Trading light in advance of Bush plan; Tyco's jumbo deal finally materializes

By Ronda Fears

Nashville, Jan. 6 - It was a light day for convertibles, traders said, although stocks soared in anticipation of an aggressive economic stimulus plan from President Bush.

During the session players were anticipating a deal to surface, and after the closing bell Tyco International launched the much anticipated jumbo deal that has been abuzz in the market for weeks.

Tyco is pitching a two-part $3.25 billion deal for pricing after the close Wednesday, and initial reactions seem to be positive. (See story below)

Tyco's existing 0% convertibles were flat with the 2021 issue at 75.75 bid, 76.25 asked and the 2020 issue at 72.75 bid, 73.25 asked. Tyco shares closed down 81c to $16.53.

Elsewhere, it also was rather quiet, traders said.

"Some hedgies were busy with stocks and we saw some convertible preferreds, mandatories trading on the dividend tax spin, but not much was happening," said a convertible dealer.

A report on the tape that President Bush plans to propose a $600 billion fiscal stimulus plan, twice as big as was speculated last week, lit a fire under equities.

Convertible players are interested in the elimination of the dividend tax that is being discussed with split views.

The elimination of the double taxation of dividends, as an incentive for companies that currently don't pay a dividend to begin doing so, would be a negative in that it would eat into the convertible preferred yield advantage. But, it could be a positive if dividend income were tax exempt, making the surrender of some yield less onerous.

"I had thought they [convertible preferreds, mandatories] would come in but the stocks have all taken off, at least in the utilities. Some outright buyers of some of the busted names [may be] speculating that the common will carry up the convert," said a buyside source.

"I'm also hearing that all dividends will be tax exempt, even though most preferreds are trust structures and are treated as debt on income statements. There's lots of confusion, what is the test for 'dividend,' can it have arrears?

"I think legislation will probably be for common stock dividends only, sparing congress the task of defining what preferreds are or what are not 'dividends'.

"This has to be bad for mandatories and convert preferreds, but they do not seem to be trading this way."

Regulatory news also sent several Baby Bells shooting upward, but traders said the converts did not see a lot of action.

The Wall Street Journal reported that the Federal Communications Commission moves that would dampen local phone competition, which would be a huge win for convertible names like Verizon Communication and Qwest Communications, among others, but could be a significant setback for others like AT&T and WorldCom.

Verizon Communications stock soared $3.62 to close at $44.07 but the 0% convertible due 2021 was quoted up just 0.5 point to 58.75 bid, 58.875 asked.

American Tower Corp. lured some credit buyers after it announced that it would report a loss for the fourth quarter and year but would sell its Verestar unit to raise money to reduce debt. The sale is expected to be completed by the end of first quarter, with more to be sold off this year.

A trader said the American Tower 2.25% discount convertible due 2009 added 3.375 points to 72.75 bid, 73.5 asked while the 6.25% due 2009 and 6% due 2010 gained slightly. The common stock added 20c to end at $3.89.

American Tower said it expects to report a loss of 26-30c per share in fourth quarter and a loss of $1.62 to $1.65 per share for 2002, before extraordinary items.

Lowe's Cos. Inc. was also mentioned, moving slightly lower in continuation with last week's trend that began with Home Depot lowering its outlook.

But Interpublic Group of Cos. Inc. was said to be ticking higher, continuing to strengthen in a positive reaction to news last week of an asset sale.

In general, though, traders said the tone was positive as stocks gained nicely and credit spreads were tightening.

"Across the board, in the CDS [credit default swap] market the spreads were tightening," said a trader.

"In general, everyone seems to be happier, we just didn't see a lot of action today."

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