Sluggish market as many focus on possible war in the Middle East

By Sara Rosenberg

New York, Jan. 27 - The convertibles market was generally described as relatively slow on Monday with most people attributing the lack of activity to concerns about the developing situation in the Middle East and the anticipation of economic indicators that will be revealed this week.

The overall market is "still pretty bad," said Stuart Novick, convertibles analyst at Salomon Smith Barney.

"It seems because we're in the middle of earnings season it should be a lot busier, but it hasn't been as busy as it should be, Novick said. "I think the overriding sentiment is that people are waiting around to see what happens in the Middle East. It just doesn't seem like people want to put any money to work, [they'd] rather just sit on it. If war breaks out that's usually not good for the markets in the near-term."

A second analyst agreed, calling Monday's convertible market "sluggish" since people are trying to digest all the macro news that is being released early this week, such as economic indicators and updates on the Iraqi situation. Statistics scheduled this week include new home sales, released on Monday, and durable goods orders and consumer confidence on Tuesday and a two-day FOMC meeting that ends Wednesday.

"It's one of those days when everything else takes precedence," the analyst explained. "Everything is on hold for a couple of days till we get a timetable on action."

As far as trading activity is concerned, according to Novick, bits and pieces of a lot of names traded on Monday but nothing spectacular stood out.

International Game Technology's new 30-year 0% convertible senior notes traded at 59.72 while the stock closed at 77.89, up 7 cents. "Maybe it's up slightly with the stock up today," Novick said, adding that its one of the few names that was reported higher on the day.

"It's trading a little bit because it's a new issue," Novick explained. "Bonds are still changing hands. People are still trying to figure out who wants to hold it."

The convertibles were sold late last week at an issue price of 59.29 for a yield to maturity of 1.75% and initial conversion premium of 45% and closed at 59.75 bid, 60 offer on Friday.

Goldman Sachs & Co. was the lead manager on the Reno, Nev. computerized gaming company's deal.

Also, Sempra Energy's 8½% mandatory preferred due May 2005 traded on Monday after the company announced that it was doing a straight debt deal, Novick said. The mandatory was quoted down 31c to close at 23.815, according to a trader, while the stock closed down 40c on the day at 23.33.

"If nothing else, it will give investors a little clarity on what kind of credit spread the company is viewed at," Novick said in regards to the San Diego energy company's debt deal.

Furthermore, he pointed out that Fitch Ratings assigned an A rating to the deal with a stable outllok, which is nothing but positive for a company that operates in the same sector as CMS Energy Corp. and American Electric Power Co. Inc., both of which announced dividend cuts late last week.

CMS decided to suspend its common dividends, saving over $100 million a year, while AEP approved its 60c quarterly dividend for the first quarter but plans to cut it by 42% beginning in the second quarter to save $340 million annually.

Both CMS and AEP, however, also lowered earnings outlooks and AEP reported a net loss amid huge write-offs.

i2 Technologies Inc.'s 5¼% convertible due 2006 was bid down one point to close at 61.375 on Monday, according to a trader, following the release of preliminary fourth quarter results. The stock closed at 92c, down 34c or 26.98% on the day.

The company announced preliminary adjusted operating margins of 12% and preliminary adjusted earnings per share of 2c before a restructuring charge. After the charge, the company posted a loss of 3c per share.

Furthermore, the company announced a decision to re-audit its financial statements for the years ended Dec. 31, 2000 and 2001 due to recent information developed during the audit committee's ongoing investigation of allegations regarding financial reporting. Deloitte & Touche LLP has been engaged to do the re-audit.

More specifically, preliminary fourth quarter revenues are $120 million, compared to the analysts' consensus estimate of $109 million as reported by Multex, with operating expenses of $128 million, including a restructuring charge of $23 million.

On an adjusted basis, which excludes the restructuring charge, the company announced preliminary earnings of 2c per share, beating the analysts' consensus estimate of a loss of 5c per share.

i2 is a Dallas provider of value chain management solutions.

After the close Monday, Arch Coal was slated to price $150 million of perpetual cumulative convertible preferreds. Guidance on the deal is for a dividend of 5.25% to 5.75% and initial conversion premium between 22.5% and 27.5%.

Deutsche Bank Securities convertible analysts put the deal 2.65% cheap at the midpoint price talk using a credit spread of 700 basis points over Libor and 42.5% volatility in the stock.

Wachovia Securities put it 0.87% cheap at the midpoint price talk using a spread of 800 basis points over Treasuries and 40% volatility.

Both valuations also account for a 1.12% current yield on the common.

© 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.