Northrop slammed after WSJ report; CKE, American Tower, Crown Castle up on tightening

By Ronda Fears

Nashville, April 19 - One convertible trader likened the market's stillness Monday to a deer-in-headlamps paralysis ahead of Federal Reserve chairman Alan Greenspan's regular testimony before Congress on Wednesday.

"In the middle of earnings season, with the rate scare, people are like deer caught in the headlights. They don't know what to do, except wait. The spotlight is on Greenspan. Everyone is looking for some sign, a hint about when interest rates will be raised," one sellside trader said.

"It's Monday, though, and usually slow anyway," he quickly added, seemingly to steer away from any negative tone. "We'll see some new deals and that will stir something up."

Nothing in the way of a new deal popped up Monday, however, and traders at several sellside shops said activity was lackluster and without much conviction.

"The usual suspects" were active, one trader said, specifically mentioning Lucent Technologies Inc. Ahead of its earnings at the market open Tuesday, Lucent's convertibles were about 3 points higher, he said. Telecom equipment peer Nortel Networks Corp. gained in sympathy, about 0.25 point, he added.

Airline issues continued to tank, but a couple of traders noted that some high-yield paper was continuing to strengthen on recent credit spread tightening - CKE Restaurants Inc., American Tower Corp. and Crown Castle International Corp., particularly.

Northrop falls on WSJ report

Northrop Grumman Corp.'s mandatory convertible, which matures in November, dropped sharply Monday in tandem with the stock, traders said, on reports of "major accounting irregularities," as one trader described the news.

The Wall Street Journal reported that it has documents that will be used in a federal lawsuit accusing the company of overcharging for radar-jamming devices and other equipment on military jets during the 1980s and then attempting to cover it up as Pentagon auditors were threatening to withhold payments or end contracts because of the irregularities.

Northrop's 7.25% mandatory plunged 1.08 points to 103.72 on the New York Stock Exchange. A dealer quoted the issue off 0.875 point to 103.5 bid, 104 offered.

Northrop shares on Monday fell $1.75, or 1.74%, to 99.

Junk richens on tighter spreads

Several junkier convertible names were mentioned moving up on tighter credit spreads in the high-yield bond market.

"To our amazement, spreads have been tightening, still," said a dealer. "So even though the market overall eased a bit last week, or cheapened a little, some of the junkier names richened up."

CKE Restaurants Inc. was one name he mentioned specifically, saying the Hardee's fast food chain parent's straight bonds tightened more than 60 basis points last week. Some of that, he said, is due to some balance sheet work the company is doing, specifically refinancing its bank debt and taking out a junk bond issue.

The CKE Restaurant 4% convertible due 2023 (CCC/Caa1) added 4.75 points Monday to 149 as the stock rose 48 cents, or 4.53%, to $11.07.

Moody's on Friday assigned ratings of B1 and B2 to CKE Restaurants' proposed $320 million first lien secured bank loan and $60 million second lien secured bank loan, respectively. The company launched the new bank credit facility earlier this month, with proceeds to call its senior subordinated bonds due 2009, fund a $20 million share repurchase program and repay its existing bank loan, according to Moody's.

American Tower and Crown Castle were mentioned by another trader in the same context of moving up as spreads continue to tighten on their straight debt. He said American Tower was, in part, moving up with Crown Castle, which boosted its outlook last week.

Crown Castle last week said that, based on stronger-than-expected leasing demand for communication towers in thus far in 2004, it was raising its financial guidance.

For 2004, Crown Castle now expects site rental and broadcast transmission revenue of $875 million to $885 million; previously, the company forecast $860 million to $870 million. The company also boosted its outlook for adjusted EBITDA to $465 million to $475 million, up from its earlier expectation of $455 million to $470 million. Free cash flow is now seen at $150 million and $160 million rather than $145 million and $160 million as projected earlier.

Crown Castle's 4% convertible due 2010 (CCC) gained 3.75 points to 163.5 bid, with the stock closing Monday up 46 cents, or 3.16%, to $15.

American Tower's 3.25% convertible due 2010 (CCC) added 1.25 points to 133.5 bid, as the stock ended Monday up 20 cents, or 1.56%, to $13.

Imclone leads biotech firming

Several biotech issues were stronger Monday as enthusiasm in that group was furthered by several items of good news on the tape.

Imclone Systems Inc. was one of the high-profile names getting attention. The company announced late Friday that the U.S. Food & Drug Administration is scheduled to consider its manufacturing plant where the colon cancer treatment drug Erbitux is manufactured in June. Subject to licensure, Imclone said it and partner Bristol-Myers Squibb Co. continue to believe they can meet full commercial demand for Erbitux on an ongoing basis.

On Feb. 12, the FDA approved Erbitux.

Imclone's 5.5% convertible due 2005 shot up 10 points on Monday to 122.25 bid, 122.5 offered. The underlying stock rocketed up $7.03, or 1.86%, to $66.30.

Treasuries whiplash hedgers

Lots of investors have been banged up recently in the bond market in trying to hedge interest rate risk, although the Treasury market was rather quiet Monday ahead of Greenspan's testimony on Wednesday.

The backup in bond yields was a particular note in a report Monday showing the Merrill Lynch convertible hedge index slipped 0.11% - net of a 2% annual management and a 20% performance fee - in the second week of April.

Most of the hedge index loss in the week came from rising yields, said Merrill convertible analyst Tatyana Hube, noting that the 10-year Treasury yield rose to 4.35% from 4.20% in the selloff last week on more robust economic data.

Merrill estimates this expansion in yield subtracted about 36 basis points from the hedge index return.

Meanwhile, narrowing spreads in junk bonds made a positive contribution. The spread on the Merrill Lynch high-yield index contracted to 392 basis points from 404 basis points last week, which was estimated to have added about 31 basis points to the convertible hedge index.

Year to date, the Merrill Lynch convertible hedge index net return is 1.43%.

© 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.