Convertibles fall on tech slide, Calpine heads farther north

By Ronda Fears

Nashville, Tenn., Dec. 20 - Convertible traders said the market dropped Thursday as tech issues suffered from more profit warnings and weak results in the contract manufacturing and networking sectors. Weakness in contract manufacturing also struck Solectron Corp. as it readied a $1 billion mandatory convertible, but the deal is said to be over-subscribed. New paper was feeling the market's bump, but Calpine's new convert gained another 4 points on heavy trading.

"My screen is all red not much green at all," said a convertible trader at a major investment bank. "The Jabil Circuit news and Juniper Networks hurt. A good portion of the market was down in sympathy, or maybe in fear. There was quite a bit of selling going on, but I'm not sure I'd call it anything extreme."

Stocks' decline was widespread, with the Nasdaq posting a whopping drop of 64.35, or 3.25%, to 1918.54 and the Dow Jones Industrial Average falling 85.31, or 0.85%, to 9985.18.

"There's usually the year-end slump as selling picks up for all sort of reasons, but this is more of a fundamental back-tracking. People are really getting concerned about some of the names in telecom, semiconductor, networking, software, hardware, it's a pretty broad stroke in the convert market," said another convertible trader at a major investment bank.

"New paper was feeling it today. Three have been a sprinkling of new deals from the tech area and they have been hit. Most of those deals were pretty small, though, and will have little impact on the market. Solectron, however, is a major component of the convertible market. It has been hit hard by the new mandatory convert, and its earnings, and the downgrade. It is being closely watched."

Solectron's shares were down $1 to $9.81 on Thursday just ahead of the pricing. The deal is said to be at least 1.5 times over-subscribed. Solectron's zero due 2019 were unchanged at 50.625 bid, the zeros of May 2020 were off 0.5 to 52.5 bid and the zeros of November 2020 dropped 1.875 to 41.125 bid.

The biggest hits in the convert market Thursday came in Solectron's sector, electronics manufacturing services firms, traders said. Jabil Circuits Inc. rocked the group with its drop in net income and warning that its next quarter results aren't likely to meet analysts' expectations.

That sent the group in a tailspin, with Jabil Circuits' 1.75% convertible due 2021 losing 6 points on the day to 92 bid, 92.75 offered as the stock lost $3.50 to $21.25. Celestica was also lower, and Sanmina's 4.25 % convert due 2004 dropped 6 points to 107.375 bid while the zero due 2021 declined 0.5 point to 37.625 bid with the stock down $1.90 to $19.59. The SCI convert, now in the Sanmina family, a 3% issue due 2007, lost 2.25 points to 72.5 bid.

"It was pretty bloody in the EMS group today," one trader said. "There is going to have to be a huge restructuring in that group. The ratings agencies apparently think more job cuts need to take place, and there already have been enormous job cuts. Their balance sheets are way out of whack with their stock dropping in value so much this year. That's why the Solectron deal had to be a mandatory."

Networking issues were also lower on Juniper Networks' warning about the upcoming quarter as it lowered its forecast for earnings. Juniper Networks' 4.75% convert due 2007 was off 0.5 to 73 bid, but traders said most of the bad news had already been priced in. Others in the group, like Riverstone Networks, Corning and Brocade Communications showed a bigger drop. Brocade's new 2% convert due 2007 was down 3 to 97 bid, 97.25 offered as the stock lost $2.71 to $31.60.

Other new paper was slipping, however, along with much of the market, traders said. Electro Scientific Industries Inc.'s 4.25% convert due 2006 was down 1 to 97.1875 with the stock off 8c to $28.21. Sandisk was also lower, along with the bulk of the tech sector.

About the only bright spot, traders said, was the new Calpine convert, which was traded heavily Thursday.

Calpine's 4% convert continued to climb, gaining another 4 points to 106 bid, 106.5 offered as the underlying shares added 16c to $14.85. The zeros due 2021 rose 0.875 to 97.125 bid, 97.375 offered. The 5.75% convertible preferred were up 0.5 point to 54.875 bid, 56.375 offered and the 5.5% convertible preferred gained 0.5 point to 40 bid, 40.625 offered.

One other positive note, traders said, was heavy buying in the new Xerox Corp. convert as the company announced it won a suit against 3Com Corp. and Palm Inc. with a ruling that their handheld electronic organizers infringe on Xerox patents for handwriting recognition software. The 7.5% convertible trust preferred due 2021, which sold at par of 50 a month ago, gained 2.875 points on the day to 62.5 bid, 62.75 offered. The stock was up 56c to $9.03.

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