Convertibles market quiet, ends rocky session flat to higher

By Ronda Fears

Nashville, Tenn., Sept 27 - Convertible traders said Thursday's session was relatively quiet, mostly due to the Yom Kippur holiday, but there was lots of interest stirred by the rocky session for stocks. There were lots of calls, traders said, but only modest trading activity as convertible holders continue to struggle with what direction in which to move their portfolios. Convertible arbs were busy mostly in the stock market.

"It was slow in terms of real activity but we were busy, I'll tell you," said a convertible trader at one of the major investment banks based in New York. "Mostly we were getting calls about where this is at or that. Energy and power issues were a focal point today."

Syndicate sources said the market is closely watching what is happening in corporate new deal pricings for some direction as to how to price the new deals coming up.

"We are looking for direction right now, particularly on the credit side," said one syndicate source working on upcoming deals. "We still are probably a ways off on the equity side to bring some of these deals. The stock is just too low and we need to be a little higher."

Kerr-McGee Corp., which is a convertible issuer, late Wednesday sold a three-part $1.5 billion senior note deal with the five-year paper getting a 5.875% coupon and a 210 basis point spread over Treasuries, the 10-year paper getting a 6.875% coupon with a 225 basis points spread and the 30-year tranche sold with a 7.875% coupon and 235 basis points. Tyson sold on Thursday a $2.25 billion three-part deal with the three-year paper getting a 6.625% coupon with a 347 basis point spread over Treasuries, the five-year paper getting a 7.25% coupon and 360 basis points spread and the 10-year sold with an 8.25% coupon and 375 basis points.

"We are watching corporates for some guidance," another syndicate source said. "It's good to see that market doing something right now."

Stocks began the session losing ground and regained on buying in the second half of the day. The Dow Jones Industrial Average ended up 114.03, or 1.33%, to 8681.42 but the Nasdaq didn't make it into positive territory, closing off 3.33, or 0.23%, to 1460.71. Treasuries also fluctuated, traders said, but closed mostly higher as economic data seemed to solidify the view that the Federal Reserve will lower interest rates again at the FOMC meeting next week.

Meanwhile, earnings warnings continued to unsettle players, and merger news was a point of activity in energy and power names. But, the reaction to warnings was perplexing, traders said, as some that warned of missing forecasts gained ground afterward and others that confirmed previous guidance lost ground afterward.

Orion Power's merger with Reliant Resources, a unit of Reliant Energy, proved to be positive for Orion convertibles, as well as with the credit rating agencies, but flat for Reliant as the credit is seen weakened by the acquisition. Orion Power's 4.5% convertible notes due 2008 gained 10.25 points on the day to 105.5 as the underlying stock rose $5.86 to $25.06. The Reliant Energy 2% exchangeables, which convert into AOL Time Warner stock but is a debt obligation of Reliant, edged up 0.125 point to 55.875 as AOL shares added 10c to $32.35.

NRG Energy gained on inking a deal with The Shaw Group to build two new power generating plants, but Shaw didn't see a pop from the news, which traders said was partly due to no financial terms of the deal being disclosed. The NRG 6.5% convertibles added 1.5 points on the day to 18 as the stock rose 88c to $14.60. Shaw's zero-coupon convertible due 2021 edged off by 0.125 point to 53.375 as the stock dropped 85c to $27.10.

NCO Group warned about missing earning forecasts, but the stock and convertibles went higher. The company expects September revenue to be roughly $6 million below previous targets and third-quarter earnings per share to be 8c to 10c lower than expected, chiefly due to the Sept. 11 terrorist attacks on the U.S. The First Call analyst consensus put the quarterly earnings at 39c per share. NCO's 4.75% convertible notes due 2006 added 1.125 points on the day to 74.125 as the stock gained $1.31 to $13.33.

But investors disregarded XO Communications' confirmation that it will hit third quarter targets already set out. The company said it still expected to show revenues of $330 million to $340 million with an EBITDA loss of $45 million to $55 million. XO's 5.75% convertibles lost 0.25 point to 21.75 as the stock declined by 23c to 33c.

Traders said there was some selling in Global Crossing because holders fear the company's impact of Exodus Communications Inc.'s bankruptcy earlier this week. Global Crossing holds a stake in Exodus, one trader said, and is already struggling due to its own economic woes. The Global Crossing 6.375% convertibles lost 2.125 points on the day to 17.875 and the 7% converts dropped 3 points to 43.25 as the underlying stock lost 44c to $1.97. End

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