Buying thwarted by war cries, explosions in health, energy

By Ronda Fears

Nashville, Nov. 8 - Buying in convertibles was ultimately thwarted by the two-day decline in the broader markets and many players reverted to selling to take profits that have accumulated over the past few weeks.

"We started seeing more sellers as the day wore on but a good portion of our market left early," said a dealer.

"This is a big disappointment to a lot of folks. But it's been a long time since we've gone even a week without something blowing up in our face."

The negative tone was attributed to worry about a possible war with Iraq heightened, scandals that injured health names like Tenet Healthcare Corp. and Anthem Inc. and blow ups in the energy group.

El Paso Corp., Teco Energy Inc. and NRG Energy Inc. collectively sparked the explosion in the energy group with missed earnings and bankruptcy buzz.

Nvidia Corp.'s flat earnings report and tepid outlook put the brakes on the chase for tech paper, mostly, but traders said there were still a few buyers pawing through the rubble.

The Fed's rate cut took a backseat to the war scare created by the U.N. Security Council's unanimous vote to support the U.S. resolution against Iraq, although it does not mean a war is inevitable.

Moreover, convertible players are losing confidence and are not heartened by President Bush's economic plans or ability to assist the economy in a recovery.

"We have the right group in power to make some pretty revolutionary pro-business changes. The Democrats can still filibuster so let's not get carried away. Unfortunately, Bush has no Austrian economics professor on staff," said Michael Revy, portfolio manager of the Froley Revy convertible hedge fund.

"Bush's press talk was disappointing for the markets. There was no mention about economics, in particular tax policy. Bush's economic team seems incompetent. The market may be saying this victory is pyrrhic."

With no clear pro-investment tax policy and the Federal Reserve probably not able to cut rates any more, he said, the deflationists have loads of ammunition and the markets demonstrated a lack of confidence.

"It seems Bush has won enormous power. But what will he spend his power on - Homeland Security, the war on terror, placement of conservative judges and making the small tax cut permanent. Boring. And, not the solution, I am afraid," Revy said.

"There are some smarter Republicans running the chairmanships. Maybe we get something good from them."

The shaken confidence level was not only apparent in the stock market, traders said, but also in a sell-off in bonds that caused some widening in credit spreads. But some sources said credits are holding up rather well, given the circumstances.

"Credit is performing well. Risky assets remain well bid, including high-yield debt and emerging market currencies. Implied volatility remains stable, despite falling equity prices," said David Goldman, head of global markets group research at Banc of America Securities.

"We suspect that the market is anticipating a shift in capital structure at the margin, toward more equity issuance."

In convertibles, Tenet equally shared the spotlight focused on bad news but its situation sent a ripple of declines throughout the healthcare group.

Amid multiple investigations of Medicare billing practices and the merger of two of its hospitals, Tenet was hit severely. The stock plummeted $13.05 to close at $14.90.

But a level on Tenet's 6% exchangeable due 2005, which converts into shares of the healthcare REIT Ventas Inc., was not to be had. Several of the major investment banks were not quoting the Tenet issue. Ventas shares ended off 35c to $11.85.

Several other health issues fell dramatically on Tenet's troubles.

AmerisourceBergen Corp.'s 5% convertible due 2007 dropped 4.75 points to 146.5 bid, 147.5 asked. The stock fell $3.02 to $67.

Health Management Associates Inc.'s 0% convertible due 2022 lost 2 points to 85.625 bid, 86.625 asked. The stock ended down $2.14 to $17.87.

Anthem Inc. declined sharply, traders said, on the Tenet news, combined with news earlier this week that Anthem was named in a managed care lawsuit in Florida.

Anthem's 6% mandatory fell 3.5 points to 77.5 bid, 78.5 asked, according to a dealer. The stock lost $4.02 to $61.63.

There were some healthcare names holding steady against the bad press, though.

"It's all about valuation, valuation, valuation," said a buyside convertible trader.

"Some of this stuff is just too rich in this market, even for last week's market. But there's a few names that are slightly attractive. Most of the market is really picked over, though."

Community Health Systems Inc.'s 4.25% convertible due 2008 slid 0.5 point to 95.375 bid, 96.375 asked as the stock lost $2.22 to $20.58.

Energy names suffered a setback on El Paso's earnings, which missed the mark analysts expected. But, traders said, there seems to be some hope for El Paso if it manages to pull off some asset sales.

The El Paso convertibles were quoted down 3.5 points with the 0% bond due 2021 at 30.625 bid, 31.625 asked and the 9% mandatory at 27.75. El Paso's straight debt was seen off 8 to 10 points "on the long end" early in the day, a convertibles trader said.

Teco was struggling amid concerns about access to capital markets, a dealer said, after it announced Thursday that it had drawn all of it $350 million bank line ahead of its expiration next week.

Then, Merrill Lynch & Co. stock analyst Steve Fleishman cut his rating on Teco to sell from neutral, following UBS Warburg stock analyst Ron Barone cutting his rating on Teco to hold from buy on Thursday.

Teco's 9.5% mandatory dropped 2.5 points to 15, according to the dealer. The stock lost $3.01 to close at $10.49.

Another major impact on the energy market, traders said, was a Wall Street Journal article Friday that stated NRG Energy Inc. is on the brink of filing bankruptcy and would likely spur a round of bankruptcies in the energy industry.

NRG, a unit of Xcel Energy, stated it has not filed bankruptcy and has no imminent plans to do so.

But NRG acknowledged that the article accurately portrayed elements of a restructuring proposal NRG presented to its bank lenders and bondholders earlier this week. It would essentially relinquish the company to the creditors to extinguish some $10 billion in debt.

"We have begun the process of negotiating with our various bank and bondholder constituencies regarding specific points in the restructuring proposal," said NRG president Richard C. Kelly in a company statement.

"We anticipate that those negotiations will take several weeks. Consistent with what we have said previously, a Chapter 11 filing may ultimately be the means to implement any restructuring proposal agreed to with our creditors."

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