New issues provide diversion amid market downdraft

By Ronda Fears

Nashville, Tenn., April 29 - As the market downdraft continue to blow convertibles southward, traders said there were some bargain hunters foraging the busted universe and scouring a vast group of names with sell offers.

Meanwhile, the market's collective head turned to new issues as at least $1.75 billion of paper is slated to price this week.

"Everyone is on pins and needles right now, waiting for the next blowup," said a convertible trader at a major investment bank in New York.

"WorldCom is in a world of hurt, but the pain is everywhere right now. Convertibles are in a weird place, valuations. We're still seeing quite a bit of fixed income buyers, because there's so many busted converts."

WorldCom's debt troubles have continued to drag the securities lower, and with the stock at $2.35 most convertible market watchers and players don't think a traditional convert or even a mandatory would fly right now.

One observer said even if WorldCom tried to sell a convertible on swap, like several deals of late, the company probably could not do a deal big enough to raise the kind of capital it needs because the stock buyback reduces the proceeds to the issuer.

CenturyTel, which hinted at a convertible deal in its earnings report last week, put a figure of $500 million on such a deal in an SEC filing Monday and also said it planned a straight debt deal that would raise $359 million in proceeds. Those funds, along with the $1.3 billion in proceeds from its wireless asset sale to Alltel, would pay for wireline asset purchases from Verizon.

Market sources think CenturyTel is still shopping for a lead manager or managers for the deal. CenturyTel shares closed Monday down $1.54 to $30.10.

Rival Alltel is not having trouble pitching its $1.25 billion of mandatory converts, the proceeds of which will help pay for the purchase of CenturyTel assets, market sources said. Alltel shares fell $2.05 to $48.27.

Joining Alltel's pricing after the close Tuesday is KeySpan Corp. with a $400 million mandatory and market players expect Lennox International Inc.'s deal to price after Tuesday's close as well but syndicate sources are being coy about the timing.

KeySpan's deal - estimated about 2.5% cheap - is evidence, market players say, that the demand for mandatories has brought about more aggressive pricing terms. One observer noted that last year mandatory converts were pricing about 6% cheap and were more like 10% cheap a couple of years ago.

The latest additions to the mandatory list were all lower Monday, which traders said was due to pressure from the stock because there are still buyers for the high-yield issues.

Temple-Inland's 7.5% mandatory, estimated a little more than 2% cheap, on Monday was flat at 50.5 as the stock lost 30c to $51.85. Sempra's 8.5% mandatory, estimated about 2% cheap, lost 0.3125 to 25.5 as the stock slipped 25c to $25.71.

Capital One's 6.25% mandatory has been the big disappointment, said a hedge fund trader. The issue on Monday dropped 1.75 points to 47 as the underlying stock fell $3.30 to $58.75.

"I know it's a matter of supply-and-demand, the pricing terms, and there's a lot of capital in our market that needs to be put to work somewhere but we're stretching the limits of tolerance with some of these mandatories right now," the hedge fund trader said.

"That said, there are a lot of crappy deals that could probably get done right now just because of that, people want to buy new issues. There's not much to pick from in the secondary."

Traders said fixed income buyers continue to pore over the busted convertible universe, which has swollen over the past year but had been shrinking this year up until a few weeks ago.

One trader said he was looking at the downtrodden biotech sector right now, hoping to find some bargains among the wounded.

The Amex biotech index was down 2.14% on Monday, and traders said Anthem Inc. was a factor in the broad decline in healthcare-related converts. The insurance firm was injured by a huge sell-off in response to its acquisition of managed health care provider Trigon Healthcare Inc. for $4 billion in cash and stock.

Anthem's mandatory convert plunged 4 points to 84 while the underlying stock fell $4.05 to $66.65 on the news.

Merrill Lynch was finding some buyers on the recent weakness caused by the investigations into the firm's research policy, traders said. The Merrill floater convert closed down 0.5 point to 96.75 bid, 97 offered and the 0% due 2031 was off 0.125 point to 50 bid, 50.25 offered. Merrill shares lost $1.27 to $42.11.

Tyco's slide was stemmed when the 0% converts found a few buyers as sell offers came in, traders said. Tyco shares, however, continued to spiral downward in the wake of scrapping its four-part breakup plan. The stock closed down $2.90 to $17. Tyco's 2020 issue was unchanged at 62.75 bid, 63.75 offered and the 2021 issue bid was flat at 69 while the offer dropped 0.125 point to 69.375.

To the upside, Nvidia Corp. was a ray of hope regarding all the SEC investigations into accounting practices as it announcing an upward revision to earnings for the last three years, ending an SEC-prompted review. The graphics chipmaker also announced better than expected targets for the current quarter.

Nvidia's 4.75% convertible due 2007 gained 6.125 points on the day to 105.75 bid, 106.25 offered as the stock soared $5.06 to $35.43.

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