Convertible market ends flat on mixed stocks, Fed rate cut, new deals

By Ronda Fears

Nashville, Tenn., Dec. 11 - Convertible traders said liquidity picked up sharply Tuesday as the Federal Reserve cut interest rates as expected and $2.7 billion of new paper sold. For the most part, traders said, the market was flat while stocks closed mixed. The drug group of convertible names mostly showed resistance to Merck's shocking forecast of no growth in earnings next year, offset by climbers on an upbeat forecast from wireless phone maker Nokia.

"We're back to a state of confusion where there are such conflicting signs. There's bad news from Merck, but good news from Nokia. We have the Fed lowering interest rates, but there's still all the existing debt out there that some fear could go the way on Enron," said a convertible trader at a major investment bank in New York.

"Volume certainly picked up today. There were people hunting for bargains and a lot of late buyers for Calpine, AES. The new deal pipeline is helping liquidity a great deal."

Stocks were mixed on the various news points of the day, as the Nasdaq gained 9.81, or 0.49%, to 2001.93 and the Dow Jones Industrial Average dropped 33.08, or 0.33%, to 9888.37.

Calpine Corp. was still reeling, mostly lower, in the aftermath of its efforts to refute a negative article in the New York Times that put the independent power producer in the same fearful arena as now-bankrupt Enron Corp. But traders said there were buyers seen late in the session that mitigated the day's decline. Calpine's $1 billion issue of zero-coupon convertibles due 2021 (Baa3/BB+), which sold at par in April, were down 1.75 point to 92.75 bid, 93.75 offered while the Calpine 5.75% convertible preferred due 2004 dropped 7.5 points to 59.125 bid, 59.875 offered and the 5.5% convertible preferred slid 3.875 points to 40.125 bid, 42.125 offered. Calpine shares lost $3.58 to $17.79.

There also was more downward pressure Tuesday on other independent power producers like AES Corp., traders said, in sympathy with the Calpine story. The AES 4.5% convertible bond due 2005 lost 2 points to 84.75 bid, 85.75 offered while the 6% convertible trust preferred due 2008 were flat at 50.375 bid, 50.875 offered and the 6.75% convertible trust preferred due 2029 dropped 1 point to 32.125 bid, 32.875 offered with AES shares down 82c to $13.93.

More buyers were seen, however, in the telecom and telecom equipment groups, traders said, as Nokia provided a bullish outlook for its handheld phone business. Anadigics, Avaya and Corning - telecom equipment makers - as well as competitor wireless phone makers Nextel and Nortel Networks were among the biggest gainers that rode the Nokia wave higher.

"It was like the floodgate opened on bottom-feeders, well not in every case, for telecom paper," said a convertible trader at a hedge fund in New Jersey. "The newer paper hasn't had time to suffer much, but there still were a lot of people wanting to buy now because they see it as a true low point."

The Anadigics new 5% convertible due 2006 added 2.25 points on the day to 103.875 bid, 104.875 offered with the stock up 60c to $16.85. Avaya's new zero-coupon convertible due 2021 (Baa1/BBB), which sold in October at 48.75, gained 1.375 points to 58 bid, 58.25 offered with the stock up 46c to $13.61. Corning's 3.5% convertibles due 2008 (Baa1/BBB) gained 4 points to 124.875 bid, 125.875 offered while the Corning zero-coupon converts due 2015 were flat at 52.375 bid, 52.875 offered with the stock up 45c to $10.30.

Nextel's 4.75% convertible bonds due 2007 rose 1.125 points to 77.75 bid, 78.25 offered, the 5.25% convertible preferreds due 2010 added 0.25 to 62.75 bid, 63.75 offered and the 6% convertible preferred due 2011 added 1.25 points to 76.75 bid, 78.75 offered with Nextel shares up 42c to $11.62. Nortel's 4.25% convertible due 2008 added 1.875 points to 105.5 bid, 106 offered with the common up 23c to $8.51.

In the drug sector, the Merck impact was hardly noticeable, traders said. As Merck stunned analysts with a flat projection for earnings in 2002, convertible traders said there was not a great deal of activity in that group of converts.

"It was a mixed bag with regard to the drug sector, and nothing really stood out something a lot of people were unloading or buying up," said a convertible trader at one of the major investment banks in New York. "As a group they appeared to be okay in spite of the Merck news. What seemed to be more of a pattern today was buying in the consumer cyclicals like Johnson & Johnson."

There also was a lot of activity as a result of the new deals that spewed forth late Monday, traders said. Two of the six deals announced late Monday priced and freed to trade Tuesday.

The Interpublic Group of Cos., an advertising agency, and the Italian carmaker Fiat put $2.7 billion of new paper into circulation, although the Fiat deal, which converts into General Motors stock, was also marketed abroad.

Interpublic's $500 million (proceeds) of zero-coupon convertibles due 2021, which sold for a yield-to-maturity of 1% and 32% initial conversion premium, added roughly 2.125 points from the 81.914 issue price, closing at 84.125 bid, 84.25 offered with the common stock up $1.91 to $29.11. Interpublic's existing converts continued to ratchet lower, however, traders said. 1.87% discount convertible due 2006 slid 0.75 point to 78.75 bid, 79.75 offered and the 1.8% discount convert due 2004 declined 1.5 points to 93.25 bid, 94.25 offered.

"The Interpublic deal went very well. It was oversubscribed multiple times," said a syndicate source working on the deal. "It wasn't bad, for an aggressively priced zero and four hours of marketing effort."

Fiat's exchangeable also was said to have been oversubscribed in the U.S., and it was also heavily marketed in Europe. But the new 3.25% exchangeable, which priced at par with a 38.14% initial conversion premium, slipped 1 point in the immediate aftermarket, closing at 99 bid, 99.25 offered as General Motors stock fell $1.69 to $48.65.

There was nothing at bat after Tuesday's closing bell, but at the end of Wednesday convertible investors are looking for $475 million of deals from Evergreen Resources, GTech and Reinsurance Group of America. Reinsurance's deal is for convertible preferreds. Evergreen shares closed Tuesday down $3.15, GTech common dropped 43c to $42.73 and Reinsurance stock lost 76c to $33.54.

End

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