Market mixed in choppy trade; new deal surge continues

By Ronda Fears

Nashville, May 6 - In spurts, traders said it was a busy session in convertibles Tuesday, but widely mixed overall. Even the recent influx of new issues were not moving in any remarkable fashion. After the close, Nextel Partners Inc. pitched its hat in the ring with a small $100 million overnighter.

Stocks and bonds moved upward on speculation that the Federal Reserve would leave interest rates alone, which indeed came to pass, but convertibles "were surprisingly unresponsive" to those forces, as one dealer put it.

"We had these two deals today [Edwards LifeSciences Corp. and LIN Television Corp.] and I never even saw a gray market on them at all," said a convertible trader at a hedge fund based in New Jersey.

"These are basically junk bonds at convert rates. I wasn't impressed enough to place an order, though, so I really wasn't paying much attention to them."

Some sellside traders said the LIN TV deal traded in the gray market, but below par on rumors that the terms would be tightened.

LIN Television sold $100 million of 30-year exchangeable subordinated notes, which convert into parent LIN TV Corp.'s class A shares, at par to yield 2.5% with a 72.5% initial conversion premium, with a warrant kicker.

While indicative terms were not revised, the overnight Rule 144A deal came with a tighter yield than talk of a 2.75% to 3.25% coupon. The premium was set smack in the middle of guidance.

The television company also sold $200 million of 10-year senior notes at par to yield 6.5%. Proceeds from the sale offerings will be used to redeem its existing 8.375% senior subordinated notes due 2008.

The convertible was closed out Tuesday at 99..875 bid, 100.125 offered by JPMorgan, the lead banks.

LIN TV shares ended up 64c, or 3%, to $22.25.

Edwards sold $125 million of 30-year convertible senior notes at par to yield 3.875% with a 90% initial conversion premium.

The overnight Rule 144A issue sold at the cheap end of guidance. It was closed out by one of the lead banks at 101.25 bid, 101.75 offered.

Edwards shares ended up 42c, or 1.5%, to $29.19.

After the closing bell chimed, Nextel Partners launched $100 million of 5.5-year convertible senior notes talked to yield 1.5% to 2.0% with a 37.5% to 42.5% initial conversion premium in the overnight Rule 144A market.

Nextel Partners shares closed off 9c, or 1.5%, to $6.

"I'm still taking a look at it," said a convertible manager on the West Coast.

"The yield is light but the premium looks more reasonable, I suppose, at least relative to a lot of the other deals we've seen lately. I still can't get over the deals coming at 0%, up 40% and issued at par."

Traders say a lot of the newest convertibles are not trading very actively, but a couple mentioned were Maxtor Corp., Grey Wolf Inc. and AirTran Holdings Inc. - all which priced with heftier coupons than most of late. All were higher except Maxtor, which was quoted off about 0.25 point.

While the Fed left rates unchanged, most onlookers are expecting interest rates eventually will begin to tick higher and many in the convertible market fear the new deals with high premiums will be a big disappointment.

"When short-term rates go up, your carry cost will be higher and when the stocks start heading up, you won't see any of that," said a convertible trader at a huge hedge fund in New York.

"You're going to get crushed. And I don't think the volatility is going to carry these things," he added, mentioning the Mandalay Resort Group, Wells Fargo & Co and Walt Disney Co. convertibles.

To some extent, dealers said a good deal of activity in converts, especially in the tech area, was stunted by considerable nervousness surrounding Cisco System Inc.'s earnings report after the close.

In the secondary market, few new issues were on the lips of traders.

Activity in general was choppy, dealers said, with earnings and headlines steering convertible players.

Lucent Technologies Inc. and Juniper Networks Inc. were still seeing a bit of action from their pact, however. Lucent's convertibles were about 2 points higher, according to one trader, who also noted that the Lucent junk bonds were seen about 1.5 points higher. Juniper's converts were said to be flat, though.

Meanwhile Capital One Financial Corp. moved sharply higher.

Early Tuesday, one trader said, a rumor made the rounds that Capital One was the target of a takeover by the Royal Bank of Scotland, and Capital One securities "shot up like a skyrocket."

"Who knows if there really is any concrete reason for anyone to believe this," the trader said.

"I saw some headline or news article that said they [Royal Bank of Scotland] was 'interested' in making a play for Capital One, but that's not very solid."

Capital One's 6.25% mandatory closed up 1.35 points, or 3.5%, to 39.9 and the common stock ended $2.21 higher, a 5% gain, to $46.60.

Ted Turner's sale of his AOL Time Warner Inc. stake, cutting his interest in half, stirred some sellers of AOL-linked paper, dealers said, but no massive exodus.

There also were more sellers of energy and power paper, and Stuart Novick, a convertible analyst at Citigroup, said Warren Buffett's less-than-enthusiastic remarks about that sector was a likely catalyst for some selling.

Also, Calpine Corp. on Tuesday said it expects a first quarter loss because of $47 million in charges, among other things, but said profit excluding those one-time items would be in line with its expectations. No operating income forecast was provided, but previously the company put 2003 earnings in a range of 40-50c a share.

Meanwhile, Calpine said it continues to work with its lenders on a two-year refinancing of its $500 million and $600 million working-capital facilities. The company said it expects to complete this refinancing in the near term.

In addition to Calpine, Mirant Corp., El Paso Corp. and AES Corp. were sharply lower, traders said.

In mid-April, Calpine switched accountants to PricewaterhouseCoopers after Deloitte & Touche LLP resigned. Thus, the earnings filing has been delayed.

No other news emerged from the power sector, other than Mirant announcing it will host an analyst call at 10 a.m. ET Wednesday to discuss its 2002 financial results, operational outlook and provide a general business update.

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