Convertibles marked higher, but market remains on edge

By Ronda Fears

Nashville, Tenn., June 17 - Convertible players collectively sighed in relief with the lift in stocks, but immediately returned to an edginess focused on whether the rally will be sustained or if it was another false alarm.

"I'm not sure how much of this today is short covering but there was a fair amount of that going on," said a convertible trader at a hedge fund in New York.

"Time will tell. We've not been about to sustain more than a couple of days of gains so far."

In terms of activity in convertibles, trading continues to be very thin and the calendar light.

Lennar saw a nice boost from an acquisition and Tyco got a slight lift from news that it is suing a former director over fees connected to the CIT acquisition and its former corporate attorney for bonuses.

In the other direction, however, Getty Images was marked lower as the stock got hit and telecoms were showing signs of weakness although the group was widely mixed.

"For a day when the market is up so strongly, it's amazing how little activity we've seen," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities.

"People are just marking things up and sighing a breath of relief. People will need to see a little more of this before they relax much."

With the onset of summer, activity is expected to continue to be slow. Summer months have been very active over the past two years, mainly due to heavy issuance, but that was an anomaly compared to the usual lull.

"We're getting back to what the summers used to be in terms of market activity and trading," said Tom Sugiura, convertible analyst at Bear Stearns.

There had been hopes for a strong summer calendar, but new issues have been just trickling into the market.

El Paso's new mandatory this week is getting a lot of attention. The $500 million deal is set to price Thursday, a day after the DTE Energy mandatory - if it is not advanced.

Sources said the books are already oversubscribed, after guidance was released early Monday.

El Paso shares closed up 50c to $22.33.

The El Paso 0% convertible bond due 2021 was unchanged at 40.5 bid, 40.625 offered.

The El Paso 4.75% convertible preferred due 2028 closed up 0.27 point to 36.67 on the NYSE, and was quoted up 0.35 point to 36.75 bid, 38.5 offered by a dealer.

DTE Energy shares closed off 70c to $42.80.

The market is hungry for new paper, but the investment bankers working in convertibles are not expecting much of a boost to activity at least throughout the summer.

"I think we'll see a real lull this summer, unlike last year and the year before," said a salesman at one of the major investment banks.

"We'll have a steady stream, though, and business will probably pick up after August."

Tyco was continuing to head north, but traders did not report a great deal of activity in the name.

Tyco said on Monday it has sued a former director, Frank E. Walsh Jr., for breach of fiduciary duty by receiving a $20 million fee, allegedly from Dennis Kozlowski, Tyco's former CEO, for work in last year's acquisition of CIT Group Inc.

Tyco also sued its former general counsel, Mark A. Belnick, alleging he accepted large cash and restricted stock bonuses, valued at about $20 million in the year 2000 alone, from Kozlowski.

"There was not a lot happening with the Tyco converts today, some but not as much as Friday," said a dealer.

"Walsh's fees in the CIT deal have come up before and the company defended it, or Kozlowski did. I don't think the market's going to react to this lawsuit. What we'll see is a bump along with the stock."

Tyco shares closed up 69c to $14.09.

The 0% convertible due 2020 gained 0.25 point to 62.25 bid, 63.25 offered and the 0% convertible due 2021 was unchanged at 70 bid, 71 offered.

There was no surprise that Adelphia did not make the interest payments on which the grace period expired Saturday, but there still was no bankruptcy filing.

Virtually everyone, however, is certain the troubled cable company will file for bankruptcy.

Traders said the Adelphia convertible bonds are still being quoted between 8 and 10.

In over-the-counter trading, Adelphia common shares ended up 2c to 17c.

"There might be some firm offers out there, but buyers are scarce for Adelphia now," said a convertible trader at a hedge fund in Connecticut.

There was a little bit of activity in Lennar Corp., traders said, on its bid for the remaining shares of The Fortress Group, Inc., a regional homebuilder, that it does not own.

Lennar's offer comes to about $50.7 million in cash and would add to Lennar's earnings per share in 2002 and 2003.

Separately, Fortress announced signing an agreement to sell its Texas-based homebuilding operations, Wilshire Homes, for $23 million, which when closed would cut Lennar's net cash cost for Fortress to about $27.7 million.

Lennar's 0% convertibles gained with the stock and there were a few buyers, traders said.

The 2018 issue added 2 points to 73 bid, 73.375 offered and the 2021 issue rose 0.875 point to 44.75 bid, 45 offered.

Lennar stock closed up $2.10 to $55.50.

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