Nextel Partners gains on S&P outlook; Xerox climbs 3.875 on rosy forecasts; Ciber's issue climbs

By Ronda Fears

Nashville, Nov. 26 - Convertibles on whole were firmer Wednesday, dealers said, but most offered a disclaimer of sorts by stressing that trading volume was very thin. Several buyside traders said the convertible arbitrage players were mostly busy in stocks, which exaggerated the slow pre-holiday session.

The holiday tamed an otherwise healthy new issue market in November, thus, Ciber Inc. found success with its small offering. The information technology consulting firm upsized its deal to $150 million from $100 million and buyside traders said it was very active early in the day.

Ciber sold the 20-year convertibles at par to yield 2.875% with a 50% initial conversion premium, on swap, at the tight end of price talk for 2.875% to 3.25%, up 46% to 50%.

A buyside trader said the new Ciber convert traded to 102.375 bid, 102.875 offered and then activity in the issue pretty much died out in the afternoon along with the rest of the market. Ciber shares closed off 5c, or 0.55%, to $9.04.

"Most of everything that was going to get done happened this morning," said a junior convertible trader at one of the bigger shops, adding that many of the senior traders left at noon for the Thanksgiving holiday.

"There were a couple of situations that developed this afternoon, like Nextel Partners, but it was really dead this afternoon. Of course, all the junior staff gets stuck doing the paperwork [after the closing bell rings], but I guess we have to pay our dues, so to speak."

Nextel Partners Inc.'s credit outlook on Wednesday was upgraded to positive by Standard & Poor's, which cited the cell phone marketer's refinancing of its $475 million senior secured bank facilities.

The newer Nextel Partners 1.5% convertible due 2008 was quoted up 2.625 points to 118 bid, 118.5 offered, and the older 1.5% convertible due 2008 was up 4.75 points to 167 bid, 168 offered. Nextel Partners shares ended up 43 cents, or 3.75%, to $11.89.

Nextel Communications Inc., which owns 30% of Nextel Partners, continued to make strides as Lehman Brothers upgraded the stock on Wednesday. The Lehman upgrade echoed the positive sentiment expressed by Moody's on Tuesday when the rating agency raised the cell phone maker's credit outlook to positive.

The Nextel 6% due 2011 saw the most action, traders said, with the issue adding 1 point to 115.875 bid, 116.875 offered. Nextel shares closed up 92 cents, or 3.78%, to $25.25.

Xerox Corp. made a huge move Wednesday, too, following a string of positive news this week.

"They [Xerox convertibles] have been moving up all week, but weird as it sounds, they saw the most activity today, when it seemed like everybody was gone. But someone out there was buying up Xerox," the trader said.

The news flow on Xerox began Monday at its investor conference in New York when chief executive Anne Mulcahy said she is very comfortable with Wall Street's expectations for fourth-quarter earnings of 13-16 cents a share and full-year earnings of 50-55 cents a share. The company expects annual earnings per share growth of 35% in 2004 and 2005.

Then, on Tuesday, Merrill Lynch upgraded the stock.

On the stock upgrade, Merrill's convertible research team added the Xerox mandatory to its convertible model portfolio as an equity alternative, citing an attractive valuation.

Xerox's 6.25% mandatory convertible closed on the New York Stock Exchange up 3.56 points, or 3.17%, to 115.85. The underlying stock also saw heavy volume, rising 51 cents, or 4.46%, to close at $11.95 - a new 52-week high.

Fair Isaac Corp. was marked up sharply on the pop in the stock from a Smith Barney upgrade to buy from hold, another buyside trader said, adding that "there wasn't really a live market on the converts." He said the stock upgrade was based on valuation "as well as the fact that expectations have been lowered to a more realistic level."

The business consulting firm's stock soared on heavy buying, closing up $2.64, or 5.02%, to $55.26. The trader said the convertibles were marked up 8.875 points to 114.875 bid, 115.375 offered.

There were some issues heading south going into the holiday, though.

Lincare Holdings Inc. and Apria Healthcare Group Inc. were still getting pinched from the new, lower reimbursement provisions for respiratory services in the Medicare reform bill.

Deutsche Bank downgraded Lincare Holding Inc. stock to sell from hold on Wednesday, although Legg Mason upgraded Apria stock on Monday before the health aid program revisions cleared Washington on Tuesday.

In a statement Wednesday, Lincare said it was scrutinizing the new bill but admitted the full impact will not be clear until 2005, and noted even the government is still reviewing the changes adopted. As it is, the company made several key observations but did not assess the full impact.

Right now, it appears that the bill will cut reimbursement for inhalation drugs from 95% of wholesale prices to 80%, the company said. For durable medical equipment, rates will be frozen from 2004 to 2006. The rates for the top five services will be adjusted in 2005 to reflect prices paid under the Federal Employee Health Plan. And, in 2007, competitive bidding will begin in the largest metropolitan areas.

Also, Lincare said in its statement that it does not believe that the provisions contained in the new Medicare bill would adequately compensate home care providers for inhalation drug therapies.

"The affect on payment rates for our services in 2005 and subsequent years will not be known until some time in 2004 when additional studies and reporting mandated by the Medicare bill are completed by the GAO [Government Accounting Office] and other federal agencies," Lincare chief executive John P. Byrnes said in the statement.

Lincare's convertible has dropped all week, as has been the case with Apria Healthcare's convertible.

Lincare's 3% convertible due 2033 lost another 0.5 point Wednesday to 96 bid, 97 offered while the stock ended down another 66 cents, or 2.19%, to $29.46.

Apria Healthcare's 3.375% convertible due 2033 fell 1 point to 110.5 bid, 111 offered with the stock closing down 50 cents, or 1.84%, to $26.65.

Eastman Kodak Co. was steady Wednesday, but some traders said there could be some pressure from the Standard & Poor's cuts to its credit outlook to negative from stable.

S&P expressed concern that Eastman Kodak's acquisition pace may outstrip cash flow generation and preclude debt reduction.

"Kodak is executing the acquisition strategy it unveiled on Sept. 25 more rapidly than Standard & Poor's had expected," the rating agency said. "This is a concern, given the company's uncertain intermediate-term earnings prospects."

In the past two months, Kodak has announced more than $300 million in acquisitions in addition to roughly $600 million identified before Sept. 25, which are part of a plan for $3 billion in acquisitions from 2003 to 2006.

Liquidity remains adequate, S&P noted, adding that discretionary cash flow is solid, which is crucial to Kodak's credit profile. At Sept. 30, Kodak had $983 million in cash and $849 million in commercial paper outstanding.

Then, in early October, the filmmaker sold $1.075 billion of debt, including $500 million of convertibles, to reduce commercial paper borrowings as they mature and partially fund the $500 million purchase of PracticeWorks Inc.

Kodak's 3.375% convertible due 2033 was quoted flat at 108.125 bid, while the stock closed up 14 cents, or 0.58%, to $24.40.

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