Convertibles plunge on profit worries, WebMD markets new deal

By Ronda Fears

Nashville, Tenn., March 25 - Convertibles plunged across-the-board Monday as stocks slid sharply on widespread worry that corporate earnings will not show strong signs of an economic turnaround yet. It virtually sidelined convertible players, traders said.

Some tension broke with a new deal marketed intraday and priced after the close by WebMD Corp., but dealers said volume was very thin. WebMD sold $300 million of five-year convertible subordinated notes at par to yield 3.25% with a 17.7% initial conversion premium. WebMD shares closed off 13c to $7.87.

After the close, DDi Corp. announced plans to sell $75 million of convertibles and the only other new deal on the table is EDO Corp.'s $100 million of five-year convertible subordinated notes that is set for Wednesday's business.

DDi shares ended down $2 to $9.52 and the 5.25% convertible notes due 2008 were quoted down 0.875 point to 73.25 bid, 74.25 offered.

EDO shares slid $1.01 to $25.80.

"It was a tough day, for the new paper out there, everything," said a convertible trader at an investment bank in New York.

"There were some buyers out there, but no one liked the bids. There wasn't any volume to speak of."

So, practically everything was marked down at the end of the day, traders said, and price quotes were somewhat erratic because of the thin market.

The one new issue that was moving north was Travelers Property & Casualty Corp.'s new 4.5% convertible was quoted up 0.25 point to 25.83 by one dealer with the underlying new stock up 39c to $19.95.

Lehman Brothers was on the lips of several market pros as it announced the hiring of Venu Krishna away from Salomon Smith Barney to head its convertible research desk, which has been in flux for around a year since high-profile Ravi Suria left to join the buyside.

Lehman's convertible floater was off, with no reflection on the news of the day, by 0.375 point to 101.125 bid, 101.375 offered. Lehman shares ended down $1.16 to $62.83.

Merrill's floater was also lower, and that firm also has been in the news in recent weeks after well-reputed Anne Cox resigned as the head of their convertible research, also to join the buyside. The Merrill convertible floater was quoted down 0.625 point to 102.875 bid, 103.125 offered. Merrill shares lost $1.06 to $54.07.

Otherwise in the secondary, Calpine Corp. and Lucent Technologies Inc. were spotlighted on recent credit rating activity.

Calpine lost ground on the S&P downgrade Monday, but one trader noted that it appeared to be more of a market reaction rather than a reaction to the rating news.

"The rating change, for what it's worth, I think had been priced into Calpine already. No one was surprised," said a convertible trader at a hedge fund in New York. "S&P seemed to be pretty clearly headed that way."

Calpine's 4% convertible note due 2006 was quoted down 1.5 points to 98 bid, 98.5 offered as the stock lost 23c to $13.68.

Calpine emphasized that S&P's downgrade of its senior unsecured debt to B+ from BB+ does not trigger any defaults under its credit agreements, and the company continues to conduct business as usual.

"Calpine remains committed to attaining an investment grade rating with S&P," stated Bob Kelly, president Calpine Finance Co.

The downgrade followed Calpine's new $2 billion bank facility that it procured by pledging its North American natural gas assets and some power plants as collateral, which caused concern among credit analysts.

Additional debt threatens to raise Calpine's long-term borrowing costs, S&P said, and place considerable pressure on the company's ability to repay $3.5 billion in late 2003 and early 2004.

Lucent continued to spin out as a result of a Moody's downgrade last week, which was exacerbated by the Solectron Corp. downgrade Monday by S&P, traders said.

Lucent's new 7.75% convertible trust preferred due 2017 lost 1.25 points on the day to 92.75 bid, 93.25 offered and the 8% convertible trust preferred due 2031 was quoted down 1.375 points at 89.5bid. Lucent shares closed ended down 8c to $4.51.

Standard & Poor's downgraded Solectron's debt deeper into junkland, pointing chiefly to the company's lowered sales outlook due to an ongoing spending drought by customers like Lucent and Nortel.

The Solectron 0% convertibles were quoted unchanged with the May 2020 issue at 56.125 bid and the November 2020 issue at 46.25 bid, as the underlying stock dropped 59c to $7.41.

What few issues were moving north stood out like sore thumbs, traders said.

"We saw some people chasing a couple of issues higher, UPS and Waste Connections," said a convertible trader at an investment bank in New York.

"What the thinking is on those two names, I couldn't tell you. But obviously, I suppose UPS is expected to be standing well despite the economic climate, and you'd think there would be some security for a company that hauls garbage like Waste Connections no matter what's going on everywhere else."

The UPS 1.75% convertible due 2007 was quoted up 4.875 with the stock off 6c to $60.64.

The Waste Connections 5.5% convertible note due 2006 was quoted up 2.5 points to 112 bid, 113 offered with the stock up $1.39 to $32.66.

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