Market digs Coeur d'Alene issue, sending it to 106.875; retailers mixed, airlines dive

By Ronda Fears

Nashville, Jan. 8 - Convertible traders reported another super busy day Thursday, but there was considerable selling mixed in with the recent buying surge. New paper was particularly hot, with the Coeur d'Alene Mines Corp. deal shooting 6.875 points from par and Red Hat Inc. gaining another 1.625 points.

"The data [unemployment claims, which rose by 14,000 to 353,000 for the week ending Jan. 3] was not good, and that hurt bonds. And the dollar is still in this funky slump that no one can really explain, but convertibles were our friend today," said the head convertibles trader at a sellside shop.

"There was a little pain from the weakness in bonds, some selling in spots in the convertible market - like airlines and a few retail names - but for the most part the market is still way better bid. There is just so much money swirling around, new money."

Airlines in particular took a dive on heavy profit taking after a JPMorgan report panned JetBlue Airways Corp. There also were several retailers suffering on weak holiday sales, but on the flipside there were just about as many heading higher on good figures.

Homebuilders like Lennar Corp. also were slammed along with mortgage lenders like Countrywide Financial Corp. on less faith that the building frenzy can last much longer.

Technology and telecom issues were especially hot, though, on signs that sales are getting much better. There were several positive guidance headlines in both areas, including a surprise boost by Nokia Corp. and positive analyst speculation on fourth-quarter results at Hewlett-Packard Co. Verizon Communications Co. bumping up its capital expenditure plan for 2004 also helped wireless names.

Demand north of $20 billion

It has been somewhat of a slow start for the convertible primary market, and nothing emerged on Thursday. But what's been injected into the market so far has been met eagerly even though buyers acknowledge that the new paper is expensive. More capital to deploy has been the chief reason for the spike in demand.

"The market is rich all the way around, so really one of the best places to buy - as is always the case, really - is the new issues. You've got more opportunity to realize some profits," said a hedge fund manager in Connecticut.

While new money is a major source of the new paper demand, one trader said it's also just the routine January pop.

"Some of it is that it's just January. We're back from the holidays. We've got money to put to work," the trader said.

"A lot of guys sat on their hands all December, not wanting to mess up any of their returns."

Buyside sources involved in virtually every convertible strategy out there, though, also say they have a lot of new money.

While it is difficult to gauge demand in the convertible market, since there are no official tracing systems for inflows, one trader at a sellside shop that traffics a vast amount of convertibles said there could be more than $20 billion of new paper put into circulation before it would begin to impact secondary valuations.

"It [the secondary market] will stay rich until a lot of new supply comes on," the trader said.

"The [convertible market's] capacity to handle $10 to $15 to $20 billion of paper could be absorbed without affecting the secondary."

When will new issues begin to steadily come to market is the big question, although capital markets sources say there is a very nice shadow calendar in the wings. Most market participants agree that there may not be a big surge until after earnings season is over.

New paper hot in rich market

Needless to say, then, new paper was the hottest item in the convertible market.

Ret Hat Inc.'s new 0.5% issue, which was sold with a 37% initial conversion premium, tacked on another 1.625 points to close at 104.875 bid, 105.5 offered while the underlying shares gained 50 cents, or 2.69%, to $19.09.

Coeur d'Alene Mines Corp.'s new 1.25%, up 24% issue skyrocketed out of the gate after getting a bid of 1 point over issue price in the gray market with no offers.

Deutsche Bank Securities, bookrunner on the Coeur d'Alene deal, quoted the deal Thursday at 106.875 bid, 107.125 offered. The stock ended up 11 cents, or 1.79%, to $6.24.

The Coeur d'Alene issue priced aggressively outside of yield talk of 1.5% to 2.0% and at the rich end of premium guidance of 20% to 24%. Sellside analysts not associated with the offering, however, put it 2.71% cheap to 3.62% cheap at the middle of guidance.

That was an improvement for buyers from the last month or so when new deals were getting priced right at around fair value or maybe as cheap as about 1.5% better than theoretical value.

Thus, a source working on one of the new deals that were printed this week said both appeared to have been well received, and were participated in by both dedicated convertible investors and hedge funds alike.

Countrywide, Lennar hit

Several names associated with homebuilding were knocked down Thursday on concern about backlogs in the construction industry, which could be signaling an end to the building boom. A sellside trader said there has been an increasing amount of activity, mostly selling, in the housing sector for the past week or so.

"This housing boom has gone on too long, in my opinion. I've been nervous for a while but kept seeing these names keep firming so I held out for as long as I could, probably longer than I'm comfortable with," said a hedge fund manager in New Jersey.

Homebuilders tumbled in early action. Then, the trouble spilled over into mortgage lenders and others associated with the industry, such as material suppliers like Lowe's Cos. Inc.

Lennar 's 0% convertible due 2021 plunged 2.5 points to 66.5 bid, 66.75 offered. The stock lost $3.81, or 4.08%, to $89.46. Lennar is a presenter at the Wachovia Securities America at Home 2004 Conference on Jan. 14.

Countrywide's 0% convertible due 2031 fell 2.625 points to close at 113.75 bid, 114.25 offered. The stock lost $2.05, or 2.81%, to $70.95.

Lowe's 0.861% convertible due 2021 dropped 1.75 points to 104 bid, 104.5 offered, and the 0% convertible due 2021 fell 2.25 points to 89 bid, 89.125 offered. The stock lost $1.44, or 2.6%, to $53.86.

JetBlue sparks airline dive

Most of the blame for the dive airline paper took on Thursday was credited to JetBlue.

JetBlue went spiraling lower on a JPMorgan research note that the firm no longer believes the airline is capable of earnings growth in 2004, chiefly due to increased competitive hostilities despite a planned 37% increase in capacity. The firm cut its earnings estimates for JetBlue to 84 cents from 99 cents for 2004 and to $1.10 from $1.25 for 2005.

Also Thursday, JetBlue reported a 43.6% rise in traffic.

The JPMorgan headlines, however, sent shockwaves of concern throughout the already ailing airline sector.

The stocks were hit, dragging down the convertibles. While there was considerable selling in the airline converts, one dealer was quick to note, as well, that most of that paper "stood up pretty well" on swap, so hedged investors were not hurting so badly.

JetBlue's 3.5% convertible due 2033 fell 3.875 points to 104.125 bid, 104.625 offered. The stock plunged $3.25, or 11.24%, to $25.67.

Continental Air Lines Corp.'s new 5% convertible due 2023 lost 1.25 points to 125.25 bid, 126 offered with the stock down 44 cents, or 2.4%, to $18.87.

Northwest Airlines Corp.'s new 6.625% convertible due 2010 dropped 1.5 points to 123 bid, 124 offered while the shares closed down 52 cents, or 3.69%, to $13.59.

Delta Air Lines Inc.'s 8% convertible due 2023 slipped 0.875 point to 94.75 bid, 95.25 offered as the stock dropped 33 cents, or 2.53%, to $12.70.

AirTran Holdings Inc.'s 7% convertible due 2023 lost 1.625 points to 160.25 bid, 161.25 offered with the stock down 90 cents, or 6.7%, to $12.53.

ExpressJet Holdings Inc.'s 4.25% convertible due 2023 dropped 2.125 points to 112.5 bid, 113.125 offered as the shares lost 53 cents, or 3.42%, to $14.96.

Retailers mixed on sales

December sales figures were out Thursday and while many were not as bas as had been expected, one dealer said there were several misses. Also, he noted that many of the numbers that were within expectations were not so stellar, anyway.

"Holiday sales were better-than-expected in a lot of cases, but that was no great feat; the expectations had been lowered and lowered, so it was not a big deal to meet these numbers," the trader said.

"The ones who missed, though, were punished severely, like Gap. They were just beginning to look like a turnaround situation, at least some people were thinking that, and then these numbers blew some people away."

Gap Inc. reported December comp store sales were just 1% higher, missing estimates that in some cases looked for a gain of 5%.

The Gap 5.75% due 2009 fell over 15 points to the 137.5 area, the trader said. Gap shares plunged $3, or 13%, to $20.

"It seems like what happened over the holiday was that the big chains, the department stores, even some of the upper scale retailers were discounting so much that it hurt the discounters' numbers," the trader said.

Men's Wearhouse Inc. posted a 2.9% gain in comp sales for December but lowered its fourth quarter EPS guidance to 50-52c from the 58-60c estimate provided in November. The Men's Wearhouse 3.125% due 2023 dropped 1.375 points to 96.25 bid, 96.75 offered, while the stock fell $1.69, or 6.96%, to $22.59.

Computer sales was a particularly bright spot in the retail space, though.

Best Buy reported a gain in December comps of 9.3% and also said it sees fiscal 2004 earnings (the end of January) hitting the middle to high end of its estimated EPS range. The company has guided for $1.34 to 1.39. While the company sells computers, entertainment, and a variety of other electronics items, Best Buy noted in its earnings report that home office items were a standout performer.

Best Buy's 2.25% due 2022 added 1 point to 110 bid, 110.5 offered. The stock gained $1.51,or 2.89%, to $53.72.

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