El Paso, other power issues lower; Delta deal emerges as airlines' descent continues

By Ronda Fears

Nashville, Feb. 2 - Convertibles traded sideways en masse, traders said Monday, while there were standouts in the cheapening of power names and airline paper. Still, while bids were prominent, there were not a lot of buyers in the market; there wasn't much trading at all.

"It was like a holiday, the worst day we've had in a while," in terms of trading volume, said one convertible dealer.

Another sellside convertible trader explained, "A lot of people were still making their way back from the Super Bowl."

Yet another market source referred to the quiet session as a "Super Bowl hangover effect."

Airline paper continued the descent that began last week, accelerating Monday on the heels of the terrorist alerts stemming from the Super Bowl in Houston. Some traders think the decline in airline paper is far from over, too, and could drop another 10 points or so.

In any event, Delta Air Lines Inc. returned to tap convertible investors for another $325 million. The overnighter was talked to price at 2.875%, up 30%, but sources said bookrunner Morgan Stanley & Co. was reoffering it at 98 to 99.

Most of the power or utility issues were lower, too, after making a strong run in recent weeks, as a Standard & Poor's report suggested those that have escaped bankruptcy so far are still not out of the woods when it comes to servicing debt.

Calpine Corp., Reliant Resources Inc., and El Paso Corp. were all mentioned in the S&P report. El Paso Corp. suffered, as well, from a filing in which the company warned that it would likely write down its proved reserves.

Delta emerges amid decline

Delta's overnight deal was rumored last week, a buyside market source said, but was held back by the slide in airline paper that touched the group across the board. The descent among the airline group, though, hadn't subsided on Monday and some think it's not nearly done.

"We'd heard about this overnight deal on Thursday, but it didn't happen," the source said.

"All the airlines were taking a beating, still are really. But I guess they just figured they better kick this out there now and just see how it flies."

Delta's existing convertible, the 8% due 2023, closed Monday off about 0.125 point to 88.875 bid, 89.875 offered. Delta shares closed off 5 cents, or 0.48%, to $10.45 but were down another 20 cents, or 1.91%, in after-hours trading.

The new Delta convertible was to be reoffered below par, according to a market source. It would be the first repricing since early December when the Genzyme Corp. 1.25s, Akamai Technologies Inc. 1s and Emulex Corp. 0.25s were all reoffered at roughly 1 or 2 points below par.

Airline paper has been backtracking recent gains for a week or more, traders said. On Monday, the group declined further on security issues over the weekend that caused several flights to be cancelled.

Delta's 8% convertible was in 2 to 3 points on swap last week, one sellside dealer said. Other declines were more severe.

"All the airlines melted down last week," the trader said.

"It could get real interesting. I think we could another 10-point drop in these [converts]. Some of these airlines are going to run out of money. They've got pension liabilities and contract problems with pilots," not to mention some hefty debtloads.

On Monday, all the airline convertibles were lower, with Northwest Airlines Corp., Continental Airlines Corp. and Mesa Air Group Inc. leading the decline.

Power names primarily plunge

Although S&P said last week that it anticipates utilities to remain investment-grade credits near term, in a report Monday the rating agency cast a pall over the recent surge in independent power producers.

S&P said that the power producers that avoided bankruptcy in 2003 by refinancing debt will still be struggling under the weight of some $65 billion of debt that will have to be serviced soon, within the next decade. Excess generating capacity also will weigh on profits and keep many in a precarious position for years.

"The energy merchants must find a way to reduce their crushing debt burdens and do so fairly quickly if they are to survive," S&P credit analyst Peter Rigby said in the report.

Companies mentioned in the S&P report as having huge amounts of debt maturing over the next four years included Calpine, Reliant Resources and El Paso.

Last week, S&P acknowledged that the credit quality of utilities extended a downward spiral in 2003 that began in 2000, but overall the agency said it expects the group's ratings to remain in the investment-grade range.

The convertibles of Calpine and Reliant were quoted slightly off, with both stocks edging lower Monday.

El Paso's converts, however, dropped a couple of points in tandem with a 2 to 3 point slide in its straight debt. An 8-K filing by El Paso at the Securities and Exchange Commission, suggesting a downward revision in proved reserves, was a source of added pressure.

The news was not a credit story, but it affected El Paso stock and that, in turn, put pressure on the bonds, a trader said. He said the El Paso convertibles traded at 46.75 but closed a little above that, at 47 bid, 47.5 offered. El Paso shares ended down 29 cents, or 3.41%, to $8.21.

Techs cheapen, Gap firms

Technology and telecom paper continued to cheap, although Nortel Networks Corp. was still bucking the trend with another gain Monday. On the flipside, there were some retail issues bouncing back after a sharp selloff following disappointing holiday sales.

Most tech issues continued to pull back, traders said, but several said the biggest crack was in chips.

A report out of Banc of America Securities that it is expecting a 30% correction on average for the stocks in the semiconductor equipment group from recent peaks, and that it is likely under way, was the biggest culprit.

Still, there have been convertible analysts recently suggest looking at some of the chip issues on any cheapening, such as Teradyne Inc. The Teradyne 3.75% due 2006 was quoted off 1.25 points to 116.5 bid, 117 offered with the stock closing down 48 cents, or 1.78%, to $26.42.

Conversely, some think certain retail stocks have been oversold in the wake of the Christmas season, such as Gap Inc.

Lazard Freres upgraded Gap stock to a buy from hold with a $24 target, noting the stock has fallen 10.6% since the hip retailer reported disappointing December comp sales. The firm added that Gap shares are down 20% since the New Year began on speculation about below-plan January comps and the expectation of decelerating 2004 comps against very tough comparisons.

Gap is a favorite among convertible players, from a fairly large group of retail converts.

The Gap 5.75% convertible due 2009 added 1.5 points on the day to 131.5, a trader said. The stock gained 32 cents, or 1.72%, to close at $18.90.

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