Arch Coal's new deal gains out of gate; players mostly on sidelines

By Ronda Fears

Nashville, Jan. 29 - Despite the nice gain in stocks, traders said convertible players mostly remained on the sidelines Tuesday ahead of the State of the Union address by President Bush.

Arch Coal Inc. priced a downsized deal of $125 million instead of $150 million at the rich end of guidance, but it gained 2 points from par in the immediate aftermarket.

The 5% perpetual convertible preferred priced at 50 with a 27.5% initial conversion premium, and ended at 52 bid, 52.125 asked. The stock closed up 81c to $17.16. Proceeds will be used to repay bank debt, for working capital and for general corporate purposes.

"Looks like the structure caused a bit of a problem," said a dealer.

"There may, and that's a maybe, be some tax benefits to holders of these perpetual preferreds but there's just not enough downside protection."

While otherwise it was fairly quiet, traders said there were the usual active names, like Nextel Communications Inc., Lucent Technology Inc. and Nortel Networks Corp.

But some of the wind was let out of the Nortel and Lucent sails, as SBC Communications Inc. put the kibosh on optimism in the telecom sector with a warning that 2003 sales would decline again.

Xerox Corp. was the big winner, moving up on a surprise profit and rosy forecast by the copier maker.

"The market still is just a bit rich for there to be a lot of activity,"

"There has not been enough new supply," said a source at one of the major convertible trading desks.

"Demand is still good, everything's just so picked over. Everyone is very guarded right now on ideas, angles, right now, too."

Part of the caginess, he said, is because of so much uncertainty about the war effort and U.S. economy - both expected to top Bush's talk.

"Right now, you could be placing bets and just don't want to be in the spotlight, or you're just afraid to make the wrong move and so you just lay low. In any event, we're not seeing any big moves," he added.

"There has been some people begin to sell homebuilders, like Lennar, because if the war lasts longer than expected, then the economy will take a hit and new houses may be slammed."

Lennar Corp.'s 0% convertible due 2018 (Baa3/BB+) has lost about 2 points over the last couple of sessions, quoted Tuesday at 72.375 bid, 72.625 asked. The 0% convertible due 2021 (Ba2/BB-) is down about 0.75 points since late last week, quoted at 47.5 bid, 47.625 asked. Lennar shares ended up 33c to $54.70.

The war also has left the market with less new paper than was anticipated for January.

Gaming is another area that suffers in an economic downturn, but the lack of paper in that space in the convertibles market has helped International Game Technology's new deal.

The IGT deal, however, was still fairly active, one trader said, but it closed Tuesday slightly lower at 59.625 bid, 59.75 asked. IGT shares closed up 21c to $78.10.

Oneok Inc.'s new 8.5% mandatory edged up 0.26 to 25.39 as the stock closed up 30c to $17.25.

Power names had been gaining on a broad perception of improved sentiment, but AES Corp. hit a wall after disclosing late Monday that it would take some $2.7 billion in charges.

AES is particular had been moving up as it managed to renegotiate its bank lines recently.

The AES 4.5% convertible due 2007 dropped 1.25 points on Tuesday to 53.25 bid as the stock ended up 33c to $3.48. The AES junk bonds were said to have opened 2 points lower.

Xerox was a big winner, though, after beating analysts' expectations for profits in fourth quarter as well as 2002, then with a forecast for profits in first quarter and 2003.

Cost-cutting was credited with the sharp turnaround, but one trader noted that on the conference call Xerox executives also said equipment sales are projected to increase in 2003 after declining last year.

Xerox's 0.568% convertible due 2018 was quoted up 1.25 points to 62.75 bid, 63.75 asked and the 7.5% trust preferreds up 1.5 points to 64.5 bid, 65 asked. Xerox shares closed up $1.40 to $9.45.

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