Energy bucks downward trend; overall sentiment positive; telecoms, tech down but Level 3 up

By Ronda Fears

Nashville, Sept. 10 - Several big convertible market players - from hedge funds and outrights - said they were sitting out Wednesday amid the sharp pullback in tech stocks. The general feel of the convertible market, however, remains fairly strong.

"I see people coming back from the dead," said Jimmy Giordano, president of JGiordano Securities Group.

"People are looking for lower premium names, dividend protection. But everything's starting to feel better to me, across the board.

"I don't think there's a lot of concern. People are feeling better about the world."

Another sellside market source seemed to confirm that sentiment, saying: "It seems like customers are willing to take on a little more risk in this market."

Still, a big outright fund manager on the West Coast said it was no surprise that stocks pulled back so sharply, given the lack of support for the recent rally.

"The jury is still out on the economy, I think," the manager said.

"The [economic] data seems erratic and nothing that I'd bet the farm on. That said, I do feel like the convertible market is looking pretty good these days.

"There's a lot more to feel good about, anyway. There have been some bids come in and at least there's no wholesale selling going on."

A hedge fund manager in New Jersey said he is essentially looking to hold on to the small gain in returns seen recently, a turnaround from the past three months or so, and he is generally bullish about the market going forward.

"We've got a niche that is working pretty well - lower premium issues, high hedge ratio cash flow trades," the manager said. "We just keep plugging away."

The hedge fund manager echoed many other players in lamenting the severe dearth of new issues over the past month.

Since mid-August when a slew of convertible professionals took late vacations - following a hectic and unusually busy summer primary market - there have only been four new issues, and that's counting the NII Holdings Inc. deal on tap after Wednesday's close.

NII Holdings was at bat with $100 million of 30-year convertible notes talked to yield 3.5% to 4.0% with a 27.5% to 32.5% initial conversion premium.

Lehman Brothers analysts put the NII deal 5.13% cheap, at the midpoint of guidance, using a credit spread of 700 basis points over Treasuries and a 45% stock volatility. Deutsche Bank Securities put it 1.11% rich to 3.24% cheap, at the middle of talk, using a credit spread of 800 bps over Libor and a 45% stock volatility.

NII shares closed Wednesday down $3.31, or 5.17%, to $60.69.

Telecom paper in general, however, was notably weaker, traders said, along with the vast majority of tech issues - particularly chips and biotechs.

"There were some pretty sharp declines across the market," said one dealer.

"But we're still seeing buyers, like for Cephalon and Level 3."

Cephalon Inc. shares dropped with the biotech sector, losing $1.23 on the day, or 2.52%, to $47.61. The 2.5% converts due 2006 were quoted at 92.25 bid, 92.75 offered. Both tranches of 0% converts were quoted at 96 bid, 96.5 offered.

Level 3's new 2.875% due 2010 were a "couple of points better," according to a sellside trader at a smaller boutique in New York. The 6s, both of 2009 and 2010, also looked a tad firmer, he said.

UTStarcom Inc. was marked aggressively lower, one buyside trader noted, on a rumor that China Netcom is planning to or has stopped purchases from UTStarcom. But, he said some believe that the panic may present a buying opportunity.

The UTStarcom 0.875% convert due 2008 fell 6.375 points to 161.375 bid, 162.375 offered while the stock dropped $1.78, or 4.78%, to $35.45.

In reaction to the chatter that Chinese firms are scaling back spending, several China internet names - Sina Corp., Sohu.com Inc. and Netease.com Inc. - were marked sharply lower, too, traders said. One dealer noted, though, that those all are small deals with very little liquidity.

It looks like profit-taking prevailed over participation in the rally of Cummins Inc., traders said. The convertible plunged Wednesday, following a spike on Tuesday that caused holders to debate whether to take some profits or join the buying party.

Cummins' 7% convertible preferred lost 1.25 points to close Wednesday at 61.375 bid, 61.625 offered but a dealer said it traded as low as 57 during the session. The stock was lower for most of the session, too, ending down $1.72, or 3.46%, to $48.03.

There were some buyers out there Wednesday, though.

Traders said energy, utility and oil and gas paper showed some nice gains.

"In a time like this, when there's a lot of uncertainty about the overall economy, then people turn to things like energy, the staples of the markets," said one dealer.

CMS Energy Corp., TXU Corp., Sierra Pacific Resources Inc. and Dynegy Inc. all showed 1-2 point gains, he said.

Metals name Inco Ltd. - the 1% converts, at least - was another issuer rising in that vein, he added. The Inco 3.5% converts were slightly weaker, he said.

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