Convertibles flat in slow, choppy session; Nortel slides on downgrade to junk status

By Ronda Fears

Nashville, Tenn., April 4 - Convertibles ended basically flat in a thin, choppy session. Busted names that continue to make headlines were the focus du jour, with Nortel Networks taking the spotlight Thursday as its credit was cut to junk status.

Retail issues headed north and many are not busted, traders said, just expensive.

"It's just been very quiet," said John Siebel, a convertible trader at Silverado Capital Management.

"A lot of the names that are making headlines are busted. We're massaging our positions, adjusting hedges."

With volatility still declining, after a sharp contraction at the latter part of March, many hedged convertible players are feeling some pain as a result.

"Vol is coming in, so the market is cheapening. There was a very sharp contraction at the end of March," Jeff Siedel, convertible analyst at Credit Suisse First Boston.

"A lot of the hedgies, whether they'll admit it or not, are feeling it."

With a large portion of the convertible market busted, traders and portfolio managers are scouring the market in search of yield pickup and trade opportunities.

"It's really rough right now," said the head trader at a hedge fund in New York.

"What's not busted is very rich, very expensive. So opportunity is getting slim."

Thus, activity is very stilted without a heavy new-issue docket.

Nortel saw some action, mostly selling, after Moody's cut its credit rating to junk. But traders said there was not a mass exodus in Nortel on Thursday.

The Nortel 4.75% convertible due 2008 was already busted and on Thursday, the convert was quoted down 1 point to 69.75 bid, 70.25 offered as the underlying stock lost 11c to $4.24.

Moody's said the timing of the downgrade was not due to anticipated results for the first quarter but rather the expectation that Nortel's operating performance will remain under pressure for an extended period and that it will be difficult for the company to return to profitability this year.

Nortel is due to report earnings April 28.

In response to the downgrade, Nortel chief executive Frank Dunn said no effect was expected on day-to-day operations, but it did trigger a series of liens, pledges and guarantees against assets to secure credit agreements.

"We see the downgrade as being primarily driven by industry conditions affecting the telecom sector following the events of 2001," Dunn said.

"Our work plan for dealing with conditions in the wake of last year contemplated and factored in the possibility of credit rating downgrades. In arranging our credit facilities, we took the possibility of downgrades into account. We are prepared. We gave ourselves flexibility to ensure we'd continue focusing on our priorities and objectives for regaining market momentum and profitability. It is business as usual."

Much of the market had anticipated it, too, what with widespread credit downgrades or downgrade warnings in the telecom sector, most recently regarding NTL Inc. and Corning. In addition to credit-related worries, some in the telecom sector face tougher scrutiny for accounting issues, like Qwest Communications.

Qwest said on Thursday that the SEC has converted an informal review of its accounting issues, chiefly stemming from its merger with USWest, into a formal review. Qwest has been considering a big convertible issue, but market sources suspect that may be put on hold pending a resolution of the SEC probe.

Only small overnighters are trickling into the market, a pattern seen for the past few weeks now.

Early Thursday, terms emerged on an overnight Rule 144A deal from Skechers USA Inc. for $75 million via CIBC World Markets.

Skechers sold the deal at par to yield 4.5% with a 20% premium, which analysts said was right at fair value, assuming a credit spread of 900 basis points over the comparable Treasury note and 43% volatility.

The new Skechers convert was quoted up 1.25 point from par to 101.25 bid, 101.75 offered as the shoemaker and retailers' stock dropped 74c to $20.90 on the new issue.

Otherwise, retail issues were one of the bright spots in terms of gaining ground. Among the ones moving up were the new Gap issue, J.C. Penney, Costco and Genesco, another shoemaker.

But many of those issues are considered rich, traders said.

Gap's 5.75% convertible due 2009 added 2.75 points to 117.75 bid, 118.5 offered with the stock up 51c to $15.27. J.C. Penney's 5% due 2008 gained 2.875 to 92 bid, 92.5 offered as the stock rose 94c to $20.06. Costco's 0% due 2017 added 1.25 to 90.75 bid, 91 offered while the shares gained 57c to $39.47. Genesco's 5.5% due 2005 gained 3.5 to 132 bid, 132 offered with the stock up $1.03 to $27.08.

Power names were lower, particularly those with any California connection as renegotiated power deals with that state are close to being finalized. California is negotiating to revise or exit altogether some $42 billion of high-priced long-term power deals signed with several suppliers last year during the height of the state's energy crisis.

Calpine accounts for about one-third of the $42 billion. Calpine 4% convertible notes due 2006 dropped 1.625 points to 92 bid, 92.25 offered on Thursday. Calpine shares closed down 35c to $11.93.

The exit from Adelphia tapered off, traders said, and the converts were basically flat.

Adelphia's 6% convertible notes due 2006 (B3/B) was quoted unchanged at 71 bid, 72 offered, as was the 3.25% convertible notes due 2021, which are putable in May 2003 at par, at 84 bid, 85 offered. Adelphia shares lost another $1.04 to $10.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.