Converts mixed as stock rally falters while spreads tighten; new issues mixed as well

By Ronda Fears

Nashville, April 24 - It was a mixed bag in convertibles Thursday, although traders said the tech, telecom and cable areas are still firming up, traders said. Thus, a breakfast deal from Mercury Interactive Corp. was gobbled up, after it was repriced at a discount.

"There were lots of issues that softened up but the techs and telecoms are still pretty hot," said a dealer at one of the big convertible desks.

"We were very busy, though, and that's a nice thing."

Some of the weak spots, he said, were due to profit taking sparked by recent run-ups - like with Level 3 Communications Inc.

Lucent Technologies Inc., Nortel Networks Corp. and Nextel Communications Inc. all had another good day as well. Those three have generated interest in existing converts with buybacks as well.

It wasn't such a good day for several insurance names, however, after American International Group Inc. posted a decline in first quarter profits, due in part to selling investments at a loss, and warned that the SARS epidemic in Asia could cut into its sales.

In the primary arena, there still is a lot of talk about new deals.

There was talk late in the day about an overnighter, as had been the case Wednesday, that never panned out. Buzz Wednesday named Best Buy Co. as the issuer but only a small synthetic deal off the Merrill Lynch desk emerged, which was probably the source of that talk.

No names were mentioned late Thursday, and some speculated that it could end up being another breakfast deal.

Mercury's was repriced by UBS Warburg, but market sources said the deal seemed to have gone very well and the entire $500 million deal placed with buyers.

It also opened up a credit default swap market for Mercury five-year paper.

Mercury sold $500 million in proceeds of five-year convertible senior notes at par to yield 0% with a 43% initial conversion premium. It was repriced to buyers at 98 for a yield of 0.408%, up 40%.

It traded lower in the gray market with the bid at issue price minus 2 points and the offer at issue price minus 1.5 points just before the open, traders said.

It was closed Wednesday by UBS at 98.125 bid, 98.25 offered.

Mercury shares dropped $1.13, or 3.13%, to $35.02, which also indicated strong hedge fund participation in the new deal.

Carnival's deal, which was also was repriced from an OID level, dipped 0.25 point on the day to 63.25 bid, 63.5 offered. The stock closed off 34c, or 1.25%, to $26.95.

Sources watching the primary market closely think the aggressive terms period has closed, after reaching an apex over the last three weeks.

"The era where converts are sold rich is winding down," the source said.

"They may still get priced below par, but the aggressive pricing seems to have reached the end of about a three-week window."

The new Mercury convert was modeled out by several sellside firms as about 1% rich on average but buyers said they liked the name and were hungry for some tech paper, which has not been a big part of the new deals so far this year.

There was no credit default swap market for Mercury prior to this deal, but a derivatives desk source said they came out with 280-320 basis points over Libor early Thursday when the new deal priced.

The existing Mercury convert also got a nice boost from the new deal, as many onlookers suggest the new 0% issue would be a cheap way for the company to take out the old 4.75s.

The Mercury 4.75% convertible due 2007 was quoted up 3.5 points to 98.75 bid, 99.75 offered - moving on hopes of more buybacks in that issue by the company as an upcoming call approaches, traders said.

The old issue still has about $300 million outstanding, after some $183 million in buybacks of the issue by the company so far. It is callable in July at 102.714.

Another software name was active, as well. Veritas Software Corp., which makes storage software, rallied despite its earning report in which the company said quarterly profits were hurt as customers delayed technology spending to counter a weak economy. While the company said its outlook still remains cloudy, the stock was upgraded by at least two shops and that boosted support for the convert, traders said.

The Veritas 1.856% due 2006 was quoted up 1.5 points to 92 bid, 92.5 offered. The stock gained $1.87, or 9.22%, to close at $22.15.

Tech issues in general continue to rally, one dealer said, and that may be premature "given the lackluster economic signs we're seeing." But he added: "You can't fight it though," and noted that tech converts - which make up around a quarter of the market - are up about 25% year-to-date.

Some of the rally is due to refinancing hopes, he said, but also because there are some legitimate turnaround situations - like Lucent and Nortel.

However Lucent's converts leveled off Thursday, he said, as many players were instead watching Nortel.

Nortel stockholders approved a reverse stock split, which is what the company referred to as a consolidation of all the outstanding common shares.

In a press release, Nortel said its board can implement the consolidation at any time before April 15, 2004, and choose a consolidation ratio between one post-consolidation share for every five pre-consolidation shares and one post- consolidation share for every 10 pre-consolidation shares.

Analysts had not yet determined what the impact could be to Nortel's convertibles. The converts were sharply higher, but traders said that was most likely just due to the earnings.

The Nortel 4.25% due 2008 was quoted up about 4.5 points to 84.5 bid, 85.5 offered. The stock ended up 2c, or 0.78%, to $2.58.

Nortel reported first quarter revenue was $2.4 billion, down from $2.9 billion a year ago but about flat with fourth quarter. Net income was $54 million, or 1c per share. That compared to a 26c per share loss a year ago and a 1c per share loss in fourth.

The company said in its earnings release that it continues to expect the overall equipment market to be down in 2003 and believes spending levels in the second quarter will be similar to the first. However, the company is not giving any revenue or earnings guidance at this time.

Several analysts said the earnings turnaround, and perhaps even the reverse stock split, will be a net positive for the credit story. However, there are lingering concerns about spending levels among Nortel's customers.

"Although there are no near-term catalysts for the Nortel story, we believe the company will be a survivor and start generating cash long before concerns are raised about its running out of cash," said Wachovia Securities convertible analyst Jeanine Oburchay.

"This is, in our opinion, a long-term story, which we should see improving over the next 12-24 months."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.