Players sidelined by drop in stocks; Nortel at bat while AEP prices early

By Ronda Fears

Nashville, Tenn., June 6 - As stocks plunged, convertible players sat on the sidelines for the most part. In thin volume, techs were sharply lower and telecoms plummeted with Sprint PCS and Nextel leading the pack. El Paso continued to firm a bit though the stock was weaker, but AES Corp. fell on an S&P downgrade.

Primary activity was a focal point, as the market eagerly awaits the Nortel deal. FPL Group and Provident Financial Group are also on tap, as American Electric Power advanced its deal to price a day early.

Nortel's new mandatory, estimated at $750 million, was quoted at issue price in the gray market.

"It was very thin trading today," said the head convertible trader at one of the major investment banks.

"Everyone's just holding on to their hats. We've got several new deals coming and talks of several more for next week. Ameren filed a new $1.5 billion shelf and energy names need a lot of balance sheet work, but we've not really heard any specific names for the new deals yet to be put on the table."

Jobless claims fell last week to the lowest level in more than a year, according to the Labor Department, but that failed to stimulate anything positive in the market as AirGate PCS cut its subscriber growth forecast.

"Everyone is nervous about the forecasts continuing to get lowered," said a convertible trader at a hedge fund in New Jersey.

"Unemployment claims may have plateaued, but if the outlooks don't get any better there will be - already is really - more job cuts. The bottom line is that there are not any solid signs of corporate profits getting any better on a large scale."

AirGate sells wireless service under the Sprint PCS Group brand name, so the news sent the pack of telecom converts linked to PCS spiraling lower as well as other wireless names like Nextel.

The Comcast/PCS 2% due October 2029 dropped 1.625 points to 25.5 bid, 26 offered and the 2% due November 2029 lost 3 points to 26.25 bid, 27.25 offered.

The Liberty Media/PCS 3.75% due 2030 fell 2 points to 46.625 bid, 47.5 offered and the 4% due 2029 plunged 2.625 pointst ot 50.5 bid, 51offered.

PCS shares closed down $1.79 to $7.99.

Nextel's 4.75% due 2007 lost 1.25 points to 56.25 bid, 57.25 offered and the 6% due 2011 dropped 1.125 points to 53.75 bid, 55 offered. Nextel shares ended down 46c to $3.95.

Energy and power names continued to get weaker, but traders said El Paso and Williams saw buyers for their converts.

AES was hurt by S&P's downgrade of the company, including lowering the 4.5% convertible notes due 2005 to B from B+ and the two convertible trust preferreds to B- from B.

The notes lost 1.5 points to 58.25 bid, 60.25 offered. The 6.75% convertible preferreds were quoted down 1.75 points to 16.75 bid, 17.25. The 6% convertible preferred closed on the NYSE down 1.5 to 21.

S&P said the outlook is negative, citing an increasingly challenging environment that AES is facing in managing businesses in Latin America. But the rating agency also pointed out that AES is not in the trading business so it has no issues arising from the recent FERC inquiries like El Paso, Calpine, Williams, Mirant and the like.

AES was disappointed and the downgrade apparently triggered covenants in its bank letters of credit.

"While we are disappointed with today's action, we are pleased that S&P has noted the significant improvement in our liquidity position since the beginning of the year and also acknowledged the fact that we are not in the trading business and consequently have no trading liabilities and no issues arising from the recent FERC inquiries," said Barry Sharp, CFO of AES, in a company statement.

"Our current parent liquidity is over $450 million, and the cash and cash equivalents at our subsidiaries is approximately $1.2 billion. As S&P notes, AES's liquidity is not seriously affected, and the associated triggers with this downgrade amount to less than $60 million of letters of credit. These letters of credit are primarily to cover payments for construction projects that were already included in our forecast."

Sharp said AES still expects to generate $1.25 billion of operating cash flow in 2002. He said the company has reduced discretionary capital expenditures by $500 million and plans to cut operating costs by $200 million. In addition, asset sales and financings already announced will add another $800 million of liquidity.

S&P did note that AES has improved its liquidity position since the beginning of the year but said the negative outlook reflects refinancing risk associated with debt maturities of $300 million in 2002 and $1.8 billion in 2003, given heightened uncertainty in the bank markets.

Tyco's convertibles were holding up well against a $2.70 drop in the stock to $14.60, traders said, with the 2021 issue seeing some buying on the weakness. Tyco shares sank amid an investigation into whether former CEO Dennis Kozlowski's used company loans to cover personal costs.

The retail sector was widely mixed on sales figures.

A notable movement was seen in J.C. Penney, to the south as the company reported same-store sales for May fell 5.1%.

J.C. Penney said low inventories of certain items caused the slump in sales, which the company originally expected to be flat or slightly higher. The retailer still expects earnings, before unusual items, of 90c to $1 per share for 2002.

The J.C. Penney 5% due 2008 fell 3.125 points to 102.5 bid, 103 offered as the stock lost $1.54 to $22.60.

In the continuing debate about the valuation of the Nortel new issue, even as it was about to be priced, Wachovia Securities convertible analyst Kimberlee Brody put it 3.73% cheap.

Brody evaluated the issue using a credit spread of 600 basis points through Aug. 15 when the Treasury strips can be stripped out and zero thereafter, since the strips back dividends for the life of the issue. She used a 60% volatility in the stock, with a 2.25% borrow cost.

Nortel shares closed down 19c to $1.41, which looks like the lowest point for the underlying stock of a new convertible at the time of pricing.

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