Quiet session ends quiet week on higher note; Cendant lower on accounting questions

By Ronda Fears

Nashville, Tenn., April 12 - It was a quiet session in convertibles but the market ticked upward a bit, ending a quiet week that was described as lower to flat overall. No new deals are on the calendar for the second week running, although market players expect something to pop up.

Cendant's converts were hit pretty hard, traders said, on a Forbes article that renewed accounting questions at the hotel operator and car rental company and caused some pre-earnings selling. However, Computer Associates shrugged off continuing reports centered around the federal investigations of its accounting practices and executive compensation.

"It was really an uneventful day, pretty quiet. There was the Cendant article and the converts were hit pretty hard, but that wasn't what I'd call a blow-up," said a convertible trader at a major investment bank.

"There wasn't a very good flow today, as has been the case for lots of days now. So, it's hard to take any day's movement to heart. For the week, we're probably lower, maybe flat."

No new deals were launched, and that disappointed players, but many expect something to turn up in a drive-by marketing or overnight effort.

"Hopefully, we'll see something pop up next week," said a convertible trader at a hedge fund in New Jersey.

"We haven't heard of anything specifically, but usually something will turn up in the course of the week."

Duane Reade's new 2.1478%/0% convertible due 2022 (Ba3/BB-), which sold at 57.276, gained 1.5 points on the day to 58.625 bid, 58.875 offered with the stock up $1.41 to $32.30.

That was the only new deal fare for the week, but other recently priced paper was higher although not to such as extent.

DDi Corp.'s new 6.25% convert due 2007 rebounded slightly, adding 0.25 point to 84.25 bid, 85 offered with the stock up 3c to $6.39. GenCorp's 5.75% convertible due 2007 edged up 0.375 to 105 as the stock gained 10c to $14.33. And, Cracker Barrel's 0% convertible due 2032 was up 0.125 to 41.625 bid, 41.875 offered while the stock rose 29c to $29.91.

An article in the latest issue of Forbes questions accounting practices at four companies, three of which have convertibles outstanding - Cendant, Allergan and Manugistics. Cendant was criticized for moving expenses into a company launched by its executives that pays royalties to Cendant. Allergan was said to have "curious" off-balance sheet research entities similar to Elan. And Manugistics was cited for related party sales.

Cendant had the only strong reaction, however, traders said.

Cendant's 3.875% convertible due 2011 dropped 1.5 points to 103.125 bid, 103.625 offered. The 0% due February 2021 lost 1.25 points to 69.5 bid, 69.75 offered. And, the 0% convertible due May 2021 slipped 0.125 point to 99.75 bid, 100 offered.

Cendant shares closed down 60c to $17.90.

"This has been an ongoing story. I think a lot of people took an opportunity to exit Cendant before the earnings," said one trader.

Cendant's earnings call is next Thursday.

In a separate news article, Computer Associates came under fire again but it was shrugged off.

Computer Associates has been under investigation for accounting questions by federal authorities since March, and has acknowledged that, but a new Wall Street Journal report said the government is also investigating whether the company boosted results to help boost stock awards for executives.

"This news today is really part of an ugly battle with a stockholder," said a dealer.

"There seems to be quite a bit of faith in this story. The earnings are due soon and are expected to come in ahead of expectations. There wasn't a big exodus here."

Computer Associates said in a company statement that it has been informed that previously disclosed inquiries by the U.S. Attorney's Office and SEC are preliminary, that no one has been identified as a target and that no conclusions have been reached.

The company said it "continues to believe that its accounting for revenues from multiyear software-licensing agreements, which it had consistently applied since the early 1980s, was proper" and that it was "consistent with the practice of most software companies even today."

The decision to adopt a new business model in October 2000 was the result of a desire to build a more customer-oriented approach to marketing its products and was not driven by accounting concerns, Computer Associates said.

The Computer Associates 5% convertible notes due 2007 added 0.25 point to 115.125 bid, 115.25 offered as the underlying stock gained 13c to $21.18.

Tech names as a group were higher for the most part, too, as the Nasdaq rose 1.8%.

Mercury Interactive was a stand-out after beating Street estimates with first quarter results.

Revenue were about flat at $90.5 million and proforma earnings were lower but it was better than expected, and as one trader said, "even more impressive when you consider so many others in this group, like PeopleSoft and IBM, are warnings about missing targets." Mercury Interactive makes software used to test server equipment.

The Mercury Interactive 4.75% convertible due 2007 added 4.625 points to 85.375 bid, 86.375 offered as the stock climbed $7.26 to $36.70.

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