Market declines on earnings, events; new issues trickle in

By Ronda Fears

Nashville, Tenn., April 25 - While stocks just eked out gains, traders said convertibles were lower as earnings and other events keep investors in turmoil. Calpine and Adelphia continued to slide. Tyco was lower, although the breakup reversal was seen positive for bondholders, and Network Associates also plunged as it halted plans to buyback McAfee.com amid its own accounting problems.

In primary activity, Isis Pharmaceuticals' new deal was up 2 points in the gray market and Temple-Inland was at bat with a mandatory. Also, Alltel announced a deal for next week and CenturyTel hinted at a new deal later.

Waste Connections' new floater, however, was lower in the immediate aftermarket, and IDEC Pharmaceuticals' new 0% also was down from issue price.

But Sempra Energy's new 8.5% mandatory gained ground as investors flocked to yield.

"Mandatories are really hot right now because people want the yield," said a trader at a convertible fund in New York.

"People are willing to disregard the lack of downside protection," which is characteristic of most mandatory converts, the trader continued, "especially in this market, especially if it's a story where the worst is behind them."

Sempra's mandatory gained 0.4375 from issue price to 25.4375 bid, 25.5625 offered as the stock gained 39c to $25.41.

The Waste Connection floater dropped 0.875 point from par to 99.215 bid, 99.625 offered while the stock fell $2.345 to $24.40 and the IDEC new 0% was at 58 bid, 58.25 offered as the stock dropped $1.60 to 56.73.

Waste Connections deal, the first floater other than those from investment banks, was described as a success but buyside sources said it would have been better received if it had a shorter put than the four-year put/call.

"That would have made it a lot more palatable," said a convertible trader at a hedge fund in New Jersey. "As it is, the put is too far out, but we bought some of it."

Waste Connections' existing 5.5% convertible due 2006 lost 3.75 points on the day to 114.75 bid, 115.75 offered.

The hedge fund trader agreed that mandatories are popular now due to investors chasing yield, but also because several of the mandatory converts that have come to market this year have been "far cheaper on a theoretical value basis" than many of the bond deals.

Isis' deal, which is estimated to be as much as 10% cheap, was gaining ground in the gray market on the volatility option, traders said. The credit is difficult to model, one trader said, but the stock volatility is "incredibly sexy" using a 55% average to model the convert.

The Isis deal was quoted up 2 points in the gray market. The stock closed down 99c to $13.30.

Volatility was helping the market overall, hedge fund traders said, but dealers marked most of the market lower.

Calpine, Adelphia and Tyco all fell into the category of falling prices but traders said there was little flow in any of those names.

Calpine's 4% convertibles due 2006 were down 3.75 points on the day to 93.5 bid, 93.75 offered as the underlying shares dropped 89c to $10.91 - still reacting to the stock's decline in response to the upsized stock sale of 66 million shares at $11.50 each.

The event is positive for bondholders, since proceeds are earmarked to paydown debt, but the converts were marked down versus the stock, which traders said discouraged much activity in the bonds.

Tyco was in a similar situation, announcing good news for bondholders - that it will scrap the breakup plan - but the converts were marked down versus the stock, which fell sharply on the news.

Tyco shares plunged $5.15 to $20.75 and that sent the 0% convertible lower. The 2020 issue lost 2 points to 63.625 bid, 64.625 offered and 2021 issue ended off 0.5 point to 69 bid, 69.5 offered.

"The news isn't nearly as bad for the bondholders as the equity," said Deutsche Bank Securities convertible analyst Jonathan Cohen.

In the long run, however, Cohen said Tyco's sale of the CIT Group in an IPO will help the company's financial situation and Tyco's plan to use proceeds from that divestiture to buyback stock will help the stock price.

Network Associates Inc., however, was hit hard on uncertainty surrounding an accounting problem it discovered itself, which also prompted the computer security provider to withdraw its offer to repurchase the 25% interest in McAfee.com that was spun off in 1999.

Network Associates said it withdrew the offer after it found accounting errors that could force it to restate financial results for 1999 and 2000.

Network Associates, whose accounting practices are under investigation by the SEC, said it does not have a "complete understanding" of the facts yet and it is conducting an internal investigation to determine the scope and magnitude of the problems. The company said its findings are unrelated to the SEC investigation, but it has told the SEC about the discovery and is to report further findings in two to three weeks.

The news sent both companies' shares plummeting.

McAfee.com dropped $4.57 to $13.97.

Network Associates shares fell $4.86 to $18.89. The Network Associates 0% convertible due 2018 was flat at 46.5 bid, 47 offered and the 5.25% convert due 2006 fell 23.5 points to 129.5 bid, 129.75 offered. One trader said the 0% issue didn't move because it is putable in February at 49.452.

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