Buyers step in for EDS, Lucent as stocks inch up in short covering

By Ronda Fears

Nashville, Tenn., Sept. 20 - It was a mixed bag for convertibles Friday as stocks inched higher, mostly attributed to short covering activity. But buyers were seen for a few troubled names like Lucent Technology Inc. and Electronic Data Systems Corp.

Meanwhile, a new $125 million mandatory was announced that will convert into Hilb, Rogal & Hamilton Co. shares.

Traders said converts were mostly lower for the week, hindered by numerous profit warnings and widening credit spreads. JPMorgan Chase's warning was a big factor weighing on the market and financials were particularly weak - banks, brokers and fund managers. The EDS warning did considerable damage, too.

"This is going to continue for the next six months, until new issues pick up," said Rao Aisola, head of convertible research at Bear Stearns & Co.

"Visibility is something that's non-existent," he said when asked if he thought it would be six months before issuance picks up. "It's one of those things you can't predict."

The Hilb, Rogal & Hamilton deal, which will be issued by The Phoenix Cos. Inc., has no time frame set, yet, as it is going through routine Securities and Exchange Commission scrutiny.

Otherwise, nothing new has happened on the forward calendar.

Thus, managers were sorting through the market for perceived bargains and trying to avoid disasters.

Qualcomm Inc. said it will ship more cell-phone chips but traders said that did little to improve the sentiment for the wireless group, much less telecoms and telecom equipment names as Ciena Corp. announced another round of layoffs.

Homebuilders and homebuilding supply companies saw a nice rebound from the sharp losses a day earlier on lower housing starts data but traders said there was not a lot of action in the converts of Lennar Corp., D.R. Horton Inc. and Masco Corp.

"That [Lennar] was one of the few bullets I managed to miss. I was out a while ago, after being long when they were all short too early. I made a very lucky trade," said Michael Revy, portfolio manager for Froley Revy's convertible hedge fund.

"We also managed to miss EDS. I always thought they were a black box. I hear the straight debt has not come in much, which could be the trade if that's so."

Revy said he likes mandatories for cash-flow trades.

Hartford Financial Services Group Inc., Temple Inland Inc. and Toys 'R' Us Corp. are "an example of all the toxic names available," he said.

The Toys 'R' Us mandatory is trading like the company goes bankrupt when $400 million in debt comes due in February 2004, he said, but the Toys 'R' Us bonds are not trading that way.

The new Hartford 6% mandatory ended off 0.49 point to 49.05 with the stock closing down 76c to $44.99.

Temple Inland's new 7.5% mandatory closed up 0.69 point to 45.19 as the common added 95c to end at $44.47.

The Toys 'R' Us 6.25% mandatory gained 0.20 point to 37.95 while the stock closed off 6c to $11.40.

Mandatories in the energy, power and utility space were mixed as Duke Energy Inc. made a profit warning while Merrill Lynch & Co. equity analysts reiterated an overweight recommendation for Calpine Corp. and AES Corp.

Duke lowered its 2002 earnings estimate and said profits in 2003 may decline if the North American merchant energy market does not improve. In third quarter, the company said it would take a charge for deferring construction of three power plants due to depressed conditions in unregulated power.

Duke's new 8% mandatory ended down 0.96 point to 16.5 and the old 8.25% mandatory closed off 0.99 point to 16.99. Duke shares lost $1.02 to close at $20.40.

Following Merrill's global power and gas conference this week, analysts at the firm repeated overweight ratings for Calpine and AES stock.

The AES 4.5% due 2005 was quoted up 0.375 point to 51 bid, 53 asked but the two convertible trust preferreds were seen lower. AES shares closed up 17c to $2.92.

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