Convertibles gain solidly, Tyco edges up on buzz

By Ronda Fears

Nashville, Tenn., March 6 - Convertibles were solidly higher, traders said, although there still seemed to be a shift toward quality issues. There was a lot of market buzz about Tyco selling its plastics unit in an auction Friday, but the convertibles were up only slightly because of uncertainty about the event. Qwest Communications was higher, but declined in after-hours trading following a late-day conference on the Moody's downgrade.

The primary market also showed some life when Merrill Lynch launched an overnighter after the bell, pitching $1 billion of 0% convertible floaters. Commerce Bancorp also had a new convertible trust preferred in play. And, St. Mary Land & Exploration launched a small deal for after Thursday's close.

"It was a good trading day. There have been a couple of nice days this week, so things are looking better," said a convertible trader at a hedge fund in New Jersey.

"It certainly makes it easier to get to work, you know. We held on through all the pain and now it's starting to pay off. But with rallies like this, you've got to take a step back and look at what's really going on. I don't think it's going to hold water. So, we're adjusting our hedges and doing a few other things to reflect that."

Dealers said there still seemed to be a tilt toward quality, as apparently many investors do not yet trust that the bulls have conquered the bears.

"It will take more than a week for this to be declared a definite turnaround," said a convertible trader at a major investment bank in New York.

"There are still too many warnings and misses going on, like the data storage group falling today. The seasoned players are doing their homework and are not making any knee-jerk decisions."

During the second half of the session, traders said, some positive rumors began about Tyco making progress in the divestiture of its plastics unit, which was never a target among the four-prong breakup plan. That gave some life to the stock, but traders said the converts only moved up slightly as investors were a bit skeptical to react to the news - which had not been announced by Tyco by late Wednesday.

"There had been talk about something major happening with Tyco this week and today we started hearing about the plastics unit getting sold. Apparently, there is going to be an auction because there are several interested buyers," said a convertible trader at a hedge fund in New York.

"We've heard that the bidding is supposed to start at $3 billion and the bidders we've heard about are pretty big outfits. We understand that Goldman Sachs Group Inc. and Deutsche Bank are handling the auction."

The trader said Blackstone Group, JPMorgan Partners, Kohlberg Kravis Roberts, Clayton Dubilier & Rice and Madison Dearborn Partners were identified as bidders for the Tyco Plastics unit in a news item on the tape. Tyco has said it wants to find a buyer for the plastics unit by April.

Tyco shares rose $1.79 to $34.01. The convertibles were quoted up 0.5 point with the 2020 issue at 66.375 bid, 66.875 offered and the 2021 issue at 70.375 bid, 70.875 offered.

Qwest Communications was also higher, with the stock closing up $1.23 to $10.08 despite the Moody's downgrade to a notch above junk on Tuesday. But traders said Qwest was down 21c to $9.87 in after-hours trading, following a conference call at 5 p.m. ET to discuss the downgrade. Moody's also kept Qwest on review for possible further downgrade if the company is unable to renegotiate its bank facility and raise funds to pay off some of its $25 billion debtload.

"I don't know what happened," said Qwest chief executive Joseph Nacchio in the call Wednesday. He was referring to the meeting with Moody's that followed a conference call with investors and analysts on Friday.

"We did not share anything new with Moody's than we did on that call, nor what we shared with S&P beforehand. Everyone is focused on the downgrade, but no one's said anything about S&P. S&P did not issue a downgrade."

Qwest chief financial officer Robin Szeliga said the company is making progress in talks with lenders to avert default on $4 billion in loans coming due in June, but the company does not anticipate or intend to secure any new bank facility with assets that would jeopardize bondholders' security.

The fate of Qwest's plans to make a $1.25 billion convertible offering are still up in the air, however.

Merrill Lynch, however, plunged into the market after a strong day for the brokerage's stock with a $1 billion convertible offering.

Merrill was pitching the overnighter of 30-year convertible senior floating rate notes at three-month Libor minus 200 basis points with a 0% floor and the yield capped at 7.5%, with an initial conversion premium of 30% to 33%. Merrill Lynch was book-running lead manager.

Merrill shares closed up $1.10 to $54.40 but were quoted off $2.11 to $52.29 in after-hours trading.

Terms are expected early Thursday.

Also from the financials sector, Commerce Bancorp sold $175 million of 30-year convertible trust preferreds with a 5.95% dividend and 27% initial conversion premium, at the cheap end of guidance, and the issue was up 1.75 points in the immediate aftermarket to 51.74 bid, 52 offered. The underlying shares gained $2.54 to $44.08.

Elsewhere, traders said the market firmed up virtually across-the-board. The one major exception was with data storage names, due to the McData Corp. warning of a loss in first quarter. That put pressure on Emulex and Brocade.

The Emulex 1.75% convertible due 2007 lost 4.75 points to 91.75 bid, 92.5 offered as the stock fell $3.23 to $34.04. Brocade's 2% convertible due 2007 was down 1.875 points to 89.25 bid, 89.75 offered with the stock losing $1.15 to $25.16.

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