Market bolstered by tightening credit spreads as stocks decline

By Ronda Fears

Nashville, Tenn., Sept. 12 - Trading remained a bit thin Thursday but traders said convertibles continue to show remarkable resilience against the slide in stocks, largely due to credit spreads continuing to tighten.

Higher jobless claims, Fed chief Alan Greenspan's comments and remarks by President Bush at the U.N. clearly suggesting a war with Iraq is at hand turned stocks southward.

But news that the FCC is expected to cancel the $16 billion wireless auction of the NextWave spectrum was a shot in the arm to flagging telecom credits, which extended into a nice spread tightening in high-grade bonds.

"I think the markets clearly are not comfortable with the prospects of a war," said Jeff Seidel, head of convertible research at Credit Suisse First Boston.

"There's a very limited number of names that are trading in our market. That said, there have been better bids the last few days."

Overall, most traders described the convertible market as firm against the stock slide, with modest flow.

Several bits of news from Tyco International Ltd. improved the market's comfort level with the name but traders said there was little price movement in the bonds despite a fair amount of the paper changing hands.

Verizon was the big winner in the FCC news, which would release it from a $9 billion liability, but several other telecom names also got a boost. In general, analysts said the telecom news is expected to translate into a boost for much of the credit markets.

"This news lifts some of the dark clouds lingering for the corporate market," said Banc of America Securities credit strategist Jeffrey Rosenberg.

"Along with the auto sector, the persistent volatility in the telecom sector has weighed down on the entire market," he said, adding that the telecom sector represents nearly 10% of the high-grade bond market.

Telecom credits account for some 20% of the convertible market.

The FCC repossessed the licenses from bankrupt NextWave Telecom Inc. for nonpayment and resold them to other carriers but a federal appeals court said that violated bankruptcy law. That kept the FCC from completing the auction but the agency kept carriers who made bids, like Verizon, on the hook until the legal wrangling was over.

The U.S. Supreme Court is slated to hear the arguments over the licenses on Oct. 8.

Some observers speculate that if Verizon gets free of the $9 billion obligation, it will pursue a merger with Sprint PCS.

Verizon's 0% convertible due 2021 added 0.875 point to 54.75 bid, 55 asked while the stock closed down 62c to $31.15.

The five Sprint PCS linked converts were basically unchanged, traders said. PCS shares closed off 3c to $3.54.

Tyco made more headway in restoring investor confidence, reporting its board of directors voted not to support nine of its 11 members for re-election next year. Only chief executive Edward Breen and former DuPont chairman Jack Krol will be nominated and supported for re-election, Tyco said.

The news follows the appointment of a new chief financial officer on Wednesday.

Also Thursday, former Tyco executives L. Dennis Kozlowski and Mark Swartz and former general counsel Mark Belnickon pleaded not guilty to federal charges. Kozlowski and Swartz are accused in an elaborate scheme to defraud the company and investors of some $600 million. Belnickon is charged with falsifying documents to hide $14 million in loans to himself.

Tyco's 0% convertibles were unchanged on the day, with the 2020 issue at 67.25 bid, 67.75 asked and the 2021 issued at 73 bid, 74 asked. Tyco shares closed up 6c to $17.86.

Pressure eased for Vivendi Universal, as well, on reports that its banks are close to ironing out a €2.0-€3.0 billion loan package by next week, filling a short-term funding gap as the company moves ahead with a €10 billion asset disposal plan.

But, Georgia-Pacific Corp. saw a huge sell-off in its stock and S&P warned it may cut the credit to junk after the company delayed the planned spin-off of its consumer products and packaging division. Georgia-Pacific said it was postponing the split due to weakness in the financial markets and its building products segment.

S&P put Georgia-Pacific on negative watch, saying it may cut the ratings to junk if the paper giant cannot find another way to bolster credit protection measures.

The company had hoped to raise $1 billion from the split, to use to pay down debt.

Still, the Georgia-Pacific converts held up.

Georgia-Pacific's 7.5% convertible preferred closed up 0.05 point to 21.55 in modest volume while the stock fell $1.90 to close at $19.37 with heavy selling.

Medimmune Inc. also staved off a sharp decline.

The stock lost on a Morgan Stanley equity note saying the potential for a rapid FDA turnaround for Medimmune's FluMist is diminishing as the FDA has neither officially accepted the drug resubmission nor has its been confirmed.

Morgan Stanley convertible analysts, however, said Medimmune's strong credit story overrides the FluMist delays, in a report posted on the firm's ConvertBond.com website.

Medimmune's 5.75% due 2008 was quoted off 0.625 point to 90.315 bid, 09.375 asked. The stock closed down $1.03 to $23.34.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.