Sellers emerge; Charter weaker on junk deal; Lucent leads telecom paper sharply lower

By Ronda Fears

Nashville, April 20 - Convertible traders noted the emergence of sellers Tuesday as comments from Federal Reserve chairman Alan Greenspan evoked more forecasts of an impending interest rate hike, some as early as June.

"There definitely was more for sale today in the market," one dealer said, at a small sellside shop.

With the selloff in equities at the end of the day and with the bond market weaker, "this should shake some things out a bit," he said, adding that it may be "wishful thinking on my part."

But traders at the bigger bulge bracket desks said they were not anticipating a long-term cheapening in the convertible market.

"There's too much money still sloshing around," one trader said.

The only caveat to any sustained market cheapening, another dealer said, would be if there were some heavy redemptions, massive amounts of cash taken off the table to put into stocks or elsewhere. Then, he said, there might be a marked cheapening but still only as a "window of opportunity" for buyers looking for relative bargains.

"That's not encouraging, for it means that everything will stay very tight and no real good ideas will come up," said the trader at the smaller shop. "Oh well, maybe trading will pick up."

For right now, traders said it appears that convertible investors "are waiting on new paper for [buying] opportunity."

To that end, Mercury Computer Systems Inc. launched $100 million of 20-year convertible notes talked to yield 2.0% to 2.5% with a 30% to 35% initial conversion premium. The deal is slated for Wednesday's business.

But for the most part, the primary market is expected to be very quiet this week, according to sources at the big convertible underwriting shops. Several deals are in the works, just not likely to launch this week what with all the turmoil related to rates.

Lucent weighs on telecoms

Lucent Technologies Inc. reported another profitable quarter, traders said, but a slide in revenues sparked a sharp selloff that quickly spread throughout the entire telecom equipment sector and into the broader telecom group.

Murray Hill, N.J.-based Lucent reported net income of $68 million, or 2 cents a share. It was Lucent's third quarterly profit, but compared with a net loss of $553 million, or 14 cents, in second quarter 2003. A 9% decline in revenues, to $2.19 billion from $2.26 billion, was the market's focus, however, as a potential barometer of future results.

Lucent's 2.75% convertibles were down 11 to 13 points with the 2023 issue pegged at 143 and the 2025 issue at 150. Lucent shares fell more than 10% to close at $3.89.

Other key losers were Level 3 Communications Inc. and Juniper Networks.

Level 3's newest convertible, the 2.875s, came in about 0.25 on a delta neutral basis, at the 80 level, and the busted 6s due in 2009 and 2010 were weaker also. A sellside shop put the 6s at about 60. Level 3 shares lost 19 cents, or 5.16%, to close at $3.49.

Charter slips on tight junk deal

Charter Communications Inc. lost ground Tuesday even as the company sold a $1.5 billion junk bond deal to refinance some bank debt, and buzz still swirled that at least one of its convertible issues is the next refinance candidate.

The Charter 4.75% convertibles were off about 0.25 point at 94.25 bid, 95 offered and the 5.75% converts off about 0.125 point at 97 bid, 97.5 offered. Charter shares closed down 12 cents, or 2.59%, to $4.51.

Analysts said, however, that the Charter junk bonds were pricing far too tight.

Charter sold an eight-year tranche for $1.1 billion with an 8% coupon, or at a spread of 387 basis points, versus price talk in the 8.125% area. The St. Louis cable company also sold a 10-year tranche for $400 million printed with an 8.375% coupon - right at price talk - for a spread of 399 basis points.

Merrill Lynch bond analyst Matthew Crakes said in a report that talk of an 8.25% coupon even was too tight, and he suggested playing Charter's new bank facility instead.

Crakes said he felt the new deal should come around 8.25% to 8.5% given a restructuring is likely at Charter longer term and its new bank facility priced at Libor plus 300 basis points, which is equivalent to a flat Libor curve yield of 7.5%.

"The main reason the new notes should price in this area is due to strong demand from single-B-only investors that have had difficulty holding Charter paper below single B," the Merrill analyst said in the report.

"Accordingly, at the current price pro forma, we would pass on the deal but would offer a neutral rating on the new notes as there is little chance of long term impairment. However, based on the likelihood of a future balance sheet restructuring (through a massive debt for equity swap, pre-pack, or outright bankruptcy), relative value versus other credits and interest rate risk, we see more compelling value in several other credits."

Charter has discussed selling stock or issuing a new convertible offering to deal with the old convertibles.

Charter still has more than $3 billion of zero-coupon notes that turn cash pay between 2004 and 2007, Crakes said, and will add $350 million or more of cash interest expense, further pressuring free cash flow and Charter's debt servicing ability.

"We remind investors of our high-yield axiom: If a company is not growing EBITDA faster than its zeros are accreting, a restructuring is the likely outcome," Crakes said in the report.

Yellow rides CNF tide upward

Yellow Roadway Corp. stock was higher Tuesday in sympathy with trucking competitor CNF Inc. reporting stronger profits amid gains in shipping volume, and the converts were one of very few issues that caught a bid.

The Yellow Roadway convertibles were bid up about 1 to 1.25 points, one buyside trader said, with the stock up 40 cents, or 1.19%, to close at $34.11.

CNF officials said in the company's earnings conference call that trucking volumes picked up in first quarter and were expected to rise again this quarter.

Yellow Roadway reports earnings on Friday.

Vol ideas from Lehman

In Lehman Brothers' convertible research team's monthly volatility watch report, out on Tuesday, a few ideas popped up.

With volatility running below average, and a positive view on the stock at Lehman, analysts suggest consider buying call options on the underlying stock if you're holding the American International Group 0.50% or 0%, Best Buy 0.684%, Cendant 3.875%, Devon Energy 0% or TJX 0% convertibles.

With volatility running below average, and a negative view on the stock at Lehman, analysts suggest consider buying put options on the underlying stock if you're holding the Duke Energy 1.75%, Equity Office Property 7.25% or Xcel Energy 7.5% convertibles.

With volatility running above average, and a positive view on the stock at Lehman, analysts suggest consider selling put options on the underlying stock if you're holding the Countrywide Credit 0% convertibles.

The report, launched just a couple of months ago, builds on Lehman volatility analyst James Hosker's weekly publication that tracks single stock volatility, zoning in on companies with convertibles outstanding whose six-month at-the-money implied volatility is more than one standard deviation away from the one-year average.

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