Apex Silver, Marriott deals appear; Nortel, Lucent, Motorola losers in rotation out of tech, telecom issues

By Ronda Fears

Nashville, March 9 - Convertibles were moving sideways in general amid what light to moderate trading actually took place Tuesday, traders said. Meanwhile, new deals emerged from Apex Silver Mines Ltd. and Host Marriott LP for a total of $500 million of new paper.

In the secondary trenches, a shift to a more defensive posture is taking shape, market watchers said, so the tech and telecom groups were softer while cyclicals and other more traditional segments were firming a bit, although there were only a handful of gainers in the session.

Nortel Networks Corp., Lucent Technologies Inc. and Motorola Inc. were notable losers, along with Juniper Networks.

Tyco International Ltd. was among the few issues heading higher, with the 2.75s quoted up 2 points outright to 139.25 bid, 139.75 offered and the 3.125s up 2.25 points outright to 149.5 bid, 150 offered. The stock ended off a dime, or 0.34%, to close at $28.98.

New deals not seen in gray

The primary market showed some life late Tuesday, but the two deals that launched after the close did not stir anything in the gray market, according to buyside sources.

Apex Silver is pitching $125 million of 20-year convertible notes talked to yield 2.375% to 2.875% with a 25% to 30% initial conversion premium. Apex Silver shares ended Tuesday up 77 cents, or 3.28%, to $24.22.

Metals surged Tuesday on the back of weakness in the dollar. Silver futures, in fact, closed at the highest levels in more than eight years. The May contract for silver ended at $7.18 an ounce, a price not seen since February 1998, on the New York Mercantile Exchange.

Host Marriott LP offered $375 million of 20-year exchangeable notes, convertible into Host Marriott Corp. shares, with guidance for a 2.75% to 3.25% coupon and a 50% to 55% initial conversion premium.

Both deals are set to price after Wednesday's close.

At first blush, a buyside source was somewhat excited about the Host Marriott deal, saying it would definitely trade higher. Then, he saw the proposed premium and retracted his enthusiasm and forecast. At the midpoint of the indicative terms, he roughly valued the deal at about 99, noting the credit default swaps for Host Marriott were recently at about 125/130 basis points over Libor.

Host Marriott shares on Tuesday dropped a dime, or 0.8%, to close at $12.42.

Rotation cues defense teams

Several of the big sellside shops recently have discussed taking a more defensive posture in stocks, such as Merrill Lynch & Co. chief strategist Richard Bernstein's splash on the subject Monday.

"People are going to be hurting pretty soon," said a buyside trader at an outright fund in New York.

"Without a huge influx of new deals, there's going to be a lot of convertibles go away and we're just left with sub-C paper."

Meanwhile, dealers noted Tuesday that sector rotation in the stock market was making its way into the convertible market, with notable emphasis on picking up more defensive issues. Observers note a shift out of tech and telecom - really any issues where the underlying stocks are trading at high multiples - into areas like cyclicals, financials and consumer staples.

Those general moves were seen among outright convertible holders anyway.

It's directly the opposite with hedge funds involved in convertibles. They like tech and retail issues in particular, partly because those underlying stocks tend to exhibit some of the highest volatility available right now.

Sources at a hedge fund in Connecticut mentioned reverse hedging again, saying they have been dabbling with that in a few select issues since August, but expect it will be in high fashion toward the end of this year when call protection on the convertible universe begins to evaporate. At that point, he added that the implied volatility on the embedded option should become a serious factor in making money.

Tech, telecom signals mixed

With mixed signals splayed across the tape every day regarding the on-again, off-again recovery in technology and telecom spending habits of corporations, investors have been warned and are finally taking heed about the multiples some of these stocks are trading at, observers in the convertible market said.

"There is good news on one front, or at one company, and we've seen the entire sectors take a huge, gigantic leap since the first of this year," said a desk analyst at one of the larger convertible sellside shops.

"The earnings have been okay, but the comparable periods were lousy so you can't get that excited. The market is having to back off, cool its jets."

Thus, some of the high-flyers have dropped sharply off their recent new 52-week highs.

Lucent, Nortel and Motorola were mentioned specifically Tuesday by convertible dealers.

Nortel's 4.25% convertible due 2008 dropped about 1.5 points as the stock closed off 31 cents, or 4.23%, to $7.02; the 52-week range on the stock is $2.01 to $8.50.

Lucent's two newest 2.75% converts were quoted down about 2 points each with the underlying shares ending off 16 cents, or 3.94%, to $3.90; the 52-week range on the stock is $1.41 to $5.00.

Motorola's 7% mandatory fell 0.5 point to 48.5 bid, 49 offered, a dealer said. On the New York Stock Exchange, the convert closed off 0.44 point, or 0.9%, to 48.7. Motorola shares closed down 17 cents, or 0.96%, to $17.49; the 52- week range on the stock is $7.587 to $18.90.

Sovereign sinks

Sovereign Bancorp Inc.'s latest acquisition, on the heels of another just six weeks ago or so, plus speculation that it could be a takeover target itself, pressured sellers for its convertible alongside the stock.

Sovereign this time is picking up Waypoint Financial Corp. in a $980 million stock and cash deal.

Waypoint, based in Harrisburg, Pa., has $5.3 billion in assets. Sovereign, based in Philadelphia, had assets of about $43.51 billion as of Dec. 31.

In late January, Sovereign inked an acquisition agreement with Seacoast Financial Services Corp. of New Bedford, Mass., for about $1.1 billion in stock.

Market watchers have been speculating that Sovereign itself makes a good takeover candidate due to the consolidation in the bank industry.

Sovereign's new 4.375% convertible trust preferred due 2034 dropped 0.375 point to 49.875 bid, 50.125 offered. The underlying stock lost 29 cents, or 1.32%, to $21.75.

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