Nortel drags down networkers; Semtech pressures chip group

By Ronda Fears

Nashville, Tenn., Aug. 28 - Flow in convertibles was very light again Wednesday as stocks sank. Nortel Networks Corp.'s warning took several other networkers lower with it and similar news from Semtech Corp. put pressure on the semiconductor group.

"Generally, the market was bid lower but it was pretty quiet today," said a convertible trader at one of the major investment banks.

"Trading is pretty much limited to names or based on specific events."

Thus there was heavy selling in networkers and other telecom equipment names as well as chips. Hewlett-Packard's warning also hurt the tech sector.

"It shows you just how fragile the markets are," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities Inc.

"It doesn't take much to revert back to a bear market."

The turn of events essentially quashed hopes in the market that there would be a new deal this week, also.

"There won't be any new deals this week, believe me," said a convertible trader at a hedge fund in New Jersey.

The right name and right terms could sell a deal, but convincing issuers is the challenge.

"Unless you're staring down the barrel of a gun, it's very difficult to convince management that now is the time to issue a convertible," Howard said.

With the market's downturn, which particularly was sharp for many mandatories, there was some buying on the weakness.

"I am buying mandatories as they had become too cheap. I'm lightening up on bonds as too many had become just credit plays," said a convertible trader at a hedge fund in New Jersey.

"For the bonds we sold, mostly we have no problems with the credit. It's just that they have become so far out of the money it's not convertible arbitrage anymore, it's just a bond investment, which is not what we do for the most part."

Indeed, the majority of the convertible market is busted.

But the asset class has gotten some high-profile pitches, as a good alternative to stocks, recently.

Venu Krishna, head of convertible research at Lehman Brothers, was on CNBC along with Nick Calamos of the Calamos Convertible Fund on Tuesday, and on Wednesday a Morningstar Inc. analyst was pitching converts.

"The doors haven't been busting down, so to speak, because of the good ink or good press, but it's a good thing to keep converts on the minds of investors, maybe pick up some interest here and there," said the head convertible trader at a big shop.

In a pitch for investors to consider convertibles, William Harding, a senior analyst with Morningstar Inc., pointed out that the average convertible fund has declined 9.8% over the trailing 12 months ended Aug. 22 while the S&P 500 index has lost 16.2% over that time and the typical domestic equity fund has shed 15.7%.

"Even though they have delivered admirable results, convertibles receive little media coverage and tend to be overlooked by investors. Part of the reason is that it's a quirky investment class that may appeal mostly to sophisticated investors. In addition, the convertible market is relatively small in size," Harding said.

"Convertibles can play a couple different roles in an investor's portfolio. They could be used as a safer play on stocks, or an aggressive bond alternative. Individuals in search of income, however, should note that convertibles tend to yield less than regular corporate bonds."

For the most part Wednesday, sellers prevailed in the convertible market and buyers were scarce, according to traders.

Chips were hit on several fronts.

Semtech warned of a third quarter sales slump on weak consumer demand and on news of a product reliability dispute with a customer.

And Sanmina-SCI Corp. and Siemens mutually agreed to terminate Sanmina-SCI's acquisition of Siemens' final system assembly and test operations in Florida as well as two European-based operations due to general market conditions.

TriQuint Semiconductor Inc. said it was reducing its workforce by 7% and Novellus Systems Inc. was expected to cut its September outlook to down 30%.

Semtech reported a second-quarter profit compared with a net loss in the year-ago quarter on a 29% jump in revenue but said August orders were substantially lower than its historical seasonal trend, especially out of the computer market.

Semtech's 4.5% convertible due 2007 was quoted down 2.5 points to 80.375 bid, 80.875 asked. The stock fell $4.87 to $14.05.

HealthSouth Corp.'s bonds and stocks continued to weaken following Tuesday's news but the converts were holding up due to their short maturity. Bond values now depend on covenant protection language, traders said, and the corporate issues were quoted down more than 20 points to 70 bid, 72 asked around midday.

The stock closed down another $1.66 to $5.05

But the 2.35% converts due 2003 were holding at 97.25 bid, 98.25 asked due to the short date on the maturity, as "most people think they can hold on until April next year when the converts mature," one source said.

Otherwise, drugs and healthcare were a mixed bag.

Amgen Inc. was unchanged on getting European approval of a drug.

But InterMune Inc. gained sharply on positive trial data for one of its drugs, which sparked some downgrades to the stock.

InterMune's 5.75% convertible due 2006 added 9.75 points to 88.75 bid, 89.75 asked. The stock gained $4.66 to $22.66.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.