Broad declines seen throughout the market; many players search for buy opportunities

By Ronda Fears

Nashville, Tenn., June 11 - All the usual suspects - Tyco, Adelphia, all the energy and power names - lead a broad-based slide as stocks pressured convertibles lower yet again.

In addition to the most recent regular decliners, biotech names were notably suffering from a blow as IDEC Pharmaceuticals reported a setback on two drugs.

Trading was thin, but players were digging around for buying opportunities.

Meanwhile, Agere Systems scheduled its deal for Thursday's business - a $380 million seven-year convertible note.

"Everything, virtually everything, was lower today. A lot of people are still holding on, probably with white knuckles, but holding on with the thinking that the market will turn the corner soon and they can breathe a little easier," said the head convertible trader at a major investment bank.

"Most of the hedge fund guys are sitting pretty. They've been betting the trough hadn't been seen yet, that we have not reached a bottom."

There is some pain in the market, however.

"Even if you weren't caught holding Enron, Adelphia, whatever, you've been hurt almost as badly," said a dealer.

That's because, the trader said, entire sectors have been driven down along with the main characters caught up in scandalous events.

But there are buyers looking to put capital to work.

"We're buyers right now, but unfortunately we aren't coming across much that is catching our eye," said a convertible trader at a hedge fund in New Jersey.

"We've made some money. Not anything like the last three years running, but we're still ahead. So, we've got some capital to put to work. We'd really like to see the new deal calendar open up but that may be wishful thinking."

Because of the market's hunger for new paper right now, the Agere deal is expected to go well and is seen likely to be upsized.

Agere's long-awaited deal finally came to life with pricing guidance late Tuesday. The deal was filed in January, but was stalled until the completion of its spin-off from Lucent last week.

The Agere deal is talked to yield 6.25% to 6.75% and price with a 32.5% to 37.5% initial conversion premium.

Agere shares closed down 27c to $$2.63.

Not until some time after the indicative terms were circulated did the market know the deal size, however.

"I guess since Agere's stock is twice as much as Nortel's, they can sell maybe $1.6 billion," one player joked.

Nortel's $714 million mandatory last week was sold with the stock at $1.41, which is widely though to be the lowest point for the stock at the time of selling a convertible.

Nortel's deal was way oversubscribed, however, mostly due to the conversion price being so low that it will be in the money in no time. Reflecting the demand, Nortel said Monday the greenshoe was exercised, increasing the offering to a total size of $821 million.

In fact, the 7% mandatory is already in the money as the closing Nortel stock price of $1.85 is above the $1.69 upper threshold conversion price. But the issue cannot be converted early until Aug. 15.

Some had speculated the Agere deal would be $500 million or more, as that would apparently automatically extend its $960 million bank facility that comes due in September.

Meanwhile, all tech names were suffering from the Nasdaq's 2.19% decline and the Dow industrial's drop of 1.33%.

But the wounded were scattered throughout the market.

Drugs and biotech names were hurting by the IDEC news.

IDEC Pharmaceuticals announced it has discontinued the development of its drug prospect, IDEC-131, for treating psoriasis, due to incidences of blood clotting. Also, the company said its recently launched cancer treatment, Zevalin, would not receive Medicare reimbursement status until October, several months later originally expected.

The new IDEC 0% convertible due 2032 dropped 2.125 points to 50.75 bid, 51 offered. IDEC shares fell $6.34 to $32.03.

Fiat's 3.25% exchangeable due 2007, which converts into General Motors shares, lost ground and the GM converts slipped on uncertainty about the Italian carmaker's turnaround plan and how GM will fit into it, if at all.

Paolo Fresco, the chairman of Fiat, took on the added post of CEO after Paolo Cantarella resigned. The market was trying to assess if he would be authorized to consider selling Fiat's car division to its partner, GM.

The Fiat/GM convert lost 0.75 point to 96.75 bid, 97.25 offered as GM shares dropped 97c to $57.99.

GM's 4.5% convertible note, issued at par of 25, closed off 0.25 point to 26.55 and the 5.25% convertible note, also issued at par of 25, ended down 0.32 point to 27.35.

Although "only maybe a couple" of trades took place in the Adelphia converts, there was a trade at 8.75.

One shop quoted the Adelphia 3.25s and 6s both at 8.75 bid, 10.75 offered.

Adelphia shares closed in over-the-counter trading up 3c to $21c.

"It's unbelievable, I know, but there was at least one buyer out there today," for Adelphia, a trader said.

"Everyone pretty much thinks there will be a [bankruptcy] filling by Friday. Apparently, they agree that Leonard Tow may make a bid for the assets and they end up with something. I really think that makes sense, but I'm not sure it will really happen, go through."

Newly appointed directors Leonard Tow and Scott Schneider resigned, citing unreliability of Adelphia's corporate data amid "wrongdoing." Tow became a stakeholder in Adelphia by virtue of the 1999 acquisition. He was the founder of Century Communications, and is now chief executive at Citizens Communications.

"We believe Tow may have an interest in buying his former company's assets," said Wachovia Securities analyst Sri Nadesan.

Assuming a $2,700 to $3,200 per subscriber valuation, the subscriber base could be viewed as being worth $15.6 billion to $18.4 billion at the Adelphia level excluding the Highlands Holdings subscribers, and $16.4 billion to $19.4 billion including the Highland Holdings subscribers, he said.

"The real question, of course, is the real amount of the debt at the company plus the size of the bridge, or DIP, financing the company may have to incur to continue as a going concern," Nadesan said.

At this time, Adelphia's total debt - bank debt and senior bonds, but excluding convertible debt and preferred stock - appears to be $15.5 billion to $16.5 billion, and convertible debt appears to be another $1.4 billion. Therefore, total debt excluding the preferred stock appears to be $16.9 billion to $17.9 billion.

In the energy and power group everything continued to slide but CMS Energy headed the list due to several events.

CMS and Arthur Andersen parted ways, with the embattled accounting firm not issuing an opinion on CMS' restated earnings for 2000 and 2001 to adjust for the ill-reputed round-trip electricity trades.

Also, CMS was downgraded by Moody's, which cut the convertibles to Caa1.

"I think there are some believers out there for this group, but I think a lot of people still see some more downside, so they're waiting to get in," said Stuart Novick, convertible analyst at Salomon Smith Barney.

The CMS convertible preferreds dropped hard on the Moody's action, with the 2002 issue down 2.03 points to 19.1 and the 2003 issue down 1.25 points to 20.15. CMS shares lost $1.68 to $15.11.

While Moody's was quick to react to the CMS news, S&P said it "perceives no immediate impact" to the credit quality of CMS Energy due to the Arthur Andersen event.

"The decision is due to Arthur Andersen's current situation and the uncertain timing of the work of the special committee established by CMS Energy's Board of Directors to investigate matters surrounding the company's 'round-trip' electricity trades," S&P said.

Fitch Ratings put CMS on negative watch, but was more concerned about the company's bank facility.

The negative watch, Fitch said, was "due to concerns surrounding refinancing risk of CMS' $450 million bank facility that expires on June 17. CMS is currently seeking an extension on its facility, while exploring alternative liquidity structures."

On Wednesday, CMS Energy plans to make a presentation by its president and chief operating officer, David W. Joos, at Deutsche Bank's Electric Power Conference in New York.

The presentation will be webcast at 1:30 p.m. ET via CMS' home page.

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