Nortel holders stage exodus; thin market mixed, apathetic

By Ronda Fears

Nashville, Tenn., Aug. 29 - Flow in convertibles was even thinner Thursday ahead of a shortened Friday session and long holiday weekend, as traders expressed apathy but noted some profit taking.

"There's really a lot of apathy right now. Maybe it's not apathetic, just pathetic. It's the end of summer, a long weekend and holiday ahead," said the head convertible trader at one of the major investment banks.

"Trading was very light today. It's just getting very tiresome, the conflicting data and trying to make sense of the guesswork of the so-called experts.

"It comes back down to crunching a lot of numbers on each and every individual name, and that can be exhausting. A lot of the convertible market does not work for a convert arb, so that has pulled down volume too."

Moreover there was a lack of faith to move players into a buying mode, for the most part, although several issues gained alongside the Nasdaq's gain, which countered the drop in the Dow Jones Industrial Average and S&P 500.

Jobless claims were higher but earlier this week durable goods orders rose for July. Second quarter gross domestic product rose 1.1%, the same as the initial estimate in July and in line with expectations but still a marked deceleration from the 5% pace for GDP in first quarter.

"My thoughts are that low rates have kept essentially bankrupt companies afloat for too long. And then we are surprised this recession can last so long? We have really only deferred but not taken a lot of pain," said Michael Revy, manager of a convertible hedge fund for Froley Revy.

"I stay away from the lower credits, [especially] when you can buy north of 500 basis points over for investment grade paper. Maybe I am foolishly bullish. I am heavy on the hedges but have been a buyer."

He believes the lid is kept on this market until the U.S. takes action against Iraq, or more specifically Saddam Hussein. He added that the gain in durable orders could point to a military buildup in advance of a war effort.

"With limited upside, downside is easily magnified," Revy said.

"There are nice mutual fund outflow numbers, [but] where does that money go? I guess it gets partially spent."

Buyers were scarce in general, traders said.

Convertible holders were exiting Nortel Networks Corp. en masse.

Nortel shares closed up 1c to $1.05 but the 4.25% convertible due 2008 was quoted down another 1.375 points to 38.875 bid, 40.875 asked.

One source referred to Nortel's deteriorating situation as "NorHell!" Dominion Bond Rating Service, the Canadian credit rating agency, cut Nortel's long-term debt rating to B from BB with a negative outlook.

Yet Lucent Technology Inc. and Corning Inc. regained some ground as traders said there was some profit taking, albeit slim, going on.

Lucent's 8% convertible due 2032 gained 1.875 points to 56.625 bid, 46.125 asked and the 7.75% convertible due 2017 added 2.225 to 49.625 bid, 50.375 asked. Lucent shares ended up 13c to $1.82.

Corning's 3.5% convertible due 2008 added 2 points to 57 bid, 58 asked as the stock rose 12c to $2.07.

Telecom equipment names were widely mixed, however.

Agere Systems Inc. dropped dramatically while Avaya Inc. rose sharply on bargain buying.

"It doesn't take much of a point move to make a pretty large percentage move so you can pick up quite a bit in a quick turnaround," said a dealer.

Agere's 6.5% convertible due 2009 dropped 2.75 points to 70 bid, 71 asked with the stock closing down 10c to $1.46.

Avaya's 0% convertible due 2021 climbed 3.875 points to 24.5 bid, 25.5 asked. The stock ended up 60c to $2.77.

Other notable areas were software and retailing.

Software maker Peregrine Systems Inc., in the process of investigating accounting irregularities in its financial statements, said on Thursday it believes it will restate results for the last three years and reduce reported revenue by about $250 million.

Peregrine shares dropped 9c to 50c, and the 5.5% convertible due 2007 lost another 0.25 point to 30.375 bid, 40.375, but as expected there is no activity in the convert.

On the flipside, however, WindRiver Systems Inc. shot up on a contract with Intel.

WindRiver's 3.75% convertible due 2006 gained 2.75 points to 71.5 bid, 72.125 asked as the stock rose $1.14 to $5.73.

Retailers were widely mixed.

Reebok Inc. fell sharply on weak sales, but Gap Inc., which has also suffered from weak sales, gained nicely.

Reebok's 4.25% convertible due 2021 dropped 4.75 points to 98.875 bid, 99.625 asked with the stock falling $3.07 to $24.63.

Gap's 5.75% convertible due 2009 added 1.5 points to 102.125 bid, 102.625 asked with the stock up 17c to $11.78.

Fleming Inc. and Performance Food Group Corp. were lower on a downgrade of Kroger Co. by JPMorgan.

Fleming's 5.25% convertible due 2009 lost 3 points to 66.5 bid, 67 asked and the stock lost 86c to $10.71.

Performance's 5.5% convertible due 2008 dropped 1 point to 127.375 bid, 128.125 asked. The stock closed down 41c to $34.64.

Then, Duane Reade Inc. rose sharply, with the convert gaining 1.5 points to 41.75 bid, 42.75 asked as the stock added $1.58 to $16.52.

Another notable movement was in First Data Corp.

The First Data 2% convertible due 2008 dropped 2.5 points to 110.625 bid, 111.125 asked while the stock lost $1.84 to $34.08.

A dealer said the decline in First Data stemmed from a Briefing.com blurb about the possibility that it could possibly lose one of its three biggest customers in the next three months to a rival.

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