Convertible market sidelined by plunge, except for those bailing out of Enron

By Ronda Fears

Nashville, Tenn., Nov. 28 - Convertible market players were sitting on the sidelines for the most part Wednesday as stocks plunged, largely due to the erosion of investor confidence arising out of the Enron Corp. debacle. After weeks of moderate activity in the Enron convertibles, traders said investors were scrambling to bail out of the situation. Most of the selling took place five or six weeks ago when the nightmare began with Enron's poor earnings, traders said. But the failed merger with Dynegy and downgrades that took Enron credit into junk territory caused the Enron zero-coupon convertibles to fall 22.25 points and the mandatory exchangeables that convert into Enron Oil & Gas Co. to lose 11.75 points on the day.

"The eyes of the market were on Enron. Otherwise it was pretty quiet as a lot of players were out on the West Coast at the CSFB technology conference," said a convertible trader at a major investment bank in New York. "Everyone has been watching the situation for several weeks, but the converts haven't done much until today. The big drop really happened back in the middle of October, right after their earnings came. Today people were trying like heck to get rid of them, and were trying to get a trade in the 20s but that didn't happen."

The troubled energy firm's situation traces back to its earnings report on Oct. 16 when Enron posted a $618 million net loss, or 84c per diluted share, and revealed that it was taking a $1 billion write-off related to subsidiary transactions. A Securities and Exchange Commission probe then came to light and Enron said it would restate earnings for the past several years, all to the negative. Then, Enron on Wednesday disclosed that the hopeful bailout merger with competitor Dynegy, valued at $8.4 billion, had fallen through.

Junk status downgrades by the three major credit ratings agencies also occurred Wednesday, compounding the reaction by investors. Enron was downgraded to B- by Standard & Poor's, B2 by Moody's Investors Service and CC by Fitch. Enron's convertibles were issued with Baaa3/BBB- ratings.

"Everyone sort of went into a panic to dump this paper, and buyers were scarce to non-existent," said a convertible trader at a hedge fund in New Jersey. "When this nightmare began, there was a surge of selling and then it sort of quieted down until this week. As the situation just kept getting worse instead of better, there was more unloading. Today, the downgrades and the merger failure were the crowning blows that pretty much sunk the ship."

Enron has a $2.3 billion (face) zero-coupon convertible due 2021 outstanding, which it sold in January at 65.52. The issue fell into the 40s a month or five weeks ago, and has steadily dropped with the stock although traders have not reported a lot of activity in the issue for the past two to three weeks. On Wednesday, the zero-coupon converts fell 22.25 and were last quoted at 15.25 bid, 16.25 offered with Enron shares closing down $3.50 to 61c.

Enron also has a $255 million issue of 7% mandatory exchangeables that convert into Enron Oil & Gas. The 2002 issue, which was sold at par of 50 in August 1999, dropped 11.75 points Wednesday to 11.76. The exchangeables are an obligation of Enron and the underlying Enron Oil & Gas common shares are an asset of Enron. The treatment of the debt and assets in the event of a bankruptcy are uncertain at best and thought to be negative, a market source explained.

Other convertible issuers affected directly by the Enron situation include Mirant Corp. and El Paso Corp., but both issued statements Wednesday saying their exposure to Enron, a major energy trading firm, was minimal and each estimated exposure at $50 million to $60 million. Both noted that they had begun reducing exposure to the Enron situation weeks ago. Mirant even said it has already seen new business opportunities develop because of Enron's demise. But that didn't go far toward mitigating a backlash from investors. Mirant's 2.5% convertibles due 2021 lost 1.125 to 90.5 bid, 91 offered as the stock lost $1.50 to $23.40. El Paso's 1% convertibles due 2021were also lower, traders said, as the stock dropped $3.59 to $4.91.

Broker issues and the convertibles of investment vehicles were also lower as many are expected to have some exposure to the Enron situation, traders said. The Jardine Matheson 4.75% exchangeables due 2007, which convert into J.P. Morgan Chase shares, lost 2.25 points on the day to 97.875 bid, 98.875 offered as J.P. Morgan Chase stock lost $2.30 to $37.50. The Merrill Lynch zero-coupon convertible due 2031 slipped 0.375 point to 50.5 bid, 50.75 offered as the underlying stock dropped $3.03 to $48.91. A trader said the J.P. Morgan-linked convertible lost more because that brokerage, along with Salomon Smith Barney, had provided Enron a $1 billion secured credit line.

Stilwell Financial's zero-coupon convertible due 2031 lost 1.25 points on the day to 73.5 bid, 73.75 offered as the underlying stock slipped 72c to $23.96. A trader said Stilwell suffered because Janus Funds, which is a unit of Stilwell, were reported to have big holdings in Enron.

"We were fairly quiet in the market today, like a lot of other people," said a convertible fund manager in New York. "We were just keeping an eye on what we have and hoping to avoid any fallout."

New issues were quiet, as well, with nothing added to the calendar as the Nasdaq fell 48.00, or 2.48%, to 1887.97 and the Dow industrials lost 160.74, or 1.63%, to 9711.86.

Hasbro Inc.'s new 2.75% convertibles due 2021 edged up 0.25 point to 100.375 bid, 100.875 offered as the underlying shares dropped 70c to $16.58.

End

© 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.