Convertibles market preps for new deals, telecoms sink on Global Crossing bankruptcy

By Ronda Fears

Nashville, Tenn., Jan. 28 - Players were getting situated for at least $1 billion of new paper this week, traders said, and otherwise were sitting on the sidelines or selling in the telecom sector on the heels of Global Crossing's much-anticipated bankruptcy. GATX Corp.'s deal was advanced to price after the close with tighter price talk, and buy-side sources said some light was shed on the deal's generous terms by a research paper referring to off-balance sheet aircraft leasing exposure. The GATX paper traded 5 points over par in the gray market, however.

"It was a very sloppy trading day. Everyone is very uneasy about the Fed and President Bush right now, but some had to get in today and sell. Of course, selling was heaviest in the telecoms and telecom equipment areas. But no one was really surprised about the Global Crossing news, it's been priced into the converts for a long time now," said a market source at one of the major investment banks. "We didn't see much buying anywhere."

Stocks were said to have only moderate volume, awaiting the week's numerous economic reports, the FOMC meeting, earnings season winding down and President George W. Bush's State of the Union address. The Nasdaq closed up 6.21, or 0.32%, to 1943.91 and the Dow Jones Industrial Average added 25.67, or 0.26%, to 9865.75.

GATX advanced its $150 million of convertible senior unsecured note deal from the original schedule that had set the pricing for Thursday, and revised pricing guidance on the five-year, non-callable notes to a 7.5% yield from the original range of 8.0% to 8.5% yield while the initial conversion premium is still expected between 12% and 16%. GATX's weak fourth quarter earnings and off-balance sheet exposure to aircraft joint ventures suggest investors should pass on any new debt issue from the company, said Kathy Shanley, senior bond analyst with Gimme Credit in a report Monday.

"This shed a lot of light on why the terms on this deal were so cheap. We were wondering about this," said a convertible trader at a hedge fund in New Jersey, referring to the GATX deal and Shanley's report. "It's very, very cheap. But, given the questions raised, we'll probably pass on it."

There were lots of takers, nonetheless, and demand was building throughout the session. The issue was 3.25 points over par at the open and by early afternoon it had trade 5 points over par, according to traders. GATX shares lost $1.20 to $29.39.

In addition to the LaBranche & Co. Inc. mandatory and OSI Pharmaceuticals' notes, a couple of other smaller mandatories emerged for the week, bringing the tally to over $1 billion and market sources expect several other deals to pop up.

Solutia Inc. is pitching $100 million of mandatory convertibles with talk putting the yield at 7.25% to 7.75% yield with an 18% to 22% initial conversion premium. Pricing is scheduled after the close Thursday. The chemicals products manufacturer's shares were off 55c to $9.25.

FPL Group launched $500 million of mandatory convertibles with price talk for a yield of 8.25% to 8.75% with an initial conversion premium of 12% to 16%. The deal is set to price after Tuesday's close. FPL, parent of Florida Power & Light Co., shares lost 48c to $55.55.

Global Crossing's converts were unchanged on the telecom's bankruptcy, but traders said it dragged down the entire sector. Williams Communications, Level 3 Communications, Qwest Communications and Broadwing were all lower. "It's the final straw for a lot of people that had been sitting on the fence with regard to telecom. After McLeodUSA and XO Communications and Covad, a lot of people were just bailing out," said a trader. "Here's another situation where the bondholders are going to get nothing. There are fewer and fewer people willing to take that bet these days."

Hutchison Whampoa Ltd. and Singapore Technologies Telemedia Pte. agreed to pay $750 million in cash to take over Global Crossing, but no details about the deal were provided. Creditors will get a combination of cash, new debt and new equity in the restructured company under the arrangement, but details would be finalized through negotiations with a committee of creditors and must be approved by the bankruptcy court.

While the broader market was flat, there were some pretty sharp spikes in the markdowns and markups, traders said.

Hanover Compressor went south as the oil and gas servicing company addressed concerns raised in a news article last week that paralleled its off-balance sheet transactions to troubles that led to Enron Corp.'s demise.

Hanover Compressor said its total credit exposure to Enron is less than $300,000 and disclosed details on several partnership investments in a press release. But investors apparently were not assuaged. The Hanover 4.75% convertibles due 2008 dropped 2.75 points to 76.25 bid, 76.875 offered and the common shares fell $2 to $14.05.

Calpine Corp., which has also suffered in the Enron fallout, declined as well. The new 4% convert due 2006 lost 2.5 points to 96 bid, 96.5 offered with the stock off 52c to $12.04.

There was a northbound group, as well.

Amazon.com Inc. gained on the heels of reporting a profit that prompted a Moody's upgrade to the credit, with the 4.75% convert due 2009 up 1.375 points on the day to 61.375 bid, 62.375 offered and the stock rose $1.06 to $15.50.

Xerox Corp. surprised the market with fourth quarter results and said it was confident of a profit for 2002 due to reorganization and cost-cutting measures. The office equipment maker was applauded loudly, with the new 7.5% convertible preferred up 7 points to 74 and the 0.57% discount convertible notes due 2018 up 1.75 to 55.75. Xerox shares added $1.34 to $11.24.

J.C. Penney gained on renewed speculation that the department store would spin off its Eckerd drugstore chain. The company had said Friday that rumors of an investigation or unannounced litigation were unfounded and without merit. On Monday announced a switch to a holding company corporate structure, which onlookers said could be setting up to spin off Eckerd. The J.C. Penney convertible rose 1.5 points to 105.75 bid, 106.25 offered as the stock gained 60c to $24.30.

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