Convertibles flat as stocks stall, new deals wind down

By Ronda Fears

Nashville, Tenn., Feb. 1 - Convertibles were described as flat Friday as the rebound in stocks stalled and turned south again. Also, traders said interest in mandatory convertibles, which have been on a tear in the primary market, seemed to be cooling as returns have tumbled.

Gabelli apparently ran into some trouble with its mandatory and trimmed it to $90 million from $110 million. Solutia pushed its $100 million mandatory deal into next week, saying it wanted to wait on a Moody's rating. Acxiom, however, upsized its note deal to $160 million from $150 million.

"Everyone needs income right now and a means to boost their returns. Demand for mandatories is strong in the respect of that's usually a great way to accomplish that, so that's why demand is still strong for that type of issue," said a convertible trader at one of the major investment banks. But, the trader added, returns on mandatories have fallen off in the past month during the stock market rout.

"What's happening is the demand for that paper has dropped off somewhat by the hedgies, particularly in the Gabelli deal. There wasn't enough float on the stock and the arbs couldn't get positioned for that one. We get to see how important hedge funds are to the convertible market with a deal like that."

Gabelli delayed its new deal by a day, but it apparently still wasn't enough time to sell it all. The deal was downsized and sold with a 6.95% dividend and 18% initial conversion premium - at the cheap end of guidance. The deal was lower out of the gate, traders said, as the stock dropped 39c to $39.01.

Solutia delayed its $100 million mandatory deal also, but said it was because it wanted to have the Moody's rating before pricing it. The company said it anticipated the Moody's action soon. Solutia shares closed up 21c to $9.10. If the Solutia deal gets done next week, it will be in company with the scheduled $125 million of mandatory convertibles linked to LaBranche stock, which closed Friday up 65c to $31.52.

Acxiom Corp., however, saw nice demand for its $150 million of seven-year convertible notes, which have a put in year five that added a bit of incentive to buyers. The 3.75% convert, which priced with a 30% initial conversion premium, was firmer out of the gate by about 2 points, traders said. Acxiom shares closed off 37c to $13.67.

As for talk of new deals, it was slim in the convertible market, but there was buzz in the junk bond market about a possible new convert by B/E Aerospace. A junk bond trader said the aircraft equiment maker spoke at a Bear Stearns & Co. conference on Thursday and there were rumors, and the trader stressed that this was only rumor, that B/E Aerospace "might try to do a convertible equity deal, to reduce debt." The B/E Aerospace junk bonds were quoted up about 2 points on the day on Friday, accordingly.

Convertibles were slightly lower Friday, but there still were a few names continuing to fall on a myriad of investor worries.

Waste Connections Inc. reaffirmed its previously guidance given for fourth quarter and 2002 but still ended lower in sympathy with Waste Management Inc. Waste Management shares fell Friday as it forecast its fourth quarter earnings would take an estimated $16 million hickey from the Enron bankruptcy associated with paper commodity swaps. Also weighing on the Waste Management story was the company's announcement of a $1 billion stock buyback program, which prompted Moody's to revise WMI's outlook to negative from positive. Moody's said it is concerned with both the timing and the size of the announced share repurchase, particularly given the impact to earnings of negative economic trends, as well as a history of charge-offs at the company and upcoming debt maturities, including the WMI convert. Moody's also noted that these factors combined with low retained earnings and significant leverage are inconsistent with an investment-grade rating.

"We have seen no changes in our business or markets which would warrant a revision to our previously issued guidance. There have been no developments within Waste Connections that would warrant the activity in our stock today," said Ronald J. Mittelstaedt, chief executive of Waste Connections, in a news release.

WMI's 4% convertibles matured Friday so were not in play. However, Waste Connection's 5.5% convertible due 2006 fell 8.5 points on the day to 96 bid, 97 offered as the stock lost $3.09 to $23.91.

Level 3 Communications Inc. issued a very lengthy statement by its chief executive, James Q. Crowe, to refute market rumors that it would be the next casualty in the telecom industry because of a statement by the company earlier in the week that said it may be in violation of minimum telecom revenue requirement in some of its financial covenants.

"This statement has obviously caused concern on the part of a number of investors, which has been further exacerbated by press reports that seem to indicate that Level 3 was giving some sort of implied notice of an impending filing for protection from its creditors under the federal bankruptcy statutes," Crowe said.

"This speculation is no doubt fueled by the spate of bankruptcy filings in the telecommunications sector, including two this very week," Crowe added, referring to the Global Crossing and McLeodUSA bankruptcies. "This is an incorrect interpretation of our statement. I believe our situation is markedly different and financially much better than the companies in our sector that have sought bankruptcy protection."

Still, the Level 3 convertibles fell about 6.5 points with the 6% issue due 2009 at 22 bid and the 6% issue due 2010 at 21.5 bid. A trader said, however, there were no live offers on the Level 3 converts. Level 3 shares were up 1c to $3.01.

Ford slipped on Friday after announcing U.S. sales were down 10.4% in January, a day after a California jury ruled that Ford's Explorer is defective by design. The jury ruled against Ford late on Thursday, finding that the company was not liable for injuries and damages suffered in an Explorer rollover, but was found liable for manufacturing and shipping a faulty vehicle. But in a company statement, Ford said "Ford Motor Company is absolved of all responsibility for this accident and faces no liabilities," and asserted that the jury found that faulty repair work by an auto shop caused the accident in question, and not any problem with the design of the vehicle itself. Ford has battled safety issues over the past 18 months after Bridgestone Corp. recalled some Firestone tires, mainly on Explorers.

The new Ford 6.5% convertible trust preferred due 2032 were down 0.875 point to 52.5 bid, 52.75 offered and the stock lost 40c to $14.90.

There were some gainers, too, though, including several in the new issue group. Among them, GATX Corp.'s 7.5% convertible due 2007 added 3.75 points to 111.75 bid, 112.25 offered while the stock rose $1.60 to $30.60.

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