Selling hits convertibles market; Delta leads airlines lower; Tyco tanks; Halliburton gains

By Rebecca Melvin

Princeton, N.J., Aug. 2 - Selling hit the convertibles market in pockets of fairly active trading on Tuesday, with Delta Air Lines Inc. leading airline paper lower, while Tyco International Inc. and Vishay Intertechnology Inc. dropped amid disappointing earnings news.

Stalwart convertible names in energy were higher including Halliburton Holdings Co., Cooper Cameron Corp. and Transocean Inc. Crude oil closed up at a record high, extending gains Monday on concern that Saudi Arabian supply may be threatened after King Fahd's death.

The convertibles of Lear Corp. sank after Standard & Poor's downgraded the auto parts maker to junk. And Sirius Satellite Holdings lost ground after the satellite broadcaster posted a larger second-quarter loss but beat estimates and raised guidance.

Overall, the tone was weaker, traders said, with the bulk of activity focused on the paper of companies that released earnings news.

Delta sinks amid bankruptcy speculation

The convertibles of Delta Air Lines Inc. were under pressure along with its stock and other debt as another bout of speculation swirled around the possibility of an imminent bankruptcy filing from the No. 3 U.S. carrier.

The Atlanta-based company has been struggling with rising fuel costs and steep competition from low-cost carriers. Chief executive Gerald Grinstein said last week in a memo to employees that the airline's efforts to cut about $5 billion in costs were "not enough" to avoid a possible bankruptcy filing. The memo came after Delta announced a $382 million loss for the second quarter.

The airline narrowly avoided bankruptcy last year when it managed to shore up $1 billion in annual wage and benefit concessions, and $1.1 billion in financing from creditors General Electric Commercial Aviation Services and American Express.

"It certainly feels imminent the way the debt and stock are trading," a New York-based convertibles trader said of a possible bankruptcy filing. Analysts have suggested that the carrier will file in September.

Delta's 8% convertible due 2023 slid between 6 points and 7 points to 22 bid, 23 offered from a level on Monday of about 29, traders said.

Shares of Delta fell $0.44, or 14.81%, to $2.53.

JetBlue Airways Corp. paper dropped more than a point after Calyon Securities downgraded the stock of the low-cost airline to "neutral" from "add" amid fears continued low fares and high jet-fuel prices will cut into margins.

The downgrade followed on the heels of Moody's Investors Service's move on Monday to revise the Forest Hills, N.Y.-based carrier's ratings outlook to "negative" from "stable," citing a difficult U.S. passenger market.

JetBlue's 3.75% convertible due 2035 traded early down about a point to 103 versus a stock price of $20.25. Later in the day a trade was reported at 102.375. Shares of JetBlue closed down $0.5901, or 2.85%, at $20.0999.

Its 3.50% convertible due 2033 traded at 89.509 on Tuesday, little changed from Monday.

Meanwhile, the convertibles of Northwest Airlines Corp. eased 0.5 point to 1 point, after being well bid early in the session, a trader said.

Northwest's 7.625% convertible due 2023 traded at 42.695, compared with a market of 43.009 bid, 43.509 offered on Monday.

Tyco woes spur tumble

The convertibles of Tyco tumbled along with its stock after the diversified conglomerate lowered guidance for its fourth quarter and full-year 2005, citing tough market conditions in some of its business segments and higher steel prices.

The company also reported higher fiscal third-quarter earnings that beat estimates by a penny, and the company said it plans to extend a debt-reduction program, including convertible buybacks and including the issuance of more shares.

The company used $620 million of cash to repurchase the $448 million of convertible debt in the latest quarter. The action reduced Tyco's fully diluted shares outstanding by about 20 million shares and generated a $179 million, or nine cents a share, charge.

In total the company's debt-reduction program has reduced diluted shares outstanding by 96 million shares since the fiscal fourth quarter of 2004, when the repurchasing program began.

But the latest lowering of guidance from the Bermuda-based company, following on reduced guidance last quarter, prompted investment rating downgrades from Banc of America, Wachovia Securities and Merrill Lynch.

Tyco's 2.75% convertible due 2018 fell more than 6 points to 123.409 from a level seen in the low to mid 130s. Its 3.125% convertible due 2023 traded down to 132.464 after trading in the low to mid 140s.

Tyco shares fell $2.96, or 9.6%, to $27.86.

Meanwhile, convertibles of Vishay dropped after the electronic component maker said its profit fell sharply in the second quarter as sales declined.

Net income was $9.7 million, or five cents per share, down from $41.1 million, or 22 cents, in the year-earlier period. Excluding one-time items, earnings would have been about 12 cents per share and would have topped the average view of nine cents a share from analysts polled by Thomson Financial.

Sales fell 10% to $581.6 million but beat the average estimate of analysts of $577.8 million.

Vishay's 3.625% convertible due 2023 traded at 97, down 2 to 3 points from 99 bid, 100 offering on Monday. Its 0% convertible due 2021 traded at 60.639, down from 61.2 bid, 61.7 offered on Monday. Vishay shares fell $0.43, or 3.1%, to $13.52.

Vishay is a Malvern, Pa., maker of electronic components.

Lear tumbles on downgrade

Lear convertibles dropped more than 2.5 points after S&P lowered its corporate credit and senior unsecured debt ratings on the automotive supplier to BB+ from BBB-.

The rating agency also said the outlook is negative for Lear, which makes seating systems and interior components.

The downgrade reflects a sharp drop in Lear's 2005 operating performance because of market pressures; and also reflects a reassessment of the company's business profile given its high exposure to customers and product segments that are losing market share, S&P said.

The weakened financial performance by Lear resulted primarily from reduced automotive production in North America, volatile production schedules, unfavorable shifts in product mix and higher raw materials costs, S&P said.

Lear's 0% convertible due 2022 traded down more than 2.5 points to 43.25 from trades early in the day at 45.929.

On Monday, Lear convertibles were steady at about 46, and traders said that convertibles players were awaiting S&P's action, which followed a downgrade by Moody's.

"Lear was very quiet with people waiting to see what S&P would do," a trader said Monday.

CreditSight's analyst Glenn Reynolds said in a report Tuesday that Lear scrambled to file an 8-K on the general terms of bank facility changes after Moody's disclosed new term loan and covenant amendments in a note accompanying its two-notch downgrade.

"Lear gets low points for transparency and candor on its call with a major liability management news item out the very next day," Reynolds said in the report.

Lear reported its quarterly earnings on Friday.

Reynolds also said Lear provided some more, albeit limited, detail on its next steps to solidify liquidity options as it enters a period when its negative cash flow trend will be worsening through year-end.

He predicted the Southfield, Mich.-based company's debt will start to trend up again and exacerbate the already-negative direction in net debt/EBITDA, coverage measures, and overall balance sheet metrics.

"The series of disappointing developments at Lear has obviously taken the banks somewhat by surprise, since the company is now in a position where its bank line structure is taking a few steps back after new terms had been arranged as recently as first quarter 2005. At that time, Lear had highlighted its progress on the structural front," Reynolds said in his report.

Energy names gain on record oil

Convertibles traders moved into energy names again Tuesday as oil prices continued their relentless climb upward. The convertibles of Houston oil services company Halliburton added about 5 points, with its 3.125% convertibles due 2023 at 162.879 bid, 163.379 offered, up from 158.289 bid, 158.789 offered on Monday.

Other moves were more muted. Transocean's 1.5% convertible due 2021 traded at 103.185, up from 102 bid, 102.5 offered on Monday. But call risk was affecting the attractiveness of the issue as it's callable in eight months.

"No one wants to pay up for the bonds when the company is aggressively reducing their debt and they'll probably be called," a New York-based sellside desk analyst said.

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