Buyers step up on weakness but market choppy on lack of conviction, direction

By Ronda Fears

Nashville, Feb. 21 - Buyers finally stepped up on the relative weakness seen in the broader market earlier this week, convertible traders said, but trading was choppy and without any real direction.

Asked about names seeing action Friday, traders mentioned Titan Corp., Interpublic Group, Williams Cos., Juniper Networks, Nortel, Tyco, Nabors and some new issues like Micron Technology and Deutsche Telekom.

"I think there's a lot of complacency," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

"Speaking with clients this morning, there's just not a lot of conviction about what they should be doing. It's a tough market."

Liquidity in the convertible market still appears to be very strong, he said, although high-yield funds have seen a couple of consecutive weekly outflows.

"New deals are way oversubscribed, convert arbs returned 3% last month," Seidel noted.

"So I don't see money walking away from the strategy yet."

But the market is in need of a forward calendar, he conceded.

The calendar has been staying empty, like it is right now, as the vast majority of new deals of late have been drive-bys or overnighters.

New deals are bid up in the gray market and oversubscribed by multiples of four to 12 times the deal size, but many have sunk directly out of the gate and have stayed below par due to aggressive terms.

Micron Technology's new 2.5% convertible dropped 1.5 points on Friday to 93.375 bid, 93.875 asked as the stock closed down 23c to $7.52.

Deutsche Telekom's new 6.5% euro mandatory was finding buyers after it dropped 3 points in its first day of trading.

While the name was popular among a many buyers - the deal was oversubscribed three to four times - some thought it was too expensive.

"Interestingly, we found that its [DT mandatory] value with [volatility] skew is 1½ points less than its value assuming zero skew, which may explain why some pricing sheets thought it looked cheap" at issue, said a convertible market participant in London.

"We didn't, either on worst terms or on the pricing terms. You're also highly sensitive to future dividend and borrow assumptions."

The DT mandatory (BBB+) edged up 0.25 point on Friday to 97.25 bid, 97.5 asked, according to a dealer in London. DT shares closed in Frankfurt up €0.18 cents to €11.42.

Telecoms in the U.S. were still in flux in the wake of the FCC ruling, which "just adds to the muck" as Wachovia Securities, Inc. convertible analyst Jeanine Oburchay put it.

Over time, she said the RBOCs will probably win the war, although they lost this battle, but in the interim she envisions the decision to put the regulatory reins in the hands of the states as "problematic" and one that will likely cause "havoc."

CenturyTel, Alltel, Qwest Communcations, AT&T and Verizon were all rebounding Friday, but SBC Communications continued to slide.

Titan Corp.'s sharp decline Thursday on news of its president and chief operating officer's resignation created opportunity for buyers, as one dealer said.

The Titan 5.75% convertible trust preferred due 2030 lost 2.75 points on Thursday but buyers pushed it up Friday by 0.625 point to 42 bid, 42.5 asked. The underlying stock closed up 17c to $8.19 after losing $3.20 on Thursday.

"The initial sell-off was overdone. The COO leaving will have no impact whatsoever on Titan's operating performance," the trader said.

"So the convert getting whacked yesterday created an opportunity."

Titan, indeed, reaffirmed its guidance from October for fourth quarter earnings of 15c per share on revenues of $365 million to $370 million. The company reports earnings next Tuesday.

Interpublic was seeing some activity also on convertible reports in circulation from both Deutsche Bank Securities and CSFB, traders said. (See story on the Deutsche report on page one of this issue.)

Traders said there was more volume in the Interpublic 1.8s but noted that the 1.87s gained more ground on the bid side.

"We like that story," said CSFB's Seidel.

"We're a little cautious on the 1.87s. We see some risk, but the short-dated stuff is fine."

Deutsche favors the 1.8s, as well.

Most concern about the Interpublic convertibles revolves around the put on its 0% issue coming in December, since it was successful earlier this month in amending and renewing its bank lines.

The Interpublic 1.8% due 2004 was quoted up 0.25 point to 88.75 bid, 90.25 asked.

The 1.87% due 2006 was quoted up 0.375 point to 75.875 bid, 77.375 asked.

The 0% due 2021 was quoted up 0.125 point to 79.625 bid, 80.125 asked.

Interpublic shares ended up 26c to $9.66.

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