American Tower 2.25s gain on junk deal; Lennar, retail weaker on war, outlook fears

By Ronda Fears

Nashville, Jan. 21 - The convertibles market remained quiet and largely unmoved by events that rocked stocks and bonds.

"Everyone seemed pretty content to just sit on the sidelines today," said a dealer.

Players are eager to hear from Lucent Technologies Inc., which reports earnings before the bell Wednesday followed by a conference call at 8:30 a.m. ET.

"We'd like to see a clearer picture develop on the potential for recovery this year, but I'm not sure that's even possible," the dealer said.

"Even with all the corporate [spending and earnings] outlook numbers we have, in the case of a war we'd have to throw all that out the window. That's what we've been seeing the past few days, I think, some back-tracking because a war seems most likely, or more likely now than just a few weeks ago."

Electronic Data Systems Corp. and Interpublic Group of Cos. Inc. were "semi-blowups" as both revealed that the Securities and Exchange Commission has formalized separate investigations into their accounting practices.

"The news [on EDS and Interpublic] was basically already priced into the bonds," said the dealer.

American Tower Corp.'s 2.25% convertible due 2009 (Caa1/B-) also had been moving higher recently in anticipation of the put in October, but there had been lingering doubt about the matter.

So, there was a little juice to be squeezed out of the news Tuesday from the company that it would sell a $400 million junk bond with an equity kicker to repurchase the convert ($244 million face outstanding), plus repay some term loans.

It was unclear whether American Tower would be making a tender offer for the convertibles. The company statement only said it plans to use up to $216 million of the proceeds from the junk bond deal and cash on hand to repurchase the convertible notes.

"Whether they try to buy back some of the bonds in the open market or not, the fact of the matter is they are putable in October at 80.29," said a trader.

"They [the 2.25s] were probably up 3 or 4 points on the day," the trader said, adding that there is still some room for buyers, noting "the yield to put is at about 500/600 points over the curve."

American Tower said it also expects that under expected amendments to its bank facilities, needed to conduct the offering and bond repurchases, it would repay no less than $200 million of the term loans outstanding under its credit facilities and the revolving credit facility would be reduced by no less than $200 million.

The American Tower 2.25s gained to 77 bid, 78.5 asked. The 6.25% due 2009 (Caa1/B-) were quoted at 74.75 bid, 76.75 asked and the 5% due 2010 (Caa1/B-) were at 69.125 bid, 71.125 asked.

American Tower shares closed up 4c to $4.50.

News on American Tower along this line had been anticipated, or at least the market in general seemed to believe that the company would be able to refinance the 2.25s.

The EDS mandatory moved sharply lower on the SEC investigation news, but traders said the 0% convertible bonds due 2021 (A1/A+) were generally stable at 76.5 bid, 77 asked. The mandatory fell 1.77 points to 20.6. EDS shares dropped $1.87 to close at $16.95.

Reaction was described as "muted" to Interpublic's news by one dealer, as even more skepticism had been priced into the three convertible issues.

Interpublic shares ended down 77c to $13.41.

The 1.8% convertible due 2004 was quoted at 87 bid, 88 asked. The 1.87% convertible due 2006 (Baa2/BBB-) was quoted at 77 bid, 78 asked. The 0% convertible due 2021 (Baa1/BBB) was quoted at 78.125 bid, 79.125 asked.

"We have been cautious on IPG's convertibles due to this pending SEC investigation and our belief that IPG's operational results have yet to show any improvement even after two years of restructurings and cost cutting," said Wachovia Securities, Inc. analyst Sri Nadesan in a report Tuesday.

"We would like to see new business wins translate into better profitability and at least a couple of quarters of improvement on the cost side."

Noting that credit spreads on Interpublic paper have tightened over the last month, including the converts, Nadesan said he has a cautious stance on the converts.

Standard & Poor's responded to the news on Interpublic, as well, by keeping the ratings on negative watch.

"Asset sales alone are not likely to provide sufficient liquidity for the rating to remain investment grade," S&P noted.

"There is no remaining cushion in the rating to withstand any negative news or disappointing earnings performance."

S&P said it is concerned about Interpublic's liquidity related to the 0% convertible, which is putable for cash on Dec. 14 at an accreted value of $587 million, the May maturity of its $500 million revolving credit facility and some $326 million in borrowings under uncommitted lines of credit at Sept. 30 are repayable upon demand.

XL Capital Ltd. shares took a hit, closing down $1.14 to $79.75, generally due to a negative slant toward the company's earnings that are slated to be released Feb. 12.

Bear Stearns & Co. convertible analyst Matt Hempel said he issued a midday note pointing out that the 0% due May 2021 (A1/A+) was trading cheap on a volatility basis.

"The point was to capture some slightly cheap volatility if there was some weakness in the stock," Hempel said.

"It's not much, but these days trade ideas are fewer and far between."

Another Bermuda-based name, Tyco International Ltd., also was weaker. The new Tyco converts continue to wane, with the 2.75s, or Tranche A, at 102.5 bid, 102.75 asked and the 3.125s, or Tranche B, at 103.375bid, 103.625 asked.

Tyco shares closed down 76c to $17.11.

Retail names like Gap Inc. and Toys 'R' Us Inc. also lost ground, although retail sales figures for December were higher.

Lennar Corp. moved south, too, although housing starts in December were up 5% to the highest level for that month since 1986.

The war factor was keeping a lid on much of the market, traders said.

And, because of the tensions, players are becoming a bit more leery about new issues.

"I would've though something would have been launched by now, but then, it's the peak of earnings and there are still a couple of big names yet to report," said a convertible trader at a hedge fund in New York.

On the calendar this week is only the Oneok Inc. $275 million mandatory. That is set to price after the close Wednesday. Oneok shares closed off 23c to $17.07.

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