Market eager for new deal; CSX converts, default swaps hold against stock

By Ronda Fears

Nashville, Tenn., Sept. 5 - The convertibles market was eagerly awaiting a new deal from Public Service Enterprise Group and otherwise watching much of the market struggle against a reversal in stocks amid a rash of corporate warnings and weak retail sales figures.

"There was not too much going on today. It's almost as quiet as last week," said Rao Aisola, head of convertible research at Bear Stearns & Co.

"People are positioning themselves, credit spreads have come in a little, but there has been no serious movements. I think everyone is waiting for third quarter results, hoping that's going to be a catalyst."

In the struggle against the broader market's slide, CSX Corp. stock was slammed hard after a warning from the company but traders said the convertible and credit default swaps in the name were holding up against the pull.

The CSX news dragged EGL Inc. and Airborne Inc. down, as well.

"Clearly, they [CSX convertibles] were very active this morning," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

"It's a decent credit. The credit held up well, it didn't implode."

Traders noted that the CSX credit default swaps were also holding up.

"I'm not necessarily hearing activity, but levels [in CSX credit default swaps] have held relatively firm from yesterday, widened out slightly, but not much," said Bear Stearns convertible analyst Matt Hempel.

The railroad operator warned that weak coal shipping demand from utilities, down 5%, will hurt its third quarter earnings. The company didn't make a specific forecast and said that EPS should be "well above" the 47c in third quarter 2001.

The CSX 0% convertible due 2021 (Baa2/BBB) was quoted down 2.625 points to 83 bid, 83.5 asked with the stock falling $5.60 to close at $29.03. Two-year credit default swaps on CSX were quoted unchanged at 70 basis points bid, 80 asked. The CSX convert is putable in October 2003 at 83.565.

Pressure on the transport group from the CSX news sparked a selling spree in EGL and Airborne, traders said.

EGL's 5% convertible due 2006 dropped 2.5 points to 90.125 bid, 91.125 asked with the stock closing off 49c to $10.63.

Airborne's 5.75% convertible due 2007 lost 1.375 points to 95.375 bid, 95.875 asked as the stock ended down 57c to $12.55.

On the flipside to CSX's firm hold against the stock slide, Fleming Cos. Inc. experienced a deep slide after making a warning about third and fourth quarters. Credit quality concerns also continued to haunt Fleming.

Fleming warned it has yet to see an expected rebound in sales at its own grocery chains, which could cause it to miss its earnings forecasts for third and fourth quarters.

In a conference call, Fleming also countered concerns that its debt may be downgraded, saying it has been told by key bond rating agencies that there are no plans to slash its ratings. It also disputed a news report suggesting relationships with vendors have soured.

Standard & Poor's said issues surrounding Fleming's (BB/negative) vendor-related deductions have no immediate impact on its credit rating or outlook and that the agency has no concern about the matter.

Fleming has adequate liquidity, S&P said, with $65 million in borrowings and $75 million in letters of credit used under its $550 million revolver, plus adequate cushion under covenant compliance requirements.

The Fleming 5.25% convertible due 2009, however, was beaten up along with the stock.

The convert was quoted down 6.625 points to 50.5 bid, 53.5 asked at one shop, and at 51.125 bid, 52.625 asked at another. Fleming shares plunged $1.08 to close at $6.92.

Most of the retail group were lower on weak comparable sales, but there were a few names bucking the trend to move north.

Best Buy was one winner in the retail sector even though it cut its fiscal second quarter outlook for the second time in as many months. But the electronics retailer posted a 2% gain in August same store sales. Best Buy said it now expects to earn 17c to 19c a share versus 17s to 21c, its previous reduced forecast.

But the winners of the day were homebuilders, with Lennar Corp. at the front, on a boon to homebuilding stocks on speculation about investors opting to put their money in real estate versus stocks.

"We keep hearing about the housing bubble, which makes me nervous, but then there's a lot of money getting poured into real estate," said a convertible trader at a hedge fund in New York.

"So while I'm nervous on the one hand, on the other I'm feeling pretty optimistic that there's still some upside for homebuilders. I'm not sure that I would be a buyer at these levels but I'm not a seller yet. I think there's more upside to be gained still."

Lennar's 0% convertible due 2021 was up 1 point to 45.75 bid, 46.25 asked. The 0% convertible due 2018 added 1.75 points to 75.125 bid, 75.5 asked. The stock ended up $1.76 to $55.33.

As the market awaited final terms on the PSEG new deal, a $400 million mandatory, there was rumbling about a new deal slated to be launched or priced Monday, but no one could get a handle on an issuer name or sector.

PSEG shares closed up 41c to $33.54.

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