Veritas, Conexant pressure techs; hedge funds picking up Delta 8s; Beazer falls on building concerns

By Ronda Fears

Nashville, July 6 - In the wake of the quarter-point rate hike last week followed by a three-day holiday weekend, convertible players came back to work in a selling mood Tuesday. Beazer Homes USA Inc. was a notable loser with regard to interest rates and virtually the entire spectrum of technology issues suffered from severe warnings from Veritas Software Corp. and Conexant Systems Inc.

There were a few buyers unwinding reverse hedge situations, traders noted, as well as interest in some of the underlying stocks showing the steepest declines, also mostly short covering.

Delta Air Lines, Inc. also was finding some willing buyers, at least for the 8% issue, on a strong belief that the union pilots will "come to the table ready to ink a contract," which would likely mean more wage concessions than the flyers have been willing to make thus far.

Magna Entertainment Corp.'s 7.25% issue saw some action, a convert trader at a buyside shop in Connecticut said, due to new states approving slot machines at racetracks, namely Pennsylvania where Magna operates a racetrack.

Steel Dynamics Inc. was forged higher by 1 to 2 points, a dealer said, as AK Steel Holding Corp. said Tuesday it expects to record a second quarter profit. Also, a West Coast market contact said the Steel Dynamics 4% convertible was getting pitched as an issue that should get flushed from the balance sheet.

Beazer wheezed, however, as players began to worry that higher interest rates would eventually erode the pace of homebuilding and, thus, profits in that sector. "We looked at BZH and what happened the last time rates started heading back up," a market source said. "It's not a pretty picture." Beazer's new 4.625% convert dropped a couple of points, a dealer said, to around 102.

Veritas falls 10 on warning

Veritas Software on Tuesday warned that its quarterly profits and revenues estimate would miss Wall Street estimates by a staggering 20% due to sluggish demand for data storage products, which was also taken as an ill-boding herald for its peers.

Numerous downgrades to the stock followed, for Veritas as well as others in the sector.

A massive sell off sent the stock plunging $9.55, or 35.96%, to $17 and that slammed the converts some 10 points lower to 92.75. But market sources noted that there was activity in the convertible on both sides, with considerable buying on the weakness.

"The company is still a leading company with good profits," said a buyside convertible trader. "This is a case of the herd mentality, an over-reaction. It is precisely the time to buy."

Some convertible dealers and analysts said, however, that Veritas management's credibility is at stake, particularly in light of the company's recent announcement that it would restate previous-year earnings. One trader also noted that nothing about the earnings outlook was mentioned Friday when the company announced it will report earnings July 27.

In March, when Veritas said it would restate three years of financial results after an internal probe found problems with the way service revenue was recognized, the company said it did not believe it would affect fiscal 2004 results.

One sellside dealer said he thinks Veritas will be going down for several days, with the stock getting possibly as low as the mid-teens.

"If more people bail out, it could get much worse," he said. "Even with short-covering in the stock, if there are more warnings coming down the pike from tech land, and that certainly looks to be the case, then things will likely get worse before they get better."

Conexant slams telecom chips

Conexant Systems fell sharply Tuesday after the communications chipmaker lowered its fiscal third quarter outlook to reflect weakness in its wireless local area network business, chiefly blamed on undercutting price pressure from Taiwanese chip suppliers.

The Conexant converts - three issues totaling some $700 million - dropped in tandem with the stock, which plummeted 43%, or $1.77, to $2.31.

Conexant said it now expects earnings, excluding special charges, of 2 cents a share on revenue between $265 million and $270 million for the quarter, down from its previous forecast of a profit of 3-5 cents per share. Analysts had predicted earnings excluding charges of 5 cents a share on sales of $313 million, on average, according to Thomson First Call.

It slammed other communications chip names in the convertible universe, like PMC-Sierra Inc. and Vitesse Semiconductor Corp., and other general semiconductor issues as well, such as Kulicke & Soffa Inc.

Kulicke & Soffa's new 1% convert, which was re-offered at 98 when it was sold a couple of weeks ago, was quoted down 4 points on the day to 92.5, while the 0.5% issue dropped 2.25 points to 78.5. The stock fell 65 cents, or 6.48%, to $9.38.

Electronics, network names hit

A ton of tech names got hit as a result of the Veritas Software and Conexant warnings, including the new Novell Inc. convert.

"Nobody is buying in tech right now; well, there are a few mavericks, I suppose, but for the most part it is like the house is on fire and there is a stampede to get out the door," said a buyside convert trader at a hedge fund in New York.

Novell shares dropped 55 cents, or 7%, to $7.24 and the computer network name's new 0.5% issue lost 2.75 points on an outright basis, or about 0.75 to 1 point on swap, with a quote of 94.25 bid, 94.75 offered at the close Tuesday.

Adaptec Inc. and Emulex Corp. also were among notable losers Tuesday.

In the software space, one of the most severe reactions to Veritas' news was in Computer Associates International Inc., whose two convertibles lost 3 to 4 points.

Serena Software Inc. also was lower, and market sources said the drop could have been compounded by new accounting rules for contingent conversion issues in the works. (See full story on Page 1 of this edition). The Serena 1.5% convertible dropped 1 to 2 points to the 104 area, a trader said.

Delta 8s pick up on faith

With negotiations between Delta and its union pilots at center stage as the beleaguered carrier works toward a complete restructuring plan by August, traders said there was some sentiment prevailing Tuesday that the fly boys would be keen to compromise.

"The unions, all the employees, want the company to escape bankruptcy, so it is better to negotiate," said a buyside convert trader.

A convert trader at a buyside boutique said the Delta 8% convertibles were "being accumulated by large hedge funds" as they "see pilots giving in."

On Tuesday, headlines in the media said the airline would be seeking even more from the pilots, quoting a memo Tuesday to employees that reiterated chief executive Gerald Grinstein's remark last week that the airline's financial hole has deepened. The Atlanta-based airline had previously asked its pilots to take a 30% wage reduction and forgo a 4.5% raise received in May. The union's most recent offer was a 9% pay cut plus relinquishing the May raise.

The Delta 8s were quoted at a sellside shop off 0.25 point to 55.375 bid, 56.375 offered. That shop quoted the Delta 2.875s down 0.5 point to 61.875 bid, 62.875 offered.

Delta shares ended Tuesday down a quarter, or 3.65%, to $6.59.

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