Convertibles flat on light volume as market digests huge influx of new paper

By Ronda Fears

Nashville, Tenn., Dec. 14 - Convertible traders said the market was rather quiet Friday on the heels of some $4.24 billion of new paper this week, and with stocks ending the week with a slight uptick after a sharp retreat. Traders said the heavy influx of new deals has put some pressure on all new issues as a group, along with a downdraft in the underlying stocks.

"It was pretty quiet today. Calpine was getting crushed again and Lucent and that group still were getting pounded, but there really wasn't a big flow in the convertibles," said a convertible trader at a major investment bank in New York. "We had quite a set-back this week and folks are rethinking now about where they want to put their money. There's also a lot of selling to settle books at year-end, pay taxes, that sort of thing."

Stronger-than-expected CPI data was a slight negative for stocks, traders said, but most said the market is really more concerned about corporate profits while trying to get a handle on the market's bottom and, thus, the economic turn-around. Stocks eked out small gains, with the Nasdaq adding 6.66, or 0.34%, to 1953.17 and the Dow Jones Industrial Average advancing 44.70, or 0.46%, to 9811.15.

Calpine suffered from Moody's putting its credit on review for downgrade back into junkland, after just giving the credit a lift into investment-grade territory in October. Late in the day Friday, Moody's followed through and cut Calpine's ratings back to speculative grade. Fitch took actions along similarlines, in April upgrading Calpine to investment-grade and on Friday by putting it on review for possible downgrade.

Calpine's convertibles all retreated, the preferred sharply, although the newest zero-coupon convert was mostly holding on because it become putable in April at par. The zero-coupon issue (Baa3/BB+) due 2021, which sold at par in April, slipped back 0.25 point on the day to 93.25 bid, 93.75 offered while Calpine's 5.5% convertible preferred lost 7.25 points to 34.375 bid, 35.375 offered and the 5.75% convertible preferred fell 9.25 points to 51.625 bid, 53 offered. Calpine shares dropped $2.85 to $13.20 but traders said the stock was as low as $12.60 in after-hours trading late Thursday when Moody's announced its rating action.

Analysts keen on Calpine, though, are sticking to their guns.

"The practical implications for Calpine are limited as the company has operated under a non-investment grade rating for much of its history. Moody's had only upgraded Calpine to investment grade in October 2001. S&P reaffirmed its rating (BB+) and outlook on the company on Wednesday," said Deutsche Banc Alex. Brown utility analyst James Dobson in a report.

"Overall, we do not expect the announcement by Moody's to have any material practical implications for Calpine. Psychologically, though, the stock may see some pressure on Friday as a result. The next catalyst for the stock, in our view, will be any outcome of the California negotiations or of the company's efforts to increase its corporate bank revolver to $1.5 billion from $400 million. The timing for both of these events is early January."

Deutsche has a strong buy rating on Calpine stock and a target price of $39 per share.

Lucent, Ciena and Corning also continued to "bleed profusely," as one trader put it, but there was some buying in the telecom sector as well as some semiconductor names.

Many analysts also think the telecom equipment sell-off has been overdone, particularly regarding Ciena. Traders said there was not a huge unloading of the converts, but they were marked down sharply as Ciena shares fell again Friday in the aftermath of the company's $1.8 billion net loss for fiscal fourth quarter.

Lucent's 8% convertible preferred due 2031 (B3/B-) fell another 45 points on the day to 64 bid, 65 offered as the stock dropped 41c to $6.11. Ciena's 3.75% convertible notes due 2008 (Ba3/B+) lost 1.5 points to 64.5 bid, 65.5 offered as the stock closed down 68c to $14.26. Corning's 3.5% convertible due 2008 lost 1.875 points on the day to 111 bid, 111.5 offered as the common stock declined 21c to $8.74.

New paper from earlier in the week was widely mixed.

Prudential's new 6.75% mandatory convertible preferred edged up 0.41 to 53.36 as the stock rose 38c to $29.64. GTech's 1.75% 20-year convert gained 0.5 point to 102 bid, 102.5 offered with the stock up $1.16 to $45.16. The AT&T exchangeables into Rainbow Media Group added 0.2 to 23 as the underlying stock slipped 5c to $22.80. Interpublic's new zero-coupon convertibles due 2021, which sold at 81.914, declined 0.75 point to 82.25 bid, 82.5 offered with the common stock off 88c to $27.13. Fiat's exchangeable into General Motors was flat at 97.125 bid, 98.25 offered as GM shares added 15c to $47.48.

No new deals were put on the forward calendar for next week, but market sources fully expect something.

Buzz on Friday was that Juniper Network would return to the convertible market, but there was nothing other than buzz. The company did not return phone calls. Juniper's 4.75% convertibles due 2007 were flat at 73.25 bid, 74.25 offered as the stock closed down 93c to $20.25.

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