Fannie Mae convertible steady; Sallie Mae's floater rises; techs open New Year lower

By Ronda Fears

Nashville, Jan. 3 - Convertibles opened the New Year lower, but traders said it was a thin market. Indeed, one sellside trader remarked that fund managers seemed to be waiting in the wings for some event to provide buying impetus, despite the downdraft going into 2005.

"We had a lot of calls checking things out but not a lot of trading taking place today," the dealer said. "People are poking around, looking under rocks, that sort of thing."

A sellside analyst said there were "drips and drabs" of converts trading, but seemingly without any strong conviction.

New paper would spur trading volume, a trader commented, but nothing emerged on the immediate horizon although Celanese Corp. on Monday added a $200 million perpetual convertible preferred to its planned initial public offering. Meanwhile, the new $2.5 billion perpetual convertible preferreds from Federal National Mortgage Association, or Fannie Mae, were described as steady at 54.75 by a buyside trader.

Universally, the convertible market was described as lower on the day, mirroring a 0.5% decline in the Dow Jones Industrial Average and a 1% drop in the Nasdaq in the first trading day of 2005.

Airline paper, however, stood out as bucking that trend, with issues of AMR Corp. and Continental Airlines Corp. gaining as investors hoped a reported plan by Delta Air Lines Inc. to slash fares nationwide might spark a full-fledged fare war and ultimately boost air traffic. The drop in oil prices to below $42 a barrel helped somewhat, as well.

The drop in oil prices pushed several energy and power names lower, though.

Technology issues, too, began 2005 on a low note. Almost across the board that paper was lower Monday, traders said, with Gateway Inc.'s new convertibles among the most active, along with Novell Inc.

Cable and telecom issues were a lower too, but buyside sources were watching closely to spy entry points into several names in those groups.

Sallie Mae floater rises

SLM Corp., better known as Sallie Mae, shares spiked Monday as a play in its hostile $1 billion takeover bid for the Pennsylvania Higher Education Assistance Agency, which officially rejected the offer a week ago, a convert trader said. The buyside trader added that the SLM floating-rate convertible also saw a little action Monday, adding about a half-point to 104.25 bid.

"Last week the deal [Sallie Mae's bid] was hot, but, like today, the market is still pretty sluggish in terms of volume," the trader said.

SLM said last Tuesday, following the Pennsylvania agency's formal rejection, that it would pursue its takeover efforts.

"We do not retract our offer but rather seek a fairer hearing of its details," said Albert Lord, chief executive of Reston, Va.-based Sallie Mae.

Elinor Taylor, chairman of the Pennsylvania agency, said it "is not now and never will be for sale, especially to a profit-driven corporation with a track record of overcharging borrowers, laying off workers and gobbling up any organization that stands between students and a quest for bigger profits."

Lord said that Sallie Mae's bid was mischaracterized and that Sallie Mae is seeking to assume operating control of the agency while the board would retain control over policy. Student benefit programs would remain unchanged under Sallie's control, he said, and student discounts and grants could be increased "very significantly." Lord added that total state employment levels would be kept the same, at about 2,800 people.

Sallie Mae owns or manages student loans for more than 7 million borrowers and is a major student lender in the U.S. and last week also completed its privatization plan four years ahead of schedule. Lawmakers authorized the company to begin going private in 1996, and it has been managed as a private entity since 1997.

The Pennsylvania agency also is one of the largest financial-aid organizations in the U.S. and manages more than $33 billion in assets, according to its web site.

Wireless eyed for 2005

Telecom issues were mostly lower along with tech paper, but there are watchers waiting to take a hint about the sector in general, particularly in light of the Nextel Communications Inc. merger with Sprint Corp.

"We still think wireless will continue to grow in the telecom space, and like the media and entertainment space going into '05," said a convertible fund manager out West. Confirming dealers' comments, the manager added, "I would wait out to see how this FON/NXTL merger shapes up before deciding - we own a piece of both and are sitting on the sidelines."

Smith Barney Citigroup is holding its annual global entertainment, media and telecom conference the first half of next week in Phoenix, and presenters include Nextel and Sprint along with Nextel Partners Inc. and other convertible names in the wireless-related space like satellite tower operators American Tower Corp. and Crown Castle International Inc.

Media and telecom related converts "encompass a pretty big percentage of the convertible universe (maybe around 30%)," a sellside market source said. "A lot of phones [were] ringing today but not all that much [was] trading considering the level of noise around here," he added. "Perhaps [there were] just a lot of investors checking things out at the start of the New Year."

Nextel Partners' two 1.5% convertibles were described by another sellside source as about 1 point lower Monday with the underlying stock off 11 cents, or 0.56%, at $19.43.

Cable paper looking ripe, too

Cable names like Charter Communications Inc. and Comcast Corp. along with internet access providers like Level 3 Communications Inc. are on the radar screens watching the wireless racket, too, another buyside source said. He also mentioned a Standard & Poor's report Monday on cable companies looking to voice over internet as an area for growth potential.

"We are thinking a lot of this stuff got pretty rich in the last couple of years and there is a rationalization about to take place, but maybe everything just keeps going north," the manager said. "So, we're just looking for a time to make our move."

Charter announced Monday that it was launching a global wireless internet service for residential and business customers, through a new venture with RemotePipes Inc. Last week, Level 3, which has become a voice over internet play, inked a multi-year agreement with France Telecom to provide its broadband transmission and co-location services in North America.

Charter's newest convertible, the 5.875% due 2009, was described as steady to slightly lower at a bid of 115 with the stock at $2.25. Level 3's newest convertible, the 5.25% due 2011, ended Monday off about 1 point to 97.875 bid, a trader said, while the stock dropped a nickel, or 1.47%, to $3.34.

AMR, Continental lifted

Unconfirmed reports that Delta was considering fare cuts as deep as 60% did not do much to prop up its securities, but American Airlines Inc. parent AMR and Continental were a couple of convertible names moving higher on the news.

"Lower fares will mean lower [profit] margins and that won't help Delta much. Well, I can't see the volume picking up enough to counteract that anyway," a trader said. "Some of the other airline converts look better."

Delta's converts were rather "flattish," the trader said, with the 8s around 66.75 bid and the 2.875s about 68.5 bid. Delta shares closed Monday up 8 cents, or 1.07%, at $7.56.

AMR and Continental both had convertible issues in play, though, and moving sharply higher.

AMR's 4.25% convertibles were quoted 90.875 with the stock at $11.20. One trader said the issue moved up 2.5 to 3 points, "but maybe not that much," as the underlying stock eased back to close Monday at $11.04, up 9 cents on the day, or 0.82%.

Continental's 5% convertibles were quoted at 99.625 bid, moving up about 3 points on swap, while the stock shot up 42 cents, or 3.1%, to $13.96.

Universal Health levels off

Universal Health Services Inc. was settling down after a big slide last week following a warning from the hospital operator. The 0.426% convertible ended Monday at 57.875 bid, off at least "a point or more" from pre-Christmas levels, a trader said. The underlying stock lost another 50 cents, or 1.12%, to close Monday at $44.

Actually, the trader said, the Universal Health convertible rebounded slightly along with the stock between the Christmas and New Year's holidays, but again Monday fell prey to the weaker markets.

On Monday, Dec. 27, Universal Health announced that it would fall short of previously announced 2004 earnings per share guidance of $2.75 to $2.85. The King of Prussia, Pa.-based company also warned that fourth quarter earnings per share would miss expectations due to weak admissions. The company added that a substantial rise in provisions for doubtful accounts, although relatively consistent as a percentage of revenue, and operating challenges at certain facilities are expected to hurt financial results.

Piper Jaffray analyst Darren Lehrich reiterated a market perform rating on Universal Health stock but said he believes the operational challenges the company has been facing will persist into 2005 and 2006 and reduced his 2005 earnings estimate to $2.95 a share from $3.20 and his 2006 forecast to $3.30 a share from $3.55. But, Lehrich bumped up his 12-month stock price target to $46 from $45.

Bear Stearns analyst Jason Gurda was a bit more positive on the stock and reiterated an outperform rating.

"Although the timing of a recovery might be longer than expected, we see limited downside at current valuation," Gurda said in a note. "Universal Health should benefit in 2005 from increased Medicare rates, achieving profitability in two new hospitals, the anniversary of the opening of two competing hospitals and a stabilization in bad debt."

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