Convertibles mixed, flat on doubts, anxiety

By Ronda Fears

Nashville, Tenn., Feb. 22 - Convertibles were widely mixed and described as flat Friday, although stocks bounced slightly. Traders said activity was light as investors remain doubtful and nervous about the economic recovery in light of continued profit warnings and misses. There was no word on Cox Communications' attempt to forego the put on its convert, and the market looked for financing news from Calpine Corp. but nothing came before the close. JPMorgan-linked converts were lower as regulators and lawmakers turned attention to Wall Street regarding the Enron collapse.

"Trading was very light today. No one is going to have a great deal of faith until we see a nice string of higher days," said the head trader at a major investment bank in New York.

"The tone is very nervous still."

There was considerable nervousness surrounding Calpine's procurement of a $1 billion unsecured working capital facility that it has been working to get for six weeks now.

"It is crucial for Calpine to get this done. If they can't make this happen, at pretty decent terms, there will be hell to pay," said the head trader at hedge fund in New York.

"There is already an enormous crisis of confidence with regard to the independent power producers, Calpine and AES."

Well after the market close, there had been no word from Calpine on the situation. The Calpine 4% convertible notes due 2006 closed down 0.875 point to 74.125 bid, 74.375 offered while the common lost 21c to $7.11.

Confidence has also been shaken in Wall Street analysts ever since the Enron fall began. As regulators and lawmakers turned to the investment industry to further probe the energy trading giant's demise, investment bank-linked issues struggled Friday as equity analysts were quick to defend the stocks. JPMorgan-linked converts, and even Merrill Lynch, were lower throughout the day but made a late comeback.

The Jardine Matheson 4.75% exchangeable note due 2007, which converts into JPMorgan shares, was quoted off 0.625 points to 90.125 bid, 90.625 offered as the underlying stock dropped 95c to $28.19. The Merrill Lynch 0% convertible due 2031 (Aa3/AA-), which was issued at 51.11 in May 2001, was flat at 50.875 bid, 51.125 offered as the stock closed up 24c to $46.95.

JPMorgan was under more pressure, as it was the subject of a Federal Reserve Bank of New York examination of the way J.P. Morgan Chase & Co. accounted for commodity-related trades with Enron, according to The Wall Street Journal. At the same time, the U.S. House Energy and Commerce Committee said it is preparing to send letters to Wall Street investment banks in what the committee chairman described as the next phase of the panel's sweeping investigation of the Enron collapse.

Stocks showed a slight rebound, with the Dow Jones Industrial Average up 1.4% and the Nasdaq up 0.5%, but traders said much more was required after Thursday's slide in order to calm the market's case of nerves.

"With the Intel and Ciena news yesterday and Circuit City today, there's a great deal of uncertainty about where the bottom is and when we will reach capitulation," said a convertible trader at a hedge fund in New York.

"Jobless claims seem to be on the rise again, too, and all the accounting fray has not begun to subside - that's probably really just begun. We are betting on quite a bit more downside to this market."

Buyers turned out for the new Amgen deal, however, and it lifted moods somewhat on the prospects of new deals in the current market climate. But the new convert was quoted unchanged from issue price in the immediate aftermarket, as Amgen shares slipped 4c to $57.55.

Amgen fetched $2.5 billion in proceeds from the 30-year zero-coupon convertible senior notes, selling the deal at the midpoint of yield talk and the cheap end of premium guidance with a yield-to-maturity of 1.125% and 40% initial conversion premium. The A2/A rated issue sold at 71.423.

Elsewhere in the secondary, dealers said investors seemed to be looking for cover but also still showed concern about valuations.

L-3 Communications sank as the stock dropped on valuation concerns, traders said, despite L-3's participation with a team headed by Boeing Co. seeking a multi-year, multi-million dollar contract with the U.S. Air Force for wideband satellite communication terminals. The L-3 4% convertible due 2011 (Ba3/B+) declined 0.875 point to 119 bid, 119.375 offered and the 5.25% convertible due 2009 lost 1.25 to 150.625 bid, 151.125 offered as L-3 shares dropped $1.10 to $110.80.

J.C. Penney continued to get pounded in the wake of allegations about Eckerd altering billing records related to a lawsuit accusing the drugstore chain of overcharging customers on prescriptions. The J.C. Penney 5% convertible due 2008 dropped another 1.5 points to 93 bid, 93.5 offered while the common lost 51c to $20.28.

Best Buy also was sharply lower, getting punished as a result of Circuit City's profit warning. The ripple was fairly broad in the retail sector, traders said, going beyond electronics retailers. Best Buy's 0.648% convertible discount note due 2021 (Baa3/BBB-) was down 1.5 points to 73.75 bid, 74.75 offered and the 2.25% convertible due 2022 lost 2 to 95.875 bid, 96.5 offered as the underlying stock dropped $3.04 to $67.61.

Software names were also hurting after Wind River Systems late Thursday reported a wider loss that missed expectations.

The software provider posted a net loss $50 million, or 64c a share, compared with a loss of $10.6 million, or 14c a share, a year ago. Analysts had been expecting a loss of 1c per share. Fourth quarter revenue rose to $80.5 million from $80.1 million in third quarter, but fell 38% from the year-ago period. For first quarter, the company expects a pro forma loss between 2c and 4c a share on flat to 5% lower revenues.

Wind River's 3.75% convertible note due 2006 (B-) was as much as 15.5 points lower during the session, but closed down 12.25 to 82.5 bid, 83.125 offered as the stock lost $3/63 to $11.40.

Other software names lower included Siebel Systems although Veritas Software was higher.

Next week, traders said the market is looking forward to several new issues. So far, only the AmerUs $150 million deal with a new structure and Ameren Corp.'s $300 million mandatory are firmly scheduled to price.

"With just a little bit of encouragement from the stock market, we could see a couple of overnight deals next week," said a convertible trader at hedge fund in New Jersey.

"Some of these issuers are not going to be able to put off their plans much longer. What will be interesting is to see how pricing terms shake out."

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