Convertibles lower on warnings, but Lucent trots out new deal

By Ronda Fears

Nashville, Tenn., March 12 - Convertibles were lower on a spate of warnings from the tech and telecom sectors, which took it on the chin and sparked a flight to quality amid heavy volume. After issuing a warning, Lucent Technologies Inc. launched a $1.5 billion new deal, and market sources were mixed on what the reaction will be to the new paper.

Aside from the general search for shelter in the secondary, traders noted profit taking in Calpine Corp. as the long-awaited news on its new bank facility came, which brought a credit downgrade. Traders said investors were still holding pat with Tyco International Ltd., as the company confirmed bids on its plastics unit and said it would cash in on its holdings of CIT Group Inc. before spinning off the financing unit. Also, as anticipated, Performance Food Group Corp. was hit hard on the accounting errors news.

Moreover, credit downgrades are pressuring a good deal of the market, traders said.

"Flow was very healthy today," said the head convertible trader at a major investment bank in New York.

"The trepidation we began to see late yesterday was extended and amplified by the Lucent news and Nokia's warning. People are still pretty nervous. There are still a lot of downgrades coming down the pike and it's just not pretty on the credit front. That is weighing a lot on the market right now."

Dealers said there was considerable selling in tech and telecom paper after warnings from Lucent and Nokia, and the more defensive areas like financials, homebuilders, defense and retail were finding buyers.

Lucent cut its revenue forecast and said a return to profitability now will be delayed until fiscal 2003, which prompted a credit downgrade by S&P to B+ and a review for downgrade by Moody's. Lucent said it has sufficient liquidity to fund its operations and business plans and has no outstanding balance on its credit facility, but is pursuing the convertible to further strengthen its balance sheet and provide more excess liquidity.

The new Lucent $1.5 billion of 15-year cumulative convertible trust preferreds comes just a little more than six months since its $1.9 billion convertible trust preferred deal. The new Lucent convertible is expected to have terms similar to the preceding issue, with guidance putting the divided at 7.5% to 8.0% and initial conversion premium between 18% and 22%.

Traders said there was no indication on the new deal in the gray market and the existing convert was lower but on little to no volume, but the stock came under heavy selling pressure as hedge funds prepared for the deal. The existing 8% convertible trust preferred (B3/B-), a 30-year issue that sold last August with a 22% premium, was quoted down 12 points to 98 bid, 99 offered with the stock down 61c to $5.65. Lucent shares were down another 33c to $5.32 in after-hours trading.

"If you put enough on the table you can get a deal done now no matter where your stock is," said a source at an investment bank in New York.

"But whether this is enough is really pretty questionable."

The new issue does not have a put, whereas the existing convert is putable in August 2004 at par, noted a convertible analyst at a hedge fund in New Jersey. Both are non-callable for five years, but the analyst noted that the new issue would extend the hard call protection for another six months or so. The new issue also is expected to have a lower credit rating, at CCC+.

"It doesn't look like there is a compelling argument to buy the new or to swap out of the old one," the analyst said.

"It can be set up to work for you, but we probably won't get in. We didn't buy the old one. It comes down to how firmly you believe this story. Breakeven is in about two years, so you've got to believe they've got that much rope at least."

Calpine Corp. appeared to have gotten a lot more rope, so to speak, when it announced Tuesday the closing on a new $1.6 billion credit facility. The independent power producer also announced further spending cuts, but traders said many people took the opportunity to cash in on the recent surge in Calpine.

The new credit lines also sparked a downgrade by Fitch to BB from BB+, as the new financing was secured against some of Calpine's most valuable assets, and S&P put its BB+ rating on Calpine's unsecured debt on credit watch with negative implications.

Calpine said it would take a $161 million pretax charge against first quarter earnings after canceling orders for 35 turbines from GE Power Systems and trimmed its 2003 budget by another $1.8 billion. The credit facilities include a new $1 billion revolver and an amended $400 million revolving credit facility, expiring May 24, 2003. It also has a new two-year, $600-million term loan, available within 30 days.

The Calpine 4% convertible due 2006 (B+) lost 4.625 points on the day to 91.5 bid, 92 offered as the stock dropped $1.06 to $11.68. Other power names were higher, however, as traders quoted the Mirant 2.5% convertible due 2021 up 1.5 points to 77.5 bid.

Tyco was basically flat on news that it might sell a piece of its finance arm before a possible spin off, which sources said was seen as an indication the conglomerate needs more cash as it seeks to breakup in a restructuring. After the market closed, CIT filed a registration statement with the SEC to spin off its shares to Tyco shareholders, targeting completion in second quarter.

"By that and reading into that, what that means is we are not looking at continuing to hold an interest (in CIT), but may have the opportunity to monetize a piece of it prior to the spin," said Tyco chief financial officer Mark Swartz in a conference call, and also confirmed that bids were received on the plastics unit that meet with what the company hoped to get.

"Last week we received the first round of pricing indications for the sale of the (plastics) business. Those did fall within the range of expectations that we have. And we continue to be pleased with the timing of the disposition."

Bidders were Carlyle Group and Madison Dearborn Partners in a joint bid and Blackstone, Bain Capital and TL Partners in another joint offer.

Tyco holders, however, appear to be sitting on the paper awaiting a clearer picture on the unfolding situation, traders said. The 0% convertibles were both said to be off 0.125 point with the 2020 issue at 66.625 bid and the 2021 issue at 70.25 bid. Tyco shares slipped 62c to $35.

The backlash came as expected, however, for Performance Food Group Corp. After the close Monday, the food distributor said accounting errors at one of its subsidiaries would lower its net income overall by $4 million to $5 million. On Tuesday, the Performance Food Group 5.5% convertible due 2008 fell 16.25 points to 112 bid, 112.75 offered as the stock took a pounding, losing $5.96 to $29.19.

In general, though, traders said retail convertibles were very strong. Barnes & Noble's 5.25% due 2009 (Ba3/B+) added 2 points to 199.5 bid, 120 offered with the stock up 81c to $31.80. Genesco's 5.5% due 2005 (B2/B), was up 1.125 to 132.5 bid as the stock gained 34c to $27.24. J.C. Penney's 5% due 2008 (Ba3/B+) rose 1.5 to 97.75 bid, 98.25 offered while the stock added 47c to $22.16. The Lowe's 0% issues were both up 1.5 with the February 2021 issue at 80 bid, 80.25 offered and the October 2021 issue at 96.75 bid, 97 offered as Lowe's shares gained $1.37 to $43.62.

As for the southward movers, tech and telecom got the brunt of the blows.

Several chip names were sharply lower, traders said, including Advanced Micro Devices, Cymer and Nvidia. But, traders said the Photronics convertibles gained on a new chief executive officer. The new Photronics 4.75% due 2006 added 1.25 to 117.5 bid, 118 offered as the stock rose 61c to $33.71.

Telecoms were also bleeding, traders said, on heightened credit concerns.

Nortel Networks was hit after getting a downgrade Baa3 from Baa2 from Moody's, which kept the ratings on review for possible further downgrade. The Nortel 4.25% convert due 2008 (Baa3/BBB-) lost 3.125 points to 81.75 bid, 82.25 offered as the stock dropped 36c to $5.65.

"I'd say that credit concerns were haunting the market right now," said a convertible trader at a hedge fund in New York.

"And it's probably going to be some time before this ghost is exorcised."

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