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Published on 9/3/2002 in the Prospect News Convertibles Daily.

Despite widespread market turn for the worse, new deal emerges

By Ronda Fears

Nashville, Tenn., Sept. 3 - The downturn Tuesday was widespread, but energy names were hit especially hard. Still, Public Service Enterprise Group launched a new deal for this week and was getting a nice reception from a market starved for new paper.

Trading was described as fairly light, however, as convertible investors watched fears prompt a flight to quality from stocks to Treasuries. Stocks saw the worst decline since Sept. 11 while Treasury buying sent yields to record lows.

Corporate bonds, both high-grade and junk, were also suffering from the flight.

"There wasn't much to do today except watch. No one really wants to sell here, unless they are in a hole they can't hope to climb out of," said the head convertible trader at a major investment bank.

"I don't think a lot of convertible guys are long Treasuries, the yields are just too low. There is some buying in a few of the mandatories and convertible preferreds that have been hit but a lot of those are in areas that people are leery of, energy names and telecom equipment.

"We're not seeing a lot of buyers, though. No one wants to jump in front of a moving train, that being the stocks, in this kind of environment. No one's sure about economic recovery and there's still the possibility of a war with Iraq."

Some financial pundits, the trader said, are saying that fed funds futures have priced in a 25 basis point cut in interest rates during fourth quarter. In any event, the trader said, expectations about corporate earnings have been totally eroded.

Traders described the convertible market as slow with virtually every sector in the red.

Especially hard hit were energy and power names, as a Standard & Poor's report stated that the credit quality and troubles in the group continue to worsen.

PSEG, however, proceeded with its new deal, launching the $400 million mandatory for Thursday night's business.

The deal is talked to yield 10% to 10.5% with an 18% to 22% initial conversion premium.

Market sources put it 1.85% to 3% cheap, which is slightly below recent terms, but it's thought to be enough to sell to a hungry market.

In the past five weeks or so, there have only been three new deals come to market.

While not dramatic, Merrill Lynch & Co. convertible analysts Yaw Debrah and Tatyana Hube noted in a report Tuesday that the firm's U.S. convertibles index market value edged from $205.8 billion at the end of July to $205.2 billion at the end of August for a negative net issuance of $4.2 billion.

"It would be nice if there was a little more juice in it [PSEG's new deal], but it's enough to get done, I guess," said a convertible trader for a Philadelphia-based fund.

"We would not be looking at it if it wasn't more of a traditional utility. Utility issues are not what they used to be, there's quite a bit of risk in that area, but it's safer than those with lots of energy trading - that's where you've got to have a lot of guts to participate."

PSEG shares closed down $1.62 to $33.58.

Aquila Inc., Mirant Inc. and Teco Energy Inc. were two standouts in the decline in energy names as S&P said troubles plaguing U.S. utilities and energy merchants may linger well into 2003.

Power producer and trader Mirant Corp. warned it may fall short of its full-year earnings forecast, citing difficult conditions in the power-trading industry.

Mirant warned that it would not make its earnings targets and lowered guidance. The new 5.75% convertible due 2007 dropped 3.375 points to 66.375 bid, 67.375 asked. Mirant shares ended down $30c to $3.48.

Aquila was cut to junk by Moody's, which triggered bond repayments and increased collateral costs of about $192 million, according to Aquila. A reduction to junk by S&P would prompt additional payments of $292 million.

Teco Energy shares were cut by two firms and closed down $3.57 to $16.18, which sent the 9.5% convertible preferred down by 3.05 to 18.87.

Retailers also continue to struggle due to anemic economic growth, weakened consumer confidence and growing levels of consumer debt.

Fitch Ratings said in a report Tuesday that a meaningful recovery in the retail sector will not take place until 2003 and weakened consumer confidence will likely dampen the upcoming holiday selling season.

S&P also had a report out Tuesday on retailers, noting that the industry's trouble has more to do with recessionary factors than Sept. 11.

Nearly all the retail names were lower but Rite Aid Corp. gained. A dealer said there apparently are "a few believers in that turnaround story, or they believe it's a bargain at these prices."

Rite Aid's 4.75% convertible due 2006 added 3.5 points to 70.25 bid, 71.25 asked. The stock ended up 29c to $2.39.

Financials, chips, oil and gas and most other sectors were lower, as well as techs and telecoms.

Nextel Communications Inc. dropped on reactions to a Wall Street Journal article describing Craig McCaw's recent hedging of his Nextel stake, which is perceived as a lack of faith in the company.

The article in Tuesday's edition of the newspaper cited several regulatory filings that disclosed forward sale agreements on about a third of his 66 million shares, or 8% of Nextel, since April.


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