Williams boosts entire slate of power names; FCC ruling sends telecoms tumbling

By Ronda Fears

Nashville, Feb. 20 - Overall, convertibles were relatively unchanged Thursday but there were some sharp moves in energy, to the upside, and telecoms, to the downside.

New deal activity slowed and this week's fare was weaker, including the Deutsche Telecom euro mandatory, as all telecoms suffered from a setback to local carriers on the regulatory front.

"Williams moved the entire slate of power names higher," said a convertible dealer.

Williams Cos. Inc. appeared to impress some investors with its earnings and plans to sell another $2.5 billion in assets along with a 40% reduction in workforce to help meet debt maturities of $3.2 billion this year and $1.8 billion next year.

The Williams 9% mandatory gained 1 point to 90 bid, 90.125 asked as the stock rose 77c to close at $3.67.

Calpine Corp., AES Corp., Mirant Corp., Duke Energy Corp. and Sempra Energy all gained ground as well.

There was good two-way activity in several of those names, the trader said, as some holders saw the uptick in interest as an excellent time to exit.

"Some people are concerned about all these asset sales, what will be left as a going concern," he said.

Mirant's 5.75% convertible due 2007 moved up 1.75 points to 45.75 bid, 46.75 asked and the 6.25% preferred added 11.6875 points to 28.8125 bid, 29.0625 asked. The underlying stock rose 13c to close at $1.76.

Sierra Pacific's new deal, however, plunged on heavy selling even though Standard & Poor's affirmed its ratings.

The Sierra Pacific 7.25% convertible due 2010 was quoted down 4.5 points to 97.5 bid, 98 asked while the stock ended down by 30c to $3.05.

Although the bulk of telecom paper was weaker Thursday, Nextel Communications Inc. sparked some mixed reactions with its earnings.

There were no surprises as the company met its guidance and beat analysts' expectations, but traders noted some apparent swapping out of the Nextel 4.75s into the 5.25s.

Nextel's 4.75s lost 0.25 point to 94 bid while the 5.25s added 1 point to 80.5 bid. The Nextel 6s were quoted flat at 96.5 bid, 97.5 asked. The stock gained 5c to $13.53.

But lots of telecom paper declined Thursday as federal regulators handed off decision-making powers about local access to state regulators. Carriers had been hoping the Federal Communications Commission would put an end to requirements to make networks available to competitors altogether.

Obviously, carriers like Alltel Corp. and CenturyTel Inc. suffered severely. Traders said selling was more acute in Alltel.

Alltel's 7.75% mandatory (A2/A) fell 1.25 points to 44.625 bid, 44.75 asked. The stock dropped $1.64 to close at $42.38.

CenturyTel's 4.75% due 2032 (Baa2/BBB) lost 1 point to 111.75 bid, 112.25 asked and the 6.875% mandatory declined by 0.5 point to 23.315 bid, 23.415 asked. The stock ended down 82c to $26.18.

Deutsche Telekom's new euro mandatory, which priced with a 6.5% coupon and 24% initial conversion premium, also declined although European telecoms were mixed. Alcatel was also lower but Vodafone and BT Group were higher.

The DT mandatory (BBB+) dropped 3 points from par to 97 bid, 97.25 asked, according to a dealer in London. That was down from a bid of 1.125 points in the gray market. DT shares closed in Frankfurt down €0.60 to €11.24.

New paper this week from Affiliated Managers Group and Hutchinson Technology also declined.

AMG's floater lost 0.375 point to 100.625 bid, 100.875 asked as the stock slipped 34c to close at $43.75.

Hutchinson's 2.25s dropped 0.25 point to 100 bid, 100.5 asked while the stock ended off 3c to $21.20.

Elsewhere, trader said Enzon Inc.'s convert moved up on news of its merger with NPS Pharmaceuticals.

The Enzon 4.5% due 2008 was quoted up 1 point to 78.375 bid, 79.375 asked while the stock closed down 93c to $13.10. But it traded at 80, one trader said, when Enzon shares spiked to $15.50 around mid-morning.

Enzon and NPS agreed to merge in a stock-for-stock transaction valued at $1.6 billion.

Each NPS share will be exchanged for 1 share of new common stock, while each Enzon share will be exchanged for 0.7264 shares of the stock, a 26% premium to Enzon's closing price of $14.03 on Wednesday.

The merger does not trigger the change-of-control put provision for the Enzon convertible due to its all-stock nature, said Merrill Lynch & Co. convertible analyst Tatyana Hube. It will mean the conversion ratio will be adjusted to 10.2338 from 14.0884 to allow for the merger stock distribution.

Also, she said, the merger "should be stable to slightly positive" for Enzon convertible holders from a credit standpoint.

"Given that NPS Pharmaceuticals has no debt outstanding, the Enzon convertible bond will be the only debt of the new combined company post-merger, which indicates better interest coverage," she said.

"However, NPSP's negative earnings may prove to be a bit of a detriment."

Provided that the merger will result in some synergies, she said, the overall effect should be slightly positive.

At 80, the implied spread on the convertible is 645-675 basis points, Hube said, which would be a 55-85 bps improvement over levels before the merger news. She said Merrill had used a spread of 720 bps over the five-year Treasury to analyze the convertible prior to the announcement.

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