Strong volume as tightening credit spreads hold bond floors firm

By Ronda Fears

Nashville, Tenn., Sept. 26 - Traders said it was another strong session for convertibles. Although stocks were mixed, with weakness in the Nasdaq, credit spreads were tightening so the busted convert world held up nicely.

"Overall the markets look better today," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

Traders said credit spreads were tightening as bonds rose with the Dow Jones Industrial Average's gain.

"People are pleased that the bond floors are holding up, especially for a lot of these less than investment-grade credits," said a convertible trader at a hedge fund in New Jersey.

With headlines splaying the WorldCom Inc. indictments and guilty pleas from corporate executives, there was renewed weariness about the overall level of disasters hitting the convertible market. Enron Corp. and Adelphia Communications Corp. indictments also have been in the news lately.

"Almost every week you come in and there's another disaster. It's very disconcerting," said a buyside trader in New Jersey.

"There's so much angst, especially in the hedge community. The market is so fickle. You have to live with your mark-to-market every day, every month."

Thus players began talking about new issues but the consensus seems to be that of little hope that there will be much of a pick-up through the end of the year.

"We're hearing only three or four real deals being talked about for the next several weeks," said a syndicate source at one of the major underwriting banks.

"We've only heard of five or six issuers seriously considering deals."

The Platinum Underwriters Holdings Ltd. deal is seen as early as next week but the official timing is only for sometime in October.

Platinum is planning to sell $125 million of mandatory convertibles via Goldman Sachs & Co. as part of a spin-off from The St. Paul Cos. Inc. The IPO is filed for 34 million shares at $22.50 to $23.50.

Timing is less certain for The Phoenix Cos. Inc./Hilb, Rogal & Hamilton Co. mandatory, also at $125 million. That will accompany a secondary stock offering of 1.7 million shares of Hilb, Rogal & Hamilton, via joint lead managers Banc of America Securities, Merrill Lynch & Co. and Morgan Stanley.

The deal will go through a full routine SEC review, a market source said, so it could be several weeks.

The overall perception in the convertible market was positive Thursday, but there were movers in both directions as the earnings warning period continued.

Nortel Networks Corp., Xerox Corp., Lucent Technologies Inc. and Solectron Corp. were lower, but Fleming Cos. Inc. was marking additional recovery.

Also higher were AES Corp., EchoStar Communications Corp. and United Rentals Inc.

Network Associates Inc. went south while competitor Symantec Corp. headed north as a JPMorgan analyst raised concerns about antivirus contracts and weakness in Europe, suggesting that competitor Symantec is ahead of third quarter estimates.

The Network Associates 5.25% convertible due 2006 dropped 6.75 points to 103.375 bid, 103.625 asked. The shares ended down $1.75 to $11.10.

Symantec's 3% convertible due 2006 added 1.75 points to 126.25 bid, 126.75 asked. The stock closed up 74c to $34.21.

Nortel's weakness was the reaction to lower guidance announced late Wednesday, along with a plan for a reverse stock split sometime next spring. With the reverse split, the conversion ratios on the converts will likely be adjusted negatively and the perception is mixed about the end result to convert holders.

"It's laughable, actually," said a market source, saying the ratio on the Nortel mandatory could be adjusted from something like 20,000 shares to 5,000 shares based on the latest stock price of 57c and Nortel's aim to get it to between $10 and $20.

"I don't know of any reverse split that's worked out for the equity. It tends to be negative."

Nortel's 4.25% convertible due 2008 was quoted down 1.25 points to 30 bid, 31 asked and the 7% mandatory (issued in June at par of 28,751) was likewise lower at 14,550 bid, 15,550 asked.

Nortel's junk bonds, the 6.125% due 2006, were seen down 3 points to 35.5 bid.

Nortel shares ended down 7c to 57c.

Lucent was also lower but better than recent sessions, traders said. The 8% due 2031 dropped 1.75 points to 25.25 bid, 25.75 asked and the 7.75% due 2017 lost 2.125 points to 27.125 bid, 27.625 asked. The stock closed down 10c to 91c.

Teradyne Inc. also was lower, but traders said the bond held up well against the stock move. There was no news on the name, traders said, but it was trading on speculations this week about the outlook for chip equipment makers.

Teradyne's 3.75% convertible due 2006 was quoted down 1 point to 76 bid, 76.5 asked as the stock lost 32c to close at $9.30.

The debate on chips is mostly a negative trend, and many were looking for the Solectron earnings after the bell to provide some insight.

The electronics manufacturing services company posted a sharply wider quarterly net loss as charges mounted and revenues fell. Revenues were down to $3.1 billion from $3.6 billion a year earlier, but up 3% from the prior quarter.

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