Pep Boys advances pricing; market run ends in thud

By Ronda Fears

Nashville, Tenn., May 15 - A two-day run-up came to a screeching halt Wednesday as the market cooled its heels when Adelphia's woes worsened to the possibility of bankruptcy. The market was described as flat and slow, outside of a huge sell-off in Adelphia converts that consumed the market's attention.

The primary market, however, which had been silenced for over a week by the downdraft in stocks, came to life with the launching and accelerated pricing of a small deal from Pep Boys. The pricing was a surprise but a syndicate source said it was already oversubscribed and the company did not intend to upsize it, so rather than spend the money for a road show it was finalized.

"It was a disaster today for anyone holding Adelphia. People were bailing out like it was the Titanic sinking," said a convertible trader at a major investment bank in New York.

Otherwise, traders said players were sitting on the sidelines, hoping the slump would pass. The Dow Jones Industrial Average closed off 0.53% while the Nasdaq edged up 0.38%.

"People are hoping that the past two days of strong gains was not a blip, that the tone will indeed get back to a more positive bend," said a convertible trader at an outright fund in New York.

"There are still some bears out there, particularly in the hedge fund community, but I think the overall thinking is that the market has hit a bottom, reached capitulation."

Dealers said there were some yield players switching out of energy names, taking profits, and into biotech, looking for bargains.

BJ Services and Cooper Cameron were both lower as well as El Paso and Calpine on the upheaval in the power sector created by the Enron fallout that has spread to Dynegy, Reliant Energy, CMS and Mirant.

"Energy names need more research. That Dynegy trading story really hurt energy companies' credibility," said a hedge fund manager in New York

"Biotech is more interesting to me than energy names. But the universe is pretty busted."

The manager said he was buying Enzon and Gilead Sciences in the biotech sector, on weakness.

Enzon's 4.5% due 2008 was down 1 point to 78.5 bid, 79 offered with the stock down $1.14 to $31.61.

Gilead's 5% due 2007 was lower by 1.5 points to 167 bid, 167.625 offered as the common dropped 39c to $37.19.

Buyers who had chased much of the tech sector higher, notably chips, were especially on pins and needles hoping that the flatness in the stock market would not revert to a slide.

Many of the recent gainers in technology areas were giving back considerable amounts of the increases. Agilent, EDO, Computer Associates and ATMI were noted. But, there were others still climbing, like FEI Co.

Retail names were also mixed on the heels of some rather strong gains on the retail sales news Tuesday, as well as new deals from Toys R Us and Pep Boys. Traders said there was some selling to buy into the new deals, but even together the new issues were not much of an addition to the market.

Toys R Us is pitching a $350 million mandatory on a full road show with pricing next week, while the $125 million Pep Boys deal was done in a day of marketing.

"The books were full. There was no need go on the road," said a syndicate source working on the deal.

"If you can get it done in a day, why spend the money for a road show."

Another source working on the deal added that by advancing the pricing, Pep Boys potentially avoided any further hits to the common stock.

Pep Boys shares closed down $1.86 to $16.84.

The deal priced at par to yield 4.25% with a 33% initial conversion premium. The yield was at the tight end of guidance for a 4.25% to 4.75% coupon and the premium was more aggressive than the 25% to 30% indicative range.

"I guess consumer plays are still the rage," said a hedge fund manager in New Jersey.

"I'm looking at the Toys R Us deal, but felt like Pep Boys was a little rich for my blood. Toys is a bull and bear name. The stock and the mandatory look cheap, so maybe you have a small risk premium or discount depending on how you look at the story."

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