Convertible market gains as buyers search for winners in Enron debacle, techs rally

By Ronda Fears

Nashville, Tenn., Nov. 29 - Convertible market players looking for winners in Enron Corp.'s meltdown boosted the market on strong buying, traders said. Calpine Corp. and Mirant Inc. were the top picks investors see having little to no exposure to Enron's collapse and perhaps benefiting from the situation, traders said. Nvidia Corp., the computer graphics firm, also was an unlikely beneficiary, as it replaced Enron in the S&P 500 after the close Thursday.

The market also got a healthy lift as most of the tech group staged a rally, traders said, as signs that the industry has seen a bottom streamed from the CSFB technology conference. And, a new deal was at bat for an overnight pricing - a small $175 million issue from Extreme Networks.

"Today, the focus seemed to hone in on trying to pick the best situated companies in the power sector to benefit from Enron's fall, or at least to switch out of those that have large exposure to Enron into those that have little or none," said a convertible trader at a major investment bank in New York.

"There is some exposure in the convertible universe, but nothing to the extent that the Enron convertibles themselves represent to the market. Calpine and Mirant were clear choices. Others were not seen in such favorable light, like Dominion, Duke Energy, El Paso, a couple of others."

Outside of the Enron situation, there were other factors moving the market north. Several tech issues gained from positive comments coming from the CSFB conference, traders said, including many that were not presenting at the event. The broader market's rebound also lifted the convertible market, as the Nasdaq climbed 45.29, or 2.40%, to 1933.26 and the Dow Jones Industrial Average gained 117.56, or 1.21%, to 9829.42.

Still, there was a great deal of concentration on the events at and around Enron. Several companies with convertibles in play released estimates of their exposure to the Enron situation. Calpine said it has virtually no exposure, NRG Energy sees less than $10 million, Dominion Resources estimates $11 million, Sempra Energy expects less than $11 million, Mirant puts its at $50 million to $60 million, El Paso guesses about $50 million and Reliant Resources puts its at about $80 million.

Calpine went a step further than a company statement, and hosted a conference call early Thursday with analysts. The bottom line was that analysts walked away very positive on the Calpine story. Calpine's zero-coupon convertible due 2021 (Baa3/BB+), which sold at par in April, edged up 0.375 point on the day to 96.5 bid, 96.75 offered as the common gained $1.28 to $22.38. Traders said the chief concern with Calpine is the upcoming put on the $1 billion issue in April.

"Management fully expects the $1 billion Calpine 0% 2021 to be put on April 30, 2002. They anticipate refinancing via a bond or a medium term note offering, whichever is appropriate for the capital structure at that time. Even without a refinancing the increased revolver provides an ample liquidity backstop for the convertible bond," said Deutsche Banc Alex. Brown convertible analyst Jonathan Cohen. He noted that the yield to put on the Calpine convertible is roughly 8.28% to 8.94%.

Calpine currently has $750 million cash on the balance sheet plus an undrawn $400 million revolving credit facility, which is a three-year line with 18 months left to run. This facility is separate from its development-related bank facilities, Cohen said in a research note, adding that Calpine is now in discussions with its banks to bump the facility to $1.5 billion for another three years. The revision is anticipated to close in early January 2002.

Mirant and Duke rebounded Thursday, but NRG Energy, Dominion, Sempra and El Paso lost ground. Mirant's 2.5% convertibles due 2021 regained 1.5 points on the day to 92 bid, 92.5 offered as the stock rose $2 to $25.40. Duke's convertible preferred rose 0.21 to 25.41 as the common stock added 32c to $36.54.

Enron's zero-coupon converts due 2021 (B2/B-/CC), a $2.3 billion (face) issue, dropped another 1.625 points on the day to 13.5 bid, 14.5 offered as Enron shares fell another quarter to 36c. Enron's $255 million of 7% mandatory exchangeables due 2002, which convert into Enron Oil & Gas shares, lost another 1.55 points to 4.6 as Enron Oil & Gas stock dropped 81c to $35.18.

Nvidia's replacement of Enron in the S&P 500 index created buying momentum in the stock, traders said, which boosted the convertibles. The Nvidia 4.75% convertible notes due 2007 (B-) soared 4.5 points on the day to 139.5 bid, 140.5 offered as the common stock climbed $2.25 to $53.61.

"Techs were on a tear today, lots of big gainers in the group," said a convertible trader at a hedge fund in Connecticut. "We are not that optimistic for the group but there are some that are definitely considered winners. Like Networks Associates, Siebel Systems, Peregrine Systems, FEI, ATMI, several others."

New issues showed signs of new life as Extreme Networks Inc. launched a small deal for pricing after the closing bell. The $175 million of five-year converts, non-callable for three years, are expected to come with a yield of 3.75% to 4.225% and a 23% to 27% initial conversion premium. The provider of switching solutions to the local area networks industry saw its common stock drop $1.20 to $16.50 as a result of the new issue.

Also at bat after the close is Boise Cascade's $130 million of three-year convertible adjustable conversion-rate equity securities (ACES) with price talk of a 7.75% to 8.25% yield and 18% to 22% initial conversion premium.

End

© 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.