Convertibles higher as prospects of new deals spur activity

By Ronda Fears

Nashville, Tenn., Jan. 4 - Convertible traders said activity picked up considerably Friday as market players anticipate next week will launch a heavy flow of new deals for early 2002. Indeed, the New Year calendar got off to a start Friday as price talk emerged on the big Williams Cos. Inc. mandatory convertible deal scheduled for next week. In the secondary market, traders said the telecom sector was mixed but several issues continued to rally. There was some profit taking late in the session on telecoms, however, and traders said selling prevailed in the health-related groups although there was some selective buying taking place by bargain hunters.

"Volume picked up sharply today. Everyone is anticipating a strong new issues push early," said a convertible trader at a major investment bank in New York. "The Williams deal was getting mixed reactions, but it is expected to do very well. There are a lot of outright buyers looking for a way to boost their yields."

There was some market buzz Friday that an overnight deal may surface on Monday, but nothing very solid.

"We have heard there could be an overnight deal on Monday," said a convertible hedge fund manager in New York, who said the issuer name involved was a homebuilder. "Certainly, no one would be surprised. And, usually there are these rumblings a day or two in advance of an overnight deal, just so everyone gets on alert for something, even though we don't know what it is exactly."

If nothing else does pop up, Williams will bring the year's first new deal.

Williams launched $1 billion of three-year mandatory convertibles with price talk of an 8.75% to 9.25% yield with the upside participation capped between 60% and 70%. The registered deal, via joint book-running lead managers Merrill Lynch and Salomon Smith Barney, is scheduled to price after the market close Wednesday. The par $25 units consist of a three-year forward stock purchase contract and a five-year senior note. The convert is part of Williams' plan to strengthen its balance sheet and thereby maintain its investment-grade credit status, with proceeds going to fund its capital program, repay commercial paper and other short-term debt, and for general corporate purposes. Williams shares closed off 68c to $24.92.

While stocks were a bit flattish, convertibles were said to be strong because of such mixed results within the equity indices. The Nasdaq added 14.11, or 0.74%, to 2059.38 and the Dow Jones Industrial Average gained 87.60, or 0.86%, to 10259.74.

"Converts were not as flat as the equities looked. There were a lot of price spikes, particularly in the telecom and telecom equipment groups," said a convertible trader at a hedge fund in New York. "Nortel, Verizon, Corning, Ciena were higher but Nextel, Qualcomm, AT&T, Sprint were all down quite a bit. The debate still revolves around demand and the jury is still out. Everyone is placing their bets. Right now, really the equipment suppliers are doing better that the phonemakers."

Corning's 3.5s due 2008 climbed 7.25 to 129.25 bid, 129.75 offered with the stock up $1 to $10.70. Nortel's 4.25s due 2008 gained 2.5 to 107 bid, 107.5 offered as the stock gained 30c to $8.58. Ciena's 3.75s due 2008 added 1.5 to 66 bid, 67 offered with the stock up 79c to $16.47.

Of the declines among telecoms, the sharpest were the converts linked to Sprint PCS. The Comcast/PCS (Baa1/BBB-) 2% due 2029 that sold in October 1999 at 71.52 fell 3.5 to 43.5 bid and the 2% due 2029 that sold in November 1999 at 81.63 dropped 3.5 to 48.75 bid. The Liberty Media/PCS (Baa3/BBB-) 3.75% due 2030 lost 2.125 to 57.5 bid, 58 offered and the 4% due 2029 lost 3 to 71.375 bid, 72.125 offered. The Cox/PCS (Baa3/BBB-) 0.425% due 2020 slipped 0.5 to 41.75 bid. Sprint PCS shares closed down $1.89 to $22.45.

While energy, oil and gas, and oil servicing issues were slightly on the decline in fallout from rumors - denied by the company - that Halliburton would file for bankruptcy, traders said Calpine saw a surge in interest in its converts. The new 4% due 2006 (Ba1/BB+) added 4.5 points on the day to 118 bid, 118.5 offered as the stock rose 95c to $16.85. The Calpine 5.75% convertible preferreds due 2004 gained 3 to 61.25 bid, 62.5 offered and the 5.5% convertible preferreds were up 1.5 to 43 bid, 44 offered.

"Oil and gas issues didn't really take a dive on the Halliburton situation, but something like that just keeps people steering clear of a potential blowup," said a convertible trader at a hedge fund in New Jersey. "There were no big spikes, no sell-off in oil and gas or servicing. The lack of an appreciable gain in oil prices is what is hurting the group the most. But we are beginning to look at the group because when spring comes on, the vacation season is right after that and there could be some gain in gasoline that will help the sector."

Brokerages were benefiting from an upgrade on the brokerage sector by Prudential Securities, and investors appeared to be thinking that the worst was behind the group on hopes of an improving economy. The surge ran the gamut of the group, from online brokerages like E*Trade to the well-established Wall Street strongholds like Merrill Lynch & Co. E*Trade's new 6.75% convert due 2008 (B-) soared 7.875 to 127.25 bid, 127.75 offered and the 6s due 2007 added 1.25 to 78 bid, 78.5 offered as the underlying stock gained $1.19 to $12.29. Merrill's 0% due 2031 (Aa3/AA-) added 0.5 to 52 bid, 52.125 offered with the common up $2.98 to $56.64.

Several healthcare names were getting buying interest on recent weakness as bargain hunters stepped in, traders said. Cephalon's new 2.5% due 2006 added 3 to 109.75 bid, 110 offered and the 5.25% due 2006 was up 3.25 to 121.75 bid, 122.5 offered as the stock gained $3.06 to $76.27. Gilead Sciences' new 5% due 2007 advanced 5.5 points to 144.5 bid, 145.5 offered with the common up $2.77 to $61.40.

WellPoint Health Networks Inc. got a boost from its announcement late Thursday that it expects to post a profit in first quarter 2002. The WellPoint zeros due 2019 added 2 points to 86 bid, 87 offered as the stock rose $3.80 to $119.50.

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