Convertible market marked sharply lower, but flood of new deals rush in

By Ronda Fears

Nashville, Tenn., Dec. 10 - Convertible traders said the market was marked sharply lower Monday, but a lack of liquidity was the saving grace. Calpine Corp. was conducting damage control, but the securities slid on a New York Times article that put it in the same arena as Enron Corp. Volume is expected to pick up greatly Tuesday on the heels of a flood of new deals late in the session, and ahead of the beginning of the FOMC meeting expected to produce another interest rate cut. $3.425 billion of new deals were added to pipeline, bringing the week's tally to $4.2 billion, as issuers rush to tap the market before year-end.

"All of a sudden things got kind of ugly," said John Seibel, a convertible trader at the hedge fund Silverado Capital Management. "This whole market just fell out of bed."

Stocks' retreat kept many convertible players on the sidelines most of Monday, as the Nasdaq lost 29.14, or 1.44%, to 1992.12 and the Dow Jones Industrial Average dropped 128.01, or 1.27%, to 9921.45, but most of the market was marked lower and traders saw little flow. With the hope that an interest rate cut will come to pass, and that might be a stimulus for the lagging economy, business is expected to pick up on convertible desks Tuesday. But the bid impetus will be the hefty roster of new deals, traders said.

Outside of new deal activity, the big market buzz centered around Calpine Corp. and its efforts to deflect a negative article in the New York Times that likened the independent power producer to now-bankrupt Enron Corp. But Calpine's shares fell and dragged the convertibles lower as well, but traders and analysts said the selling was way over-done and bargain hunters are expected to come in Tuesday. Calpine said the New York Times article was "inaccurate and misleading," and hosted a special conference call Monday to refute the item.

"Calpine is a remarkable name and there is no comparison to it and Enron," said a convertible trader at a major investment bank in New York. "The Times piece was way off the mark, but there was some heavy selling. It was out of hand. There will be some profits made, though. Calpine managed to get an investment grade rating on its last convertible deal, which is split-rated, so the name is open to a lot more investors than it used to be. Tomorrow will be interesting."

Calpine's $1 billion issue of zero-coupon convertibles due 2021 (Baa3/BB+), which sold at par in April, lost 2 points on the day to 94 bid, 94.5 offered. The Calpine 5.75% convertible preferred due 2004 fell 11.625 points on the day to 66.5 bid, 67.375 offered and the 5.5% convertible preferred dropped 7 points on the day to 44 bid, 46 offered. Calpine shares lost $3.58 to $17.79.

Convertible investors now have a wide variety of issues to pick from on the forward calendar, and many were already busy with homework late Monday. Reinsurance Group of America joins Prudential Financial Inc. for insurance paper. The Interpublic Group of Cos. is an advertising agency. Cinergy is a utility holding company. Evergreen Resources is an independent oil and gas company. Fiat is bringing an exchangeable that converts into General Motors. GTech is an online lottery operator. And, AT&T is offering an issue that converts into Rainbow Media Group, the non-New York assets of Cablevision.

All together, there is $4.1 billion of new paper on the tables this week.

"It's absolutely incredible. The convertible market has matured so vastly this year. We are having weeks that make up what we used to see in a month," said a convertible hedge fund manager in Boston. "It is very exciting, and to be honest, sometimes a little scary. There's no doubt that demand is there, or we would see terms changing considerably. It just sometimes feels like growing pains because the relationships we have with the bankers are changing."

Terms on the deals are mostly agreeable to buyers, market sources said, although traditional convertible fund managers assert they are still heavily biased to hedge funds. And, nearly all deals that are structured as bonds this week have the contingent features that have become the norm, which traditional convertible buyers say are very onerous to nearly all potential buyers outside of hedge funds.

"It is very exciting to have such volume of business in convertibles," said a trader at a convertible fund manager in New York. "But so many of the deals are designed for hedge funds, that we are limited to playing the secondary. It seems to be getting worse, or maybe we're just in one of those cycles. There had been some regular, vanilla convertibles coming that we could get involved with, in spurts this year, but nothing in quite a while."

Syndicate sources said a stream of new deals are expected up until the holiday season curtails business significantly. There is no rush to break any records, however, since that was accomplished in July. But, sources said many issuers want to get the new deals done and on their 2001 balance sheets.

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