TXU convertibles soar 3 points on new CEO; J.C. Penney higher as Eckerd sale expected

By Ronda Fears

Nashville, Feb. 23 - Convertible players were sidelined for the most part by the ongoing downdraft in stocks, dealers said, but seemed poised to become buyers on the weakness. It was a slow day for the primary side of the market, as well, with only one small deal emerging, from BankUnited Financial Corp.

"We were getting a lot of calls, a lot of interest, today but didn't trade a huge amount," said a sellside convertible trader at one of the busiest desks.

Convertibles were softer almost en masse, he said, but players were hesitating to start the bidding on the weakness, as in and of itself the weakness was a major concern.

"There is some concern that this might turn into a correction, with comments about bubbles and stuff like that, so there's some hesitation about stepping up," the trader said.

"We don't really see it that way. The worm will turn, and it will be quick, but I couldn't say what that's going to be; but when it happens, then we'll see a nice spike."

There were precious few gainers in the session, traders said.

Lucent Technologies Inc. was one of the more liquid names moving higher, latching onto the gains at Qualcomm Inc. as it raised its outlook, one buyside trader said. Most other telecom issues were lower, however.

J.C. Penney Co. Inc. saw a slight uptick on a blurb that its sale of the drugstore chain, Eckerd, may be forthcoming. Traders said volume was "pretty decent" in the convert.

TXU Corp. was the news-maker of the day, though, with the stock hitting a new 52-week high and the three convertibles gaining 2 to 3 points after the Dallas-based utility named a new chief executive from the upper ranks of Entergy Corp. (See full story elsewhere in this edition.)

Primary slows in final week

The primary market got off to a slow start for the last full week of February, but it has already been a busy month that pushed issuance figures past year-ago levels.

As of the end of last week, year-to-date convertible issuance totaled $10.18 billion, compared with $9.81 billion during the same period in 2003.

Capital markets sources said the surge will be a source of momentum for issuance.

"This was really just a slow start for the year, at least the first half of the year when we think convertible new issues will be the busiest," one top origination official said.

Some buyside sources are skeptical, however.

"Convertibles are not the financial of last resort now that stocks have rallied back. The dip right now could be a setback for some, but not the market as a whole," said a hedge fund manager in Connecticut.

"I think the capital markets guys are going to have to work really hard to get the business under these conditions. Maybe that's why we've been seeing so many bought deals."

Until the latest AMR Corp. deal earlier this month, which was reoffered at 98.5, though, there hadn't been any bought deals reoffered below par since early December, and capital markets sources say that's a trend they see falling by the wayside.

"I think repricings for the most part are gone," said the top origination official.

"The convertible market is becoming too sophisticated for that to continue for long."

BankUnited's deal was the only deal yet to surface for this week. The $100 million of 30-year convertible notes were talked to yield 2.625% to 3.125% with a 42% to 48% initial conversion premium and were set to price before Tuesday's open.

Retailers seesaw, end mixed

Several traders mentioned comments from Citigroup Global Markets Inc. equity analysts Monday that a decision from J.C. Penney on its Eckerd drugstore chain "could be imminent." The predominant expectation is that Penney will sell the unit, although the price tag is still a matter of debate.

"The estimates keep going up for how much this sort of transaction could be, and that's strong support for the Penney credit," one dealer said.

J.C. Penney's 5% convertible gained 0.125 point to 112.75 bid, 113.25 offered with the stock closing up 13 cents, or 0.46%, to $28.54.

J.C. Penney has been wrangling with what to do with Eckerd for many months and in the last three months or so has gotten closer to determining the drug chain's fate.

Lowe's Cos. Inc., however, was on a downward slope for most of the day after its 7.3% rise in fourth quarter same-store sales, which, while in line with the company's guidance, seemed to disappoint investors.

One trader said the Lowe's watchers were thinking - "who knows why," the trader commented - that the comparables would come out ahead of the company's 6% to 7% range, so they were let down.

Wall Street, or analysts, looked for growth in the high single digits to low double digits, she said.

The Lowe's 0.861% convertible fell 2 points to 107.75, and the 0% due 2021 plunged 2.5 points to 93.5. The underlying stock dropped $1.71, or 2.93%, to $56.67.

Photronics CEO resigns

While the markets cheered TXU getting a new chief executive, traders said similar news could be a negative for Photronics Inc., which announced after the close that its chief executive, Dan Del Rosario, had resigned.

Photronics shares had closed Monday down 43 cents, or 2.24%, to $18.73, and a trader said the stock fell another 4% in after-hours trading.

"It's really difficult to make a call on these types of things but the market looks to be taking it poorly," one dealer said.

The Photronics 2.25% convertible due 2008 was weaker already on Monday, pressured by the stock. The issue dropped 2.125 points to 142.375 bid, 142.875 offered.

Photronics said Rosario's resignation was effective immediately, to "pursue other interests." The maker of photomasks used in chip manufacturing said Rosario also resigned as a member of the board.

Board chairman Constantine "Deno" Macricostas will act as interim chief executive, the company said.

Also, Photronics said a search for a permanent CEO has already begun. The board of directors will be evaluating internal candidates as well as potential candidates from outside Photronics, according to a company statement.

"Photronics' long-term strategy remains unchanged," Macricostas said in the statement.

"The company's board and management team will continue building on its strategic competitive position with the goal of capitalizing on opportunities in Asia, Europe and North America. As our first quarter results demonstrate, our entire global team is committed to strengthening our organization and to the continuous improvement of our already strong financial position.

"I am confident that as the current cyclical upturn gathers additional momentum, Photronics' ability to deliver the innovative reticule technology and service solutions will be the key to creating shareholder value for our investors," Macricostas continued.

For fiscal first quarter 2004, ended Feb. 1, Photronics reported a profit versus the year-ago loss, citing an improving business climate in semiconductors.

Photronics posted net income of $2.1 million, or 7 cents per diluted share, compared with a net loss of $8.5 million, or 26 cents per diluted shares, in fiscal first quarter 2003. Sales for the period totaled $90.5 million, up 11.2% from $91.5 million a year earlier although lower than the previous quarter.

The sequential decline in quarterly sales, the company said, was largely the result of customers closing down wafer fabrication facilities during the year-end and Asian New Year holiday periods.

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