Lucent rallies on buybacks, stabilizing outlook; Tyco weakens on loss, forecast

By Ronda Fears

Nashville, Jan. 22 - The convertibles market in general moved sideways Wednesday but activity picked up somewhat with a couple of high-profile names like Lucent Technologies Inc. and Tyco International Ltd. posting results.

Lucent headed north on its expectation of strong wireless demand, while Tyco went south as its profits fell by nearly half.

The revelation from Lucent that it had retired some $1 billion of its convertibles also boosted the issues.

"I feel like it should've been more active than it was," said Stuart Novick, convertible analyst at Salomon Smith Barney.

But the war factor was a hindrance for many managers.

"It [the possibility of war] has a lot of convertible managers paralyzed, I think, afraid to do the wrong thing so they do nothing," said a hedge fund trader in New Jersey.

David Goldman, head of global markets research at Banc of America Securities, however, said that while the war overhang is likely unwarranted, the war risk premium is worth buying. He said a war is more likely than not, regardless of whether Saddam Hussein steps down from power in Iraq.

"With earnings reports coming in slightly above market expectations, we blame the strategic situation [in Iraq] for weakness in the equity and credit markets during the past few days," Goldman said.

"Although war risk as such is hard to measure, a generalized sort of risk premium has cast a shadow across all markets. The war risk premium is worth buying."

Earnings are better, he said, and support a view that the credit markets will improve this year.

With the war fears and stocks pulling back so harshly - the S&P 500 has erased all the gains seen since the first of the year - the new issues calendar has suffered.

Nothing new emerged, but Oneok Inc. was at bat after the close with its $275 million mandatory. Oneok shares closed up 12c to $17.19.

Looking for more insight into what 2003 will hold for telecoms, players reacted positively to Lucent's news.

Lucent reported its eleventh quarterly loss, but said it still expects to return to profitability in 2003.

Chief executive officer Patricia Russo said on the conference call that she was not calling for an industry rebound but added that Lucent is seeing signs of stabilization and strong wireless demand. She said the second half of the year will be better than the first half.

That demand is expected to contribute to a forecasted 20% gain in fiscal 2003 revenues.

Lucent posted a fiscal first quarter net loss of $389 million, or 11c per share, compared with a loss of $465 million, or 14c, a year prior. Revenues fell to $2.08 billion from $3.58 billion.

Also, Lucent said it repurchased $710 million of its 8% convertibles and $388 million of its 7.75% convertibles for 388 million shares of common stock since about October. And the company said it will pay the semiannual dividend on the 8% issue with common stock.

"We want to believe them [Lucent], that things are looking up," said a hedge fund trader in New York.

"Whether Lucent makes it to profitability this year has yet to be seen but in any event people are way more comfortable with the converts."

The Lucent 7.75s (Caa2) gained 3.5 points to 61.5 bid, 62.5 asked and the 8s (Caa2/CCC+) added 5.25 points to 75.375 bid, 76.375 asked.

Lucent shares closed up 13c to $1.81.

The Lucent 7.75s are trading at about a 14.3% yield-to-maturity and 67% premium while the 8s are at about a 28.7% yield-to-put and 152% premium, noted one observer.

Tyco also posted earnings but the huge drop off in profits soured many investors and the new converts continued to weaken.

"I thought there was nothing in the way of surprises [at Tyco]," said Salomon's Novick.

"I'm sort of neutral. I didn't hear anything that made me say sell but nothing, with the yields compressing, to say buy."

The new Tyco 2.75s, or Tranche A, dropped 1.375 points to 100.625 bid, 100.875 asked and the 3.125s, or Tranche B, lost 2.25 points to 101.125 bid, 101.375 asked.

Tyco shares closed down 61 to $16.50.

Tyco reported fiscal first quarter earnings of $634.5 million, or 32c per share, down from $1.2 billion, or 60c, a year before. Revenues rose to $8.9 billion from $8.6 billion.

The company said earnings for 2003 would be near the lower end of its previous estimates and sharply lower than 2002's results, due to recent debt refinancing activities and higher pension costs.

Also Wednesday, Tyco made a preliminary filing with the Securities and Exchange Commission to increase its authorized number of common shares to 4 billion from 2.5 billion.

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