Duane Reade slides in mixed retail group, other new issues buck overall downturn

By Ronda Fears

Nashville, Tenn., April 11 - As the markets reversed course to head south, most convertibles followed suit. Several new issues, however, resisted and headed north on some buying. Duane Reade Inc. found buyers for its deal in a new structure, upsizing it on strong demand, but the paper weakened in the aftermarket on pressure in the retail sector due to worries about sales figures.

For the most part, however, volume remains stilted and the "usual suspects" - Adelphia, Xerox, Nortel, Nextel and Lucent - were the market's chief source of buzz, as one observer put it.

"It just is excruciating lately. We're off the desk about 30 minutes after the close, sometimes sooner," said a convertible trader at a major investment bank.

"This has been going on for a while now, and it's really getting grueling. We need something to break the market loose."

There were a few new issues changing hands, traders said, but Duane Reade's new deal lost ground out of the gate.

Duane Reade was pitching a new structure of CATZ, or cash-to-zero, convertibles that were said to be well received by initial buyers. The deal was upsized to $190 million in proceeds from $110 million and was sold at the aggressive end of guidance.

There was some divergence on the valuation, however.

One sell-side analyst put it about 6% cheap, assuming a credit spread of 350 basis points over the comparable Treasury note and 26% volatility in the stock. Another sell-side analyst, however, put it at 1.34% cheap, using a spread of 450 basis points and 26.5% volatility.

"The retail sector was sort of a mess today, and that apparently had some impact on Duane Reade," said a dealer.

"Sales figures, sectorwide, are not as strong as people would like to see. The catch phrase for Duane Reade here in Manhattan is, 'There's one on every corner,' but we'd expected it to do better right out of the gate."

Duane Reade did not report comparable store sales on Thursday like most of the retail sector.

The 2.1478%/0% issue (Ba3/BB-), which sold at 57.276, was bid down 0.125 point from issue price. The stock dropped 91c to $30.89.

Some new paper was higher, however.

Adaptec's 3% due 2007 gained 5.5 points to 111.5 bid, 112 offered with the stock up 93c to $13.40. The Electro Scientific 4.25% due 2006 added 1.25 points to 107.5 bid, 108.125 offered with the stock up 56c to $32.52. The EGL Inc. 5% due 2006 was quoted up 3 points to 114 bid, 114.625 offered as the stock gained 62c to $16.73.

DDi Corp., however, continues to lose ground. The new 6.25% convert due 2007 was quoted down 6.25 points to 84 bid, 84.75 offered with the stock off 86c to $6.36.

Duane Reade was not alone heading south as much of the retail sector was headed that way, too.

The Gap's 5.75% convertible due 2009 was quoted down 8 points to 110.75 bid, 111 offered with the stock falling $1.58 to $13.86 on the company's warning that April sales will be much lower than anticipated, possibly as much as 25%.

Rite Aid, however, another pharmacy chain, gained ground as the new 4.75% convert due 2006 gained 3.75 points to 91 bid, 92 offered as the stock rose 30c to $4.22.

Telecoms and telecom equipment makers continue to struggle with Lucent and Nextel leading the slide. Lucent announced it will cut another 5,000 jobs. Nextel may get another rating cut by Moody's.

Lucent's new 7.75% convertible preferred dropped 2.25 points to 82 bid, 82.5 offered with the stock down 11c to $3.92. Nextel's 4.75% due 2007 lost 1.25 to 54 bid, the 5.25% due 2010 was off 0.375 to 48.5 bid and the 6% due 2011 dropped 1.25 to 53.25 bid with the stock down 42c to $4.34.

Convertible market sources now say the likelihood of Qwest bringing a new deal to market is slim. And, onlookers expect the Agere deal that had been planned as part of a spin-off from Lucent will be pushed back beyond third quarter, which is where Lucent had deferred it to already.

"They couldn't do a deal right now, although they'd probably like to, both of them," said a convertible trader at a fund in New York, referring to Qwest and Agere.

Xerox was lower on yet more accounting investigation news, although it was not new, and some think there are signs of faith in the name.

Press releases were out by Xerox and the SEC on Thursday about the copier maker's $10 million fine to settle a civil complaint charging the company with fraud. The news was out last week on the fine, which is the largest ever by a company for financial reporting violations. Xerox also agreed to restate its books back to 1997.

"They just can't seem to bury this," said Stuart Novick, a convertible analyst at Salomon Smith Barney. "But the preferreds are at 5s up 20 (5% yield with a 20% premium). That's not a distressed level, so there are some believers in that story."

Xerox's new 7.5% convertible trust preferred due 2021 dropped 1 point to 64.5 bid, 64.875 offered with the stock down 24c to $9.70. The Xerox 0.57% discount converts due 2018 were flat at 57 bid.

The investment banks were hit again Thursday, with Merrill Lynch shares falling $4.02 to $46.90, Lehman Brothers down $2.88 to $60.28 and JPMorgan Chase losing $1.58 to $29.05.

The Merrill Lynch convertible floater due 2032 lost 1.5 points to 98.75 bid and the 0% convertible note due 2031 dropped 0.5 to 50.5 bid. Lehman's convertible floater due 2022 declined 0.875 point to 100.5 bid. The Jardine Matheson 4.75% convertible due 2007, which converts into JPMorgan shares, lost 1.125 points to 94 bid.

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