today, because there are hopes that some more buybacks are coming up," the trader said.

The Coltec convertible closed Tuesday up 0.5 point to 44 bid, 44.25 offered.

Stuart Novick, convertible analyst at Citigroup Global Markets Inc., said the firm has been doing some business in the "interesting, and somewhat confusing," Coltec TIDES, or term income deferred equity securities.

"There's a question as to who the ultimate guarantor of the issue would be," Novick said. "A lot of people believe that it would be Goodrich. If so, they seem pretty cheap."

Goodrich essentially spun off Coltec Industries Inc., or most of its divisions, into EnPro Industries in 2002. But some of the Coltec liabilities, such as a portion of asbestos claims and some debt, were retained by Goodrich.

At Sept 30, EnPro said Coltec had $145 million of the issue outstanding, and during the third quarter had bought back $50 million in principal of the preferreds, or 100,000 shares, for $35 million.

The issue is convertible at a conversion price of $52.34 into a combination of 0.955248 of Goodrich common stock and 0.1910496 of EnPro common stock.

Goodrich shares closed Tuesday up 55 cents, or 1.88%, to $29.75.

EnPro shares ended up 1 cent to $16.25.

EnPro said in its third-quarter filing at the Securities and Exchange Commission that Coltec bought call options on Goodrich stock in March 2002 with an exercise price of $52.34 that would cover a full conversion of the issue. The options expire in March 2007.

Conseco luster fades quickly

The appeal of the Conseco Inc. 10.5% step-up payable-in-kind convertible preferreds, which were issued as it exited bankruptcy, dissipated rapidly once the conversion price was fixed, convertible traders said.

The Conseco convertible preferred closed unchanged at 26.2 bid, 26.3 offered.

"There's a lot of resistance from people to buy this thing now," one convert trader said.

After Monday's close, the conversion price was set at $20.35 per share, based on the volume weighted average price of Conseco common stock for the immediately preceding 60 calendar days.

Conseco shares closed Tuesday off 8 cents, or 0.37%, to $21.75.

"There were, are, a lot of people interested in the story, in the equity," until the conversion price was set below where the stock is trading, the trader added.

"It's callable immediately. There is no call protection," and the yield is in limbo, the trader said.

The preferreds step up to 11% on Sept. 11, 2005, are payable in kind until Sept. 11, 2005 and until Conseco receives an A- financial strength rating from A.M. Best, after that in cash or in kind at Conseco's option, and are convertible from Sept. 30, 2005 onwards at the liquidation preference plus accrued dividends.

When the convertible was issued as the Carmel, Ind., insurance company emerged from bankruptcy, at first market sources said there was a lot of keen market interest in it. And, periodically the $859.7 million issue traded rather actively.

Countrywide dips on outlook

Countrywide Financial Corp. surprised the market late Monday by reining in its guidance, hitting the mortgage company's securities, which were already moving lower on concern about a housing glut.

The Countrywide 0% convertible due 2031 dropped about 1.5 points to 112.5 bid, 113 offered, a trader said, amid a "fair amount" of selling.

Countrywide shares ended lower by 88 cents, or 1.24%, to $70.30.

Merrill Lynch & Co. Inc. bond analyst Matthew Burnell said, however, in a report Monday that Countrywide's tightened 2003 guidance is "relatively benign for bondholders," and he reiterated an overweight holding in the credit. He also noted that Countrywide so far has affirmed its 2004 target of earning $8 to $12 per share.

Countrywide said that amid slower mortgage origination volume it now expected earnings per share in the neighborhood of $12.30 to $12.45, down from $12 to $13.50 and well below the analyst consensus estimate of $13.05.

As expected, Countrywide said, with mortgage rates increasing during the quarter, average daily application volume declined and was $1.3 billion in December. Similarly, the mortgage pipeline also decreased to $33 billion.

The company reports fourth quarter and 2003 earnings on Jan. 27.

Hedge funds begin 2004 up

Hedge funds began 2004 on a high note, as Merrill Lynch's convertible hedge index was up 1.16% before fees in the first full week of 2004.

Returns in the week came largely from a decrease in spreads and a further improvement in yields, with the 10-year Treasury yield decreasing from 4.375% to 4.09%.

Merrill convertible analyst Tatyana Hube noted in a report that the firm's fixed-income strategy team reiterated its forecasted U.S. long rates to rise 6% in 2004, expecting negative total return. Yield curves are expected to remain steep in the early part of the year before flattening out as monetary tightening expectations grow in the second half.

Merrill Lynch's high-yield strategy team noted that high-yield bonds finished the first week of trading in 2004 with a gain of 1.5%, led by a 3.1% advance in C-rated paper. Single-B bonds generated a 1.4% total return, while double-Bs rose by 0.9%.

Cable, airlines, telecom and chemicals were among the best performers in Merrill's high-yield bond index last week, all posting gains north of 2%. Option-adjusted spreads in the U.S. high-yield market declined by 30 basis points last week to finish at 388 basis points.

The top 10 contributors to the Merrill hedge fund index during the first week of the New Year were: Ford 6.5% preferreds, up 4.72%; General Motors 6.25% due 2033, up 4.01%; Lucent 7.75% preferreds, up 17.82%; Tyco 3.125% due 2023, up 5.16%; GM 5.25% due 2032, up 2.88%; Symantec 3% due 2006, up 5.65%; Lucent 2.75% due 2023, up 7.5%; Nortel 4.25% due 2008, up 3.6%; Lucent 2.75% due 2025, up 5.13%; and Tyco 2.75% due 2018, up 1.27%.

The bottom 10 contributors to the Merrill hedge fund index during the first week of the New Year were: U.S. Steel 7% preferred, down 11.72%; Corning 3.5% due 2008, down 9.14%; Sandisk 4.5% due 2006, down 7.37%; Kerr-McGee/Devon 5.5% preferred, down 5.96%; Baxter 7% mandatory convertible, down 1.61%; Micron Technology 2.5% due 2010, down 2.55%; RF Micro Devices 1.5% due 2010, down 5.68%; Chesapeake Energy 6% preferred, down 5.74%; Xerox 6.25% mandatory convertible, down 1.42%; and, Avaya 0% due 2021, down 3.14%.

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