Trading slowed as players step back into sidelines to study as bond rally cools, stocks retreat

By Ronda Fears

Nashville, May 8 - Traders said convertible players moved back into the sidelines to study earnings and look for opportunities Thursday but also noted that a lot of the arbitrage community was doing business in equities, mostly short-selling as stocks retreated.

Credits spreads were wider, in both corporates and junk bonds, which also gave convertible holders reason to pause.

A few retail issues were the bright spot, such as Gap Inc., on a 20% spike in April same-store sales. But that bucked the flagging trend seen in a broader view of the retail sector, and traders said the group as a whole lost ground.

"Everyone is taking a step back to look at the [earnings] numbers, studying spreads and the like, seeing if they can find a place to squeeze in if they find a good turnaround situation," said one dealer.

"The bargains are few and far between, though, and the credit stories are changing as we speak in some cases. Spreads are widening right now, and that also complicates the picture; in some cases the implied [spread] is signaling that now is the time to sell."

Bear Stearns' High Yield desk noted that junk bonds felt heavy for a second day on Wednesday as issues declining in price outpaced those advancing by a ratio of 3-to-2. Average spreads widened 14 basis points to 698, as the yield on the 10-year Treasury declined 11 bps.

There was not a big sell-off, however, convertible traders said.

Whole Foods Markets Inc., however, was marked sharply lower as its stock plunged on a gloomy outlook by the company.

In general, traders said the market was so thin that no trend was apparent.

"Usually our convert guys are a step behind the broader markets, though," said a dealer at one of the bulge bracket firms.

A dealer at a smaller shop said practically all the orders he received Thursday from their convertible clients were related to stocks.

Not even new issues saw any amount of notable activity, traders said, as many are smaller issues that tend to fade away after about a week of being issued.

On Thursday, RPM International Inc., ASML Holding NV and Nextel Partners Inc. injected the equivalent of $710 million of new paper into circulation. ASML's €380 million issue equates to about $435.3 million.

After the close, Starwood Hotels & Resorts Worldwide Inc. sold $300 million of 20-year convertibles at par to yield 3.5% with a 83.96% initial conversion premium in a Rule 144A transaction. It was repriced by the underwriters at 98.75, according to a buyside source. (See story on Page 1 for full details.)

Nextel Partners and ASML both upsized their deals, but of the three, only ASML's issue got a rise in the immediate aftermarket.

ASML sold an upsized €380 million of seven-year convertible subordinated notes, which includes exercise on the first day of the €50 million greenshoe, at par to yield 5.5% with a 71% initial conversion premium - at the aggressive end of guidance.

It was closed by Morgan Stanley at 101.5 bid, 102 offered. In Amsterdam, the stock ended off €0.45, or 5.41%, to €7.87. In the U.S. the stock closed down 32c, or 3.44%, to $8.97.

As ASML said it may use some of the proceeds to redeem its 4.25% convertible due 2004 early, many players were going to be watching how that issue opens Thursday. The bond was quoted closing Thursday off 0.5 point to 99 bid, 100 offered.

RPM sold $125 million of 30-year convertible senior notes - in the cash-to-zero structure - at 50.519 for a 2.75% yield-to-maturity with a 50% initial conversion premium - smack in the middle of guidance. The bonds will pay a 1.389% cash coupon for five years.

It was closed by Merrill Lynch at 50.5 bid, 50.625 offered. RPM shares ended down 57c, or 4.59%, to $11.88.

Nextel Partners sold an upsized $150 million of 5.5-year convertible senior notes at par to yield 1.5% with a 42.5% initial conversion premium - at the aggressive end of guidance.

It was closed at 99 bid, 99.25 offered by Morgan Stanley. Nextel Partners shares ended off 25c, or 4.7%, to $5.06.

Nextel Communications Inc., for which Nextel Partners markets products, also was weaker Thursday, but traders said that was mostly tied to the declines in the broader markets.

Earnings continued to occupy a lot of time in the market.

Whole Foods fell sharply on Thursday after late Wednesday the organic food marketer reported a strong second quarter but warned of weak profits going forward.

The Whole Foods 0% due 2018 was quoted down 6.25 points to 59.75 bid, 60.25 offered. The stock plunged $7.27, or 12%, to $53.33.

The company posted net income of $25.6 million, or 41c a share, for fiscal second quarter ended April 13, up 26% from $20.2 million, or 34c a share, a year ago. Revenues climbed to $725.1 million from $622.8 million.

However, same-store sales rose only 7%, shy of the company's forecast for 8-9%, and a trend the company sees continuing. The retailer blamed slower business on extreme weather in several major areas as well as the effects of the war in Iraq.

Looking ahead, Whole Foods said fiscal 2003 revenue growth is seen at the low end of its previous forecast for 15-20% and same-store sales also are likely to be at the low end of its projected 6.5-8.5% gain.

Whole Foods said it is maintaining its $1.62-$1.68 EPS range for the full year but, again, said earnings will likely be at the low end.

Electronic Data Systems Corp. also saw a bit of a backlash from its earnings report that showed a net loss versus profits a year ago.

The EDS convertibles were quoted down about 0.25 to 0.5 point, with the 0% due 2021 at 78.25 bid, 78.75 offered and the 7.625% mandatory at 18.75 bid, 18.875 offered. The stock closed off 58c, or 3.29%, to $17.06.

EDS late Wednesday reported a first quarter loss and said that new contract business fell by almost two-thirds, plus its biggest contract, with the U.S. Navy and Marine Corps, showed a loss of $334 million, or 46c per share.

The company, which is fending off a cash crunch amid a top management shake-up, reported a first quarter net loss of $126 million, or 26c per share, a sharp downturn from a profit of $354 million, or 72c a share, in the year-earlier period.

Revenue was flattish at $5.37 billion versus $5.3 billion a year ago, but EDS said sales were down by 12% to General Motors Corp., its former parent and still its biggest customer, accounting for 10.6 percent of total sales, down from around 12% last year.

Reactions were muted all the way around in response to testimony by News Corp. Ltd. chairman Rupert Murdoch on Thursday regarding its bid in April to buy a controlling stake in DirecTV's parent company, Hughes Electronics Corp. for $6.6 billion in stock and cash from automaker General Motors Corp.

In 2001, EchoStar Communications Corp. edged out Murdoch by striking a $30 billion deal with Hughes, but regulators scuttled the deal last year, citing concerns that the merger would harm competition.

Thus, News Corp. is facing anti-trust grilling, and several consumer groups have raised questions about how the News/DirecTV merger would affect competition.

At Thursday's hearing, Murdoch renewed past promises that News Corp., which owns Fox News Channel, would make key programming like sports and local broadcast stations available to satellite broadcasting competitors like EchoStar Communications Corp. or cable companies at a reasonable cost.

Traders said there was little reaction in the convertible universe to the news.

EchoStar, News Corp. and News Corp./British Sky Broadcasting plc, and GM issues all were softer on the day, traders said.

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