Convertibles gain on stocks bounce, new GM deal

By Ronda Fears

Nashville, Tenn., Feb. 25 - Convertibles got a nice lift Monday as stocks soared on higher home sales and boosted guidance from General Motors Corp., which also launched a two-part $2.5 billion convertible bond deal. Calpine Corp., however, moved sharply lower with still no firm new on its financing and an S&P downgrade watch, which was retracted by the rating agency.

"Volume is still not where we'd like to see it, but we got off to a lot better start this week," said the head trader at a major investment bank in New York.

"Nervousness still is the predominant mood, but of course there are these bright spots that provide a nice little bounce. The GM deal was a great shot in the arm. That alone got people moving. The Ford deal shot up and a lot of the high-grade paper."

Calpine was getting a lot of attention, as well, but not good. The independent power producer had provided no confirmation that it has procurred the $1 billion unsecured working capital facility that it has been working to get for six weeks now but the market got a scare when S&P put the credit on negative watch saying Calpine was securing $2 billion in financing ahead of unsecured bondholders.

S&P retracted the watch about an hour later, saying "no such transaction has occurred" and that it was maintaining its BB+ corporate credit rating with stable outlook, the BB+ rating on Calpine's existing senior unsecured debt and B+ rating on the convertible preferred stock. S&P had said that San Jose, Calif.-based Calpine planned to pledge all of its 1.7 trillion cubic feet of U.S. and Canadian gas assets as well as its U.K. Saltend power plant to three classes of debt - a $1 billion 18-month revolver, a $600 million two-year term loan and the existing $400 million corporate revolver that expires in May 2003. That, S&P had noted in its original statement, was in addition to the security under the $3.5 billion construction revolver, which includes power plants under construction.

"Everything was retracted, but it spooked everyone nonetheless," said the head trader at hedge fund in New York. "There were just so many details in the S&P press release that it made you nervous. Something was amiss, in any event, and Calpine got slammed."

The Calpine 4% convertible notes due 2006 lost 1.875 points to 72.25 bid, 72.5 offered while the common lost 28c to $6.83.

For the most part, however, convertibles were higher and moods were somewhat improved with GM's new deal and hopes of others this week. The market is looking for several new issues in addition to the AmerUs $150 million deal with a new structure and Ameren Corp.'s $300 million mandatory. Siebel Systems Inc.'s name has been speculated as a new issue candidate for some time.

New-issue buzz included Gap Inc. on Monday. Gap was said to be bringing $1 billion of convertibles soon, and market sources noted the company is scheduled to release earnings after the close Tuesday. The clothing retailer is expecting a loss of 3c to 5c, versus a profit of 31c a year ago. Gap shares gained 53c to $12.94.

"I don't know if the Gap deal is for sure, or the Siebel, but we are expecting more than what's on the calendar this week," said a convertible trader at hedge fund in New Jersey.

"Higher stocks help, of course, because that improves everyone's mood and attitude. But, it's also true that you don't always have to have a market moving higher in order to do a convertible, so there will be several deals brought even when stocks are on the decline."

Stocks were heading north on Monday, however, extending the gains late last week. The Dow Jones Industrial Average rose 1.78% and the Nasdaq climbed 2.63%.

Traders described volume as "decent," or moderate, with the trend seeming to be a continued search for quality and value. There also were a few bargain hunters rummaging through the tech and telecom sectors, traders said.

Lennar Corp. got a boost from the gain in home sales, with the 0% convertible due up 2.125 points to 73.875 bid, 74 offered and the 0% convertible due 2021 up 0.875 to 44 bid, 44.25 offered as Lennar shares added $1.94to $54.89.

As Americans seem to be still fairly free with the purse strings, traders said buyers were seen for several retail issues. J.C. Penney, however, didn't find any takers as its 5% convertible due 2008 dropped another 1.25 points to 91.75 bid, 92.25 offered while the common lost 47c to $19.81.

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