Lennox upsizes new deal bringing week to $2.4 billion; more tech troubles

By Peter Heap

New York, May 2 - New issues managed to shed some light in a convertibles market that was otherwise grappling with the continuing issues that have plagued performance in recent weeks.

Sonic Automotive, Inc. brought the week's fourth new deal after the close Wednesday and then Lennox International Inc. upsized its offering after Thursday's close and sold the securities at the aggressive end of talk.

Those offerings brought the week's sales of new convertibles to just over $2.4 billion.

In the secondary, it was much the same story as has been the case for some time. The tech sector suffered again in the equity markets, this time in response to concerns about Sun Microsystems Inc., where several top officials have left recently, and Oracle Corp., which suffered from news a top sales executive is departing and worries about whether the company will meet earnings targets.

"It's the same old same old," said one market participant.

Nonetheless, the Dow Jones Industrial Average managed to build on Wednesday's rise with a further 32.24 point gain. The Nasdaq was down 32.71.

"It's a very mixed bag," said a convertibles portfolio manager. "It's not great, it isn't horrible."

Among convertibles, Tyco International Ltd. was little changed following a rise on Wednesday although the stock continued to move up smartly.

Tyco's 0% convertible due 2021 was seen at 69 5/8 late Thursday, little changed from the 69¾ close the day before, when it added ¾ point. Meanwhile the stock rose 5.5%, gaining $1.11 to $21.15.

But Xerox Corp. dropped in response to a downgrade of the company's debt ratings by Moody's Investors Service late Wednesday.

The 7.5% convertible trust preferred due 2021 was at 56 late in the session while the 0.57% due 2018 was at 54. The stock lost $1.08 to $7.99, down 11.91%.

Moody's lowered Xerox multiple notches, including cutting its senior unsecured debt to B1 from Ba1, its subordinated debt to B3 from Ba2 and its preferred stock to Caa1 from Ba3, all with a negative outlook.

Moody's said the downgrade reflects its concern about the level of free cash flow that Xerox's core non-finance business generates relative to the company's debt level, the large debt maturities over the next few years, its dependence on capital market access to refinance debt obligations and the need for continued cost reductions in the face of modest revenue growth prospects.

More positive was Cendant Corp. Its 0% convertibles due 2021 - newly sweetened with extra interest and a new put option to discourage holders from exercising the existing put on May 4 - were at 101 3/8 late in the session, up from 100½ late Wednesday. The company's stock added $0.62 to $18.48, up 3.47%.

In new issues, Sonic Automotive added $130 million of seven-year convertibles to the market, with the yield of 5¼% coming in the middle of talk of 5% to 5½%, and the 30% initial conversion premium at the cheap end of talk of 30% to 35%.

After Thursday's close, Lennox International upsized its deal to $125 million from a planned $100 million. In addition to upsizing, it came at the aggressive end of talk, pricing at 6.25% and with an initial conversion premium of 25%. Talk had put the yield at 6.25% to 6.75% and the conversion premium at 20% to 25%.

Jane O'Keeffe, portfolio manager of the Bancroft and Ellsworth convertible funds, said she didn't look at the Sonic deal because of its contingent conversion feature.

The Lennox deal "looks a little bit more interesting to us," she said, speaking to Prospect News Thursday afternoon. But, she noted: "It's a fairly small deal."

In general, she added: "We haven't been all that excited about" the recent new deals.

Her firm, Davis-Dinsmore Management Co. likes to buy issues based on equity expectations.

"Although for Alltel and CenturyTel (two convertible issues earlier in the week), the equity expectations are about as low as they can go, I'm not sure what's going to get them moving on the upside," O'Keeffe explained.

Her firm has been buying in the secondary, however, "adding to positions in companies we have liked for a long time and where we feel there's some visibility in their earnings outlook and a little bit more economically sensitive names."

Among issues she mentioned are Province Healthcare, Community Health Systems and Rainbow Media.

The first two, the health care names, benefit from high earnings visibility and, as rural hospital operators, have benefited from "a fairly significant" increase in payment rates, O'Keeffe said.

Rainbow Media as a programming company should benefit from an upturn in advertising as the economy improves, she added.

With Alltel, CenturyTel, KeySpan, Sonic Automotive and Lennox priced, there are now no definitely scheduled deals on the calendar.

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