Week ends quietly, lower; Agilent falls on junk rating; El Paso rating cut after close

By Ronda Fears

Nashville, Feb. 7 - It was much quieter in the convertible market Friday, but traders said the market overall dropped on credit quality concerns underscored by Agilent Technologies Inc.'s credit falling into junk territory.

Standard & Poor's cut Agilent to junk and Moody's put the credit on review for downgrade. Agilent's converts lost 2 points on the event, which compounded the electronics firm's warning of a wider loss earlier this week.

After the close, S&P cut El Paso Corp.'s credit, sending it two more notches deeper into junk territory. The El Paso converts were described as flat on the day, but have lost 6-7 points over the course of the past week.

"Credit events affect converts more now than ever before, certainly more than stock prices since the market is so busted," said the head convertible trader at a major investment bank.

"The positive this week was that a fair amount of new supply was injected, but most of that paper is under par already. Terms were a bit rich, but the market seems to have absorbed everything so far without blinking."

Freeport McMoRan Copper & Gold Inc.'s new 7% convert was the session's only gainer among the recent new deals. The issue added 0.25 point to 100.25 bid, 100.5 asked while the stock closed up 10c to $16.94. Freeport's old 8.25% convert was pegged at 141.75 bid, 142.25 asked.

McData Corp.'s 2.25% convert dropped 1.5 points to 101 bid, 101.5 asked as the stock closed off 17c to $7.20.

United States Steel Corp.'s 7% mandatory lost 0.375 point to 47.875 bid, 48.5 asked while the stock ended off 10c to $12.15.

Other recent new supply from Micron Technology Inc., International Game Technology, Advanced Micro Devices Inc., Tyco International Ltd. and Arch Coal Inc. were also lower. Of that group, only the Arch Coal perpetual preferred is above par.

Nothing is firmly slated to come to market next week since the Crown Cork & Seal Co. Inc. deal was scrapped, but players anticipate something will pop up.

There was little to no reaction to Crown Cork abandoning its $250 million convertible bond plans, opting instead to boost its junk deal.

"I don't think anyone had even started thinking about Crown Cork. We were just looking at what was on our plate in front of us," said a convertible trader at hedge fund in New Jersey.

Much like Agilent, Tech Data Corp.'s converts lost ground on a warning that its earnings would fall short of forecasts. Market reaction to Tech Data's warning was compounded by its $235 million cash acquisition of Azlan Group, traders said.

Tech Data's 2% convert (Ba2/BB+) dropped 2.75 points to 87.5 bid, 88.5 asked. The stock fell $4.74 to $19.50.

S&P said the events had no impact on Tech Data's ratings, but it was a credit already in junk territory.

On Agilent's warning of a wider loss than anticipated, however, S&P cut the credit to junk, including the $1.15 billion of 3% convertible senior notes to BB from BBB-, due to poor operating performance and weak credit measures.

Agilent's converts had already dropped 6.25 points on its earnings warning that first quarter revenues and EPS would not meet forecasts.

The 3% convert fell another 2 points Friday to 87.75 bid, 88. The stock ended down 81c to $11.45.

S&P said Agilent's ratings could be lowered further unless operating performance stabilizes and there is meaningful sequential progress towards returning to profitability.

Moody's also on Friday put the Agilent converts, which it rates at Baa2, on review for downgrade.

El Paso's losses for the week had been stemmed by Friday, but more could transpire as an S&P downgrade put the credit deeper into junk territory.

S&P lowered El Paso's senior unsecured debt, including the converts, to B+ from BB.

"It [El Paso converts] was flat today but they've lost almost 10 points over the past week," said a dealer.

"The market has lost faith in El Paso's ability to bounce back. There's too much overhang - the California settlement, FERC."

The El Paso 0% convert was quoted down 1 point to 30.5 bid, 31.5 asked. The zeroes are down 5 points from a week ago.

The 9% mandatory was at 24 bid, 24.125 asked. The mandatory is down 6 points from a week ago.

El Paso share ended down $1.16 to $5.04.

S&P said of paramount importance is the renegotiation of El Paso's credit facilities and regaining access to the capital markets to meet debt maturities and make up for cash flow shortfalls.

El Paso's dividend cut, announced earlier this week along with other measures, saves only a modest amount of cash relative to near-term maturities, S&P said.

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