Raytheon dives on pension costs; some retail issues find buyers on recent weakness

By Ronda Fears

Nashville, March 6 - Convertible players were not exactly sidelined as imminent war tremors cast a bearish tone to stocks Thursday, but traders said flow was lighter than earlier this week.

"The market was in a sideways move, on whole," said a dealer, adding that "credit spreads are just hanging in there.

"Right now, it's so uncertain, the events in the Middle East, that no one wants to be long delta, so we were seeing selling in that area today," the trader said.

Raytheon Co. dropped sharply on a boost to its pension costs but several retail names, like Gap Inc., were higher as buyers stepped in due to recent weakness, traders said.

While lighter, traders said volume was "quite decent" as buzz about an overnighter became more concrete around midday and players began making room to add the new paper.

After the close, UTStarcom Inc. launched the Rule 144A overnighter, which also had been anticipated the day before.

UTStarcom's $350 million of non-callable five-year converts were talked to price with a coupon in a range of 0.375% to 0.875% and a 30% to 35% initial conversion premium. It was being sold with a call spread transaction, in order to minimize stock dilution - an increasingly common practice among issuers lately.

The stock closed up 5c to $18.30 but was seen in after-hours trading at $17.10.

Sellside analysts put the deal around 2.5% to 3% cheap.

An analyst at one of the lead banks on the deal modeled the UTStarcom deal, at the midpoint of guidance, 2.45% cheap, using a credit spread of 728 basis points over the comparable Treasury and 50% stock volatility.

Potential buyers were not overly concerned about the credit, but focused on the stock.

"There's not a lot of coupon to clip and it's definitely junk paper, but there's no call," said Ravi Malik, a convertible portfolio manager at Froley Revy.

"The question is mainly whether there's any upside potential in the stock.

"This used to be a growth stock, a high flyer. The problem has been their concentration in China. There's a lot of questions about saturation and political uncertainties."

After using some of the proceeds to purchase the call options, UTStarcom said some of the new capital might be used for expansions, including acquisitions.

The telecom equipment maker has recently made a concerted effort to expand outside of China. Toward that end, earlier this month the company bought some of the telecom-equipment business of 3Com Corp. for $100 million in cash.

Malik said the decision on whether to participate in the UTStarcom deal was similar to the Watson Pharmaceuticals Inc. deal earlier this week in that it boiled down to the stock story.

"We've not yet decided on UTStarcom but we did participate in Watson," Malik said.

"The terms on the convert were not so attractive. But on a relative basis, say versus Teva, the stock was cheap."

Traders said there was some buying in Gap converts that had taken a hit recently on warnings from the retailer that its spring sales were weaker than hoped.

But Gap reported Thursday an 8% gain in same store sales in February and the stock was upgraded at a couple of firms.

The Gap 5.75% convertible due 2009 was quoted up 1.5 points at 118 bid, 118.25 asked. The stock ended up 33c to $13.18.

Several other retailers were mentioned moving higher on the retail comp sales day, such as J.C. Penney Co. Inc. and Reebok International.

Despite the imminent war benefit as a defense name, Raytheon fell sharply after it affirmed its 2003 earnings outlook but said 2004 results would likely miss expectations as it boosted its estimate of pension costs.

The Raytheon mandatory plunged 2.09 points to 46.91 while the stock lost $1.49 to close at $25.42.

Reactions were mixed toward Valero Energy Corp., traders said.

Shortly after the open, Valero issued a press release saying it expects first-quarter earnings of about $1.10 per share, well above the current Wall Street estimate of 82c.

"There's still a lot of skepticism in the energy area, but Valero is one of those names that has exhibited a lot of strength," said a dealer.

"So it was a bit surprising to see any selling, and it was pretty heavy."

After the close, Moody's cut Valero's ratings, including subordinated debt to junk, citing concern over debt-financed growth through acquisitions.

From a credit perspective, dealers noted that Fleming Cos. Inc. took another hit Thursday as the food distribution firm filed a $1.4 billion claim in the Kmart Corp. bankruptcy.

"The amount shocked a lot of people," said one trader.

"There's no flow in the converts, though, except an occasional high-yield or distressed buyer who picks a little up here and there. Everybody's just been taken to the cleaners on this one."

The Fleming converts have been hovering around 26.

Fleming shares closed Thursday off 8c to $1.90 and its junk bonds were seen down 1 point.

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