Convertibles move mostly lower as oil gains; Tyco, airlines drop, but Schlumberger adds

By Rebecca Melvin

Princeton, N.J., Jan. 17 - Resumption of convertibles trading after a long weekend picked up on Tuesday where Friday's session left off for the most part, traders said.

Tyco International Ltd. convertibles extended losses, Medtronic Inc. moved higher, as did many energy names including oil-services company Schlumberger Ltd.

But Tuesday's stamp on the market included pressure on the airlines, which spurred trades in several airline names, including Continental Airline Corp.'s 5% convertibles, which dropped by about 10 points to 110, and Frontier Airline Inc.'s 5% convertibles, which were down about 6 points to 90.

Higher oil prices were the catalyst for airlines going down, a New York-based sellside desk analyst said. But Continental Airlines' earnings report and downbeat outlook for the first quarter was also weighing on the sector, he said.

"I'm surprised we didn't trade more energy names," the analyst said of the session, which he characterized as "fairly active."

"Everything seemed off today as a result of oil," a New York-based sellside trader said. "I would describe the market as mushy. But it has also run up quite a bit this year."

The convertibles of AMR Corp., parent of American Airlines, also traded lower. But those of ExpressJet Holdings Inc. appeared to hold their own, trading early in the session at 83 versus a share price of $8.00, which was unchanged from Friday. The ExpressJet convertibles weren't mentioned in trade later in the day although its shares (NYSE: XJT) slid steadily to close down 5.45%.

The convertibles of Intel Corp. were down about 0.5 point as its shares lost 1.5% after the Santa Clara, Calif.-based chip giant reported fourth-quarter earnings that missed expectations.

Intel's 2.95% convertibles traded at 99.5 versus a share price (Nasdaq: INTC) of $25.50.

Intel rival Advanced Micro Devices Inc. saw its 4.75% convertibles, which have been called, trade down to 139.25, compared to trades last week at 155.25, versus a share price of $36.25.

On Tuesday, Advanced Micro's common stock (NYSE: AMD) lost 3.7% in heavy volume to close at $32.86, down $1.27, after a Merrill Lynch analyst downgraded the Sunnyvale, Calif.-based semiconductor company's shares to "sell" from "neutral" and said in a client note that he believed it would be difficult for the company to take market share from Intel in 2006.

He said he expected good progress for AMD in the server processor market but contrasted it with lesser performance in the notebook and desktop processor markets.

Tyco convertibles extend losses

The convertibles of Tyco International slid another 4 to 5 points on Tuesday after falling 13 points on Friday as convertibles players viewed the conglomerate's planned break-up as unpalatable to investing in terms of logistics if nothing else.

"The bonds could be convertible into a basket of three stocks, and people just don't want to have to short three different stocks," a sellside analyst said.

It wasn't yet clear whether Tyco would handle its convertible debt using a basket approach or some other way.

It could be that the bonds would be convertible into the core Tyco shares. Or - and there were those convinced about a third scenario - that Tyco would offer some kind of incentive to take out the convertibles. "They might add to the conversion ratio by adding in a couple of shares or offer some kind of cash incentive," the analyst said.

The Tyco 2.75% convertibles, which the analyst said are likely to be called this week, traded at 115.25 versus a share price of $26.25.

The 3.125% convertibles, more of a question mark in terms of the break-up plan, traded at about 126 on Tuesday, down from about 130 on Friday.

On Tuesday, JP Morgan downgraded Tyco shares to "neutral" from "overweight," adding its negative sentiment to Citigroup's, which cut its rating of the shares to "hold" from "buy" on Friday.

Gimme Credit, an independent corporate bond research firm, said that the details of Tyco's proposed break-up were frustratingly vague but that it looked like the plan was to split the company into three groups rather than spin off some entities from a surviving entity.

The Pembroke, Bermuda-based conglomerate said it would break up the conglomerate into an electronics company, a health care company and a fire and security and engineered products and services company. Each will have its own board, and the transactions are expected to be completed in first quarter of 2007, the company said.

Tyco health care in 2005 had $10 billion in sales. The electronics segment had $12 billion and the fire and security business had $18 billion.

Interestingly the independent health care company is the only element of the current plan that was part of a Tyco break-up plan in 2002, Gimme Credit said in a report dated Tuesday.

"The key differences between the two plans are revealing," Gimme Credit said. Under the 2002 plan, Tyco said at the outset that it would repurchase most of its outstanding bonds, that it expected to raise enough cash from the IPOs and asset sales to eliminate more than $11 billion in debt, and that its ratings for the new companies would be "solid single A."

For the 2006 plan, Tyco is targeting only "solid investment grade" ratings. And management isn't saying what it will do with the $10 billion in debt it expects to be outstanding in 2007 when the split up takes place, Gimme Credit said.

Neither is it raising any cash with the transaction, but instead expects to spend about $1 billion.

Gimme Credit said that contrary to the sum of its parts being greater than the whole, the smaller companies will be weaker credits than one big one. Health care will be the strongest credit, it believes, with electronics the weakest.

It also said that if Tyco wanted to do right by its bondholders, it would tender for the outstanding bonds, which is what the bond market seems to be anticipating.

Tyco shares (NYSE: TYC) closed down 92 cents, or 3.4%, to $26.20, extending Friday's 10.5% loss.

Continental leads airlines lower

Continental's convertibles were lower Tuesday, with the 4.5% convertibles quoted in trade at 89.5, versus a share price of $19, compared to early January's level of 95 bid, 96 offered. Continental shares (NYSE: CAL) closed at $17.24, which was down $2.23, or 11.45%, on the day.

Continental's 5% convertibles due 2023 traded later in the session at 110, compared to trades near the opening bell at 119.125.

The Houston-based airline's common shares took a dive in heavy volume after it posted a narrower fourth-quarter net loss but said that a "significant" loss is expected in the first quarter.

Executives cited high fuel prices and aggressive low-cost competition for its current woes.

Crude oil for February delivery surged $2.39, or 3.7%, to close at $66.31 a barrel on Tuesday on the New York Mercantile Exchange. That level marked a three-month high, with reports saying the rise is related to fears of unrest in Nigeria, a member of the Organization of Petroleum Exporting Countries, which pumps about 2.45 million barrels a day. The possibility of sanctions against Iran related to its decision to resume nuclear research was also cited as a concern.

Airlines of all stripes found themselves under a cloud with the spike in oil prices. Frontier Airlines, a low-cost carrier that issued a new convertible in December, traded at 90, which was down about 6 points from Friday. Its shares (Nasdaq: FRNT) closed down 9%, or 70 cents, at $7.07.

Energy ticks up

Moving higher with oil prices were some of the convertibles of energy companies.

Sometimes the bonds expanded beyond their underlying shares. For example New York-based Schlumberger saw its 1.5% A tranche convertibles trade at 153.5 on Tuesday, up more than 2.5 points from Friday. Its 2.125% B tranche convertibles also gained 2.5 points, trading at 143.75, compared to trades on Friday at 141.10.

Schlumberger shares (NYSE: SLB) gained 1.14%, or $1.22, to $108.50.

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