Convertibles still thin, but get lift from late stock rally

By Ronda Fears

Nashville, Tenn., Feb. 8 - Convertible traders said the market was still very thin, but saw hopes for improvement next week as stocks saw a rally late in Friday's session. The primary market remained quiet, but Citigroup's Travelers Property Casualty Corp. filed a registration for its $1 billion IPO, outlining that it will include a convertible mandatory alongside the common stock.

"We're always looking to buy, but there's just slim pickings," said a convertible trader at a hedge fund in New Jersey. "We're adjusting our hedge on techs that are still in the money, but for the investment grades and other issues that are out of the money, there not much left to hedge. Ironically, during this time, people actually did better having tech names than what's traditionally considered the safety group."

A late gain in stocks lead to many converts getting marked up, dealers said, but trading was light. Buying comprised the sparse activity that was seen, and cable names seemed to be the choice du jour, dealers said. Charter Communications, Adelphia and Cablevision were all higher on buying, dealers said.

Adelphia's 3.25% convertible note added 1 point to 95.5 bid, 95.75 offered and the new 7.5% mandatory convertible due 2005 was flat at 23 bid, 23.5 offered, with the common stock up $1 to $23. Charter Communications' 4.75% convertible note due 2006 rose 1 to 79.5 bid, 80 offered as the common gained 38c to $11.25. The Cablevision convert was up 0.625 to 39.625 with the common stock up $1.20 to $40.70.

"People are looking to add income. The problem is finding something within their risk profile," said a convertible trader at one of the major investment banks. "Quest Diagnostics, Symantec, a lot of the techy names are getting another look-over."

Symantec, which makes the Norton antivirus software for computers, was rebounding from a sharp drop in the wake of an equity analyst raising questions about how it booked its recent convertible issue. The analyst issued a sell recommendation on Symantec with a note saying he believed roughly half of Symantec's pro forma earnings growth in the past and in the next fiscal year is coming from the convertible accounting rather than organic operations. Symantec reduced interest expenses to calculate pro forma earnings assuming the bonds are converted into stock. The analyst noted that Symantec fully accounts for interest in its statements made according to general accounting principles, specifically saying that Symantec was not doing anything wrong, but the company's securities were hit hard Thursday.

"This is a great example of what we're seeing in the market," said a convertible source at a hedge fund in Connecticut. "People are shooting and asking questions later." The Symantec 3% convertible due 2006 regained 3.5 points on Friday to 124.5 bid, 124.75 offered as the common stock recovered $1.30 to $34.52.

Quest Diagnostics Inc. was moving upward after it announced late Thursday that it would acquire smaller rival American Medical Laboratories Inc. for $500 million in cash, expanding its presence in the medical testing equipment market. The common shares soared $3.67 to $71.32 and that pushed the 1.75% convertible note due 2021 up by 2.625 points to 107.5 bid, 108 offered.

Tyco and Calpine continued to regain ground, and Elan was steady but there were some negative pressures still in the market. Calpine was finding support after it announced Friday that it had purchased $119 million of its 0% convertibles due 2021 in open-market and privately negotiated transactions over the past several days through several transactions at various prices, using existing cash on hand and leaving only $700 million outstanding. The Calpine convert was up 2.375 to 81.625 bid, 81.75 offered while the common rose 26c to $8.40.

Traders said that while some names were continuing to see selling on rumors, some of the reactions also are turning back to fundamentals.

Veeco Instruments Inc. was getting punished after revising its first quarter outlook on the heels of posting a fourth quarter loss of $14.4 million, or 50c per share, compared with a year-earlier profit of $5.4 million, or 21c per share. The company, which makes equipment for the semiconductor industry, said first quarter sales will fall short of Wall Street estimates and it will report a loss, excluding a number of costs, instead of the profit that was forecast. The Veeco 4.125% convertible notes due 2008 fell 5.5 points on the day to 97 bid, 97.5 offered while the stock dropped $2.67 to $27.43.

If the market surge continues into next week, convertible issuance may soon regain its momentum, sources said. But there are no deals firmly set to come to market soon.

Travelers Property Casualty Corp., Citigroup Inc.'s insurance unit, on Friday filed a registration statement to raise as much as $1 billion in an initial public offering of 20% of the company. The prospectus said plans included selling mandatory convertible upper DECS along with the common stock. Proceeds were earmarked to repay debt it owes to Citigroup. Citigroup's Salomon Smith Barney is the sole underwriter for the IPO, but no timing has been laid out.

© 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.