Convertible market broadly mixed on Enron hype, new issues,

By Ronda Fears

Nashville, Tenn., Dec. 12 - Convertible traders said the market was broadly mixed, although thought to have ended the rocky session Wednesday on a fairly even keel with Tuesday's close, much like stocks that ended flattish as buying helped pull the market from negative territory late in the day. From the primary market seats, market players and watchers were anticipating the forward calendar to be emptied after the closing bell with all five remaining deals of the week getting priced.

The hype seemingly to find other potential trouble spots like Enron Corp. has battered the energy and power sectors severely, but there was no huge sell-off. Rather, buyers stepped in late Tuesday, although one big buyer was Calpine Corp. itself, whose converts have been beaten down this week. The Calpine ripple stemming from Enron's demise has also hit AES Corp., El Paso Corp and Mirant Inc., but those also rebounded slightly.

"It has been a very rough week, but we've not seen a huge amount of selling and no real panicked selling taking place as a result of the Calpine hype, or Calpine-ron as it was dubbed today," said a convertible trader at a major investment bank in New York. "There were buyers turning out, as had been expected, but it turned out that the biggest buyer of Calpine's zeros was the company. That's a very smart move. (see separate story in this issue)"

Calpine's convertibles all gained ground Wednesday as the stock rose 41c to $15.91. Calpine announced just before the closing bell Wednesday that it has bought $122 million of its $1 billion of outstanding zero-coupon convertibles due 2021 in the open market and privately negotiated transactions, using cash on hand. The zero-coupon issue (Baa3/BB+), which sold at par in April, added 0.25 point on the day to 93 bid, 94 offered while Calpine's 5.5% convertible preferred gained 0.75 point to 40.875 bid, 42.875 offered and the 5.75% convertible preferred rose 1.375 points to 60.5 bid, 51.25 offered.

"It's definitely been a roller coaster these last couple of days for Calpine. The stock has taken a beating," said Deutsche Banc Alex. Brown convertible analyst Jonathan Cohen, who last week recommended the Calpine zero-coupon convert for yield pickup and said he stands by the recommendation.

"From a credit standpoint, that (the stock decline) is the only erosion we've seen. There's not a real credit problem here." Calpine has $750 million cash on the balance sheet, an undrawn $400 million revolving credit facility, which the company is in discussions with its banks to increase to $1.5 billion for another three years, Cohen noted, adding that the convertible market could be an option for Calpine to raise capital if needed.

AES, El Paso and NRG Energy also reversed to the north Wednesday, but also have been whipped around this week, and really since the Enron picture got so ugly. Mirant continued to fall Wednesday, but traders said the issue is not widely traded.

El Paso scared the market with a halt on the stock, pending news, but that turned out to be a debt reduction plan that pleased many, including Moody's. El Paso's zero-coupon convertible due 2020 (Baa2/BBB), which sold in February at 45.29, added 0.25 point to 39.375 bid, 39.875 offered and the 4.75% convertible preferred gained 0.5 to 50.5 as the stock rose $1.90 to $41.07. AES' 4.5% convertible notes due 2005 were up 1 point to 85.75 bid, 86.75 offered while the 6.75% convertible preferred edged up 0.5 to 32.75 bid, 33.5 offered and AES shares rose 46c to $14.39.

Elsewhere, traders said there some selling was seen in the drug sector on the heels of Merck's warning. ImClone Systems, which had been speculated to be a candidate to be included in the Nasdaq 100's rebalancing next week, lost big. But there were some gainers in the tech arena and defense-related issues like L3 Communications rose sharply on President Bush's comments about advancing military readiness that were seen as expanding business opportunities for the sector beyond the war on terrorism as it stands now in Afghanistan.

ImClone Systems dropped, traders said, without provocation by any news of the day, but seemingly as a result of the negative sentiment in drugs and healthcare. The biopharma firm is developing a portfolio of targeted biologic treatments for cancer. "There had been some speculation that ImClone would be added to the Nasdaq 100 next week, which would bring in buyers," a trader said. "It shouldn't be hurt by the Merck situation, so it looks like it was just a backlash from the sector itself." ImClone's 5.5% convertible note due 2005 fell 3.5 points to 138.125 bid, 138.625 offered as the stock dropped $2.25 to $68.14.

L3 Communications and Northrop Grumman are seen as beneficiaries to the stepped up defense measures supported by President Bush, and traders said the L3 converts rose on heavy buying but Northrop Grumman's new issue hasn't seen a lot of trading. L3's new 4% convertible (Ba3/B+) rose 2.25 points to 100.25 bid, 100.75 offered and the 5.25% converts due 2009 were up 3.25 points to 124.625 bid, 125.625 offered as the stock climbed $3.10 to $85.60.

As stocks eked out slight gains after a turbulent session, market sources said it appeared all the remaining new deals were advanced to price after the close. The Nasdaq added 9.45, or 0.47%, to 2011.38 and the Dow industrials was up 6.44, or 0.07%, to 9894.81.

"Everything is ready to go. Buyers are lined up and ready, so it appears that the powers that be decided to just bring all the new deals tonight while the market ended higher if not on a real positive tone because who knows what the rest of the week will hold," said a convertible trader at a hedge fund in New Jersey.

New paper continued to weaken a bit, traders said.

Interpublic's new zero-coupon convertibles due 2021, which sold at 81.914 on Monday, slipped 0.375 point to 83.75 bid, 84 offered with the common stock off 84c to $28.93. Interpublic's 1.87% discount convertible due 2006 were flat at 78.75 bid, 79.75 offered and the 1.8% discount convert due 2004 declined 0.25 point to 93 bid, 94 offered. Fiat's new 3.25% exchangeable due 2007 that converts into General Motors stock, which priced at par, slipped 0.5 point to 98.5 bid, 98.75 offered as General Motors stock lost 9c to $48.56. Cephalon's new 2.5% convertible due 2006 was down 1 point to 97.75 bid, 98.25 offered and the 5.25% convert due 2006 also was down 1 to 109.625 bid, 110.5 offered as the stock lost $1.01 to $65.06.

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