Some expect credit spread rally to begin leveling off; Oneok mandatory guidance emerges

By Ronda Fears

Nashville, Jan. 14 - Credit spreads were still coming in Tuesday so traders said converts did well although stocks stumbled at the open and closed only modestly in positive territory.

Meanwhile guidance emerged on a new deal from Oneok Inc. for next week - although no other new deals have surfaced for this week to join State Street Corp.'s.

Oneok is pitching $275 million of three-year of mandatory convertibles, putting the yield at 8.25% to 8.75% and initial conversion premium between 18% and 22%. It is set to price next Tuesday or Wednesday.

One sellside analyst put the Oneok deal, at the midpoint of guidance and with the stock at $18.41, at 6.1% cheap. That assumes a credit spread of 170 basis points over Treasuries, 36% volatility in the stock and a 3.37% current yield on the stock.

Oneok shares ended down 21c to $18.20.

In trading, high-grade credits stole the limelight from junk paper in terms of the credit rally and spread tightening, one observer said.

Another noted that there was an increase in selling of 0% convertibles on trepidation that rate risk would rise as spreads come in.

"I think we're a long way from that happening," although there could be some rate risk for low-yielding convertibles beginning mid-year, said Venu Krishna, head of U.S. convertible research at Lehman Brothers.

"At Lehman, out credit strategist is saying that spread tightening in the corporate bond market may be a little ahead of itself. The credit spreads may take a breather, but not widening, for a while."

A U.S.-led war in Iraq would also impact credits, which has been a source of concern although the markets seemed to be reacting on earnings news and guidance rather than the geopolitical forces on Tuesday.

Tightening spreads, while recently very noticeable among high grades like Tyco and Omnicom, has been profound for the riskier credits like Nextel, EchoStar and the like.

EchoStar has seen a dramatic improvement in valuation in the past couple of weeks, as it is a credit differential trading name, attracting players looking to profit from disparities between the credit default swap and the valuation of the convertible. But some players believe the converts are at the point of beginning to look rich.

"Not that that will stop them [EchoStar converts] from getting richer," said a hedge fund trader.

"Supply and demand is so out of whack that everything just keeps getting richer and richer."

Nextel's spreads also are coming in rapidly, and several high grade names were enjoying the credit party as well.

Tyco's new converts helped turn its credit curve out of an inverted position, but analysts note that the market's preference has turned to the B tranche from the A tranche. (See story on page one of this issue)

Tyco also launched the cash payment on the put for its 0% due 2021 on Tuesday, and that helped bids for the new converts, traders said.

The Tyco Bs, the 3.125% due 2023, gained 1.5 points to 107 bid, 107.5 asked.

The Tyco As, the 2.75% due 2018, added 0.625 point to 105.75 bid, 106.25 asked.

Tyco shares ended up 40c to $17.74.

Telecoms and telecom equipment makers took heart as French telecom equipment maker Alcatel SA said it expects fourth-quarter revenue to be up sequentially by the high 20%, while operating results should be around break-even.

Lucent Technologies and Corning Inc. both firmed on the news.

Lucent's 7.75% convertible preferred was quoted at 62.75 bid, 63.75 asked and the 8% convertible preferred at 73 bid, 74 asked. The stock closed up 3c to $1.84.

Corning's 3.5% due 2008 gained 0.25 point to 86.25 bid, 87.75 asked while the stock ended up 11c to $4.72. The 7% mandatory was at 25.625 bid, 25.875 asked and the 0% due 2015 was quoted at 60.875 bid, 61.875 asked.

Telecoms were on the rise for the most part, as well, particularly wireless and network names.

Nextel Communications Inc. was particularly strong, largely based on the credit spreads tightening rapidly.

Moving southerly were several drugmakers as Roche's news that it would cut prices by 43% for its new hepatitis C drug would spark a price war, according to one trader.

Roche said its new drug for hepatitis C will be priced 43% below a competing drug made by California biotech firm Ribopharm Inc.

ICN Pharmaceuticals and Teva Pharmaceuticals suffered from the general weakness in drug names.

ICN's 6.5% convertible due 2008 lost 2.5 points to 83.75 bid, 84.75 asked. The stock closed down $1.97 to $10.80.

Teva's 1.5% convert dropped 1 point to 106.875 bid, 107.375 asked. The 0.75% also lost 1 point to 106.5 bid, 107 asked. The new 0.375% fell 1.625 points to 104.625 bid, 105.125 asked. The stock closed off 73c to $37.17.

Genzyme Inc., however, gained on news about a new drug. The securities had been halted Monday as an FDA panel considered the new application.

The panel did not vote to recommend the new drug but the stock get some positive comments on the prospects. Standard & Poor's reiterated an accumulate opinion on the stock, sayind that it expects the drug be approved by April.

Genzyme's 3% convertible due 2021 gained 1.125 points to 95.375 bid, 96.125 asked. The stock clsoed up $1.03 to $32.61.

Fleming Cos. Inc. also took a dive after saying fourth quarter results would be far worse than anticipate after third quarter.

The company held a conference call Tuesday, but that failed to stem the downward pressure.

Fleming's 5.25% convertible due 2009 plunged 6.5 points to 47.25 bid, 48.25 asked but one trader saw the bid as low as 42.875. The junk bonds, which had been on a strong upward track, fell sharply with the 10.125% note due 2008 down 9 points to 77 bid.

Fleming shares closed down $1.48 to $5.04.

Fleming said it expects earnings from continuing operations for fourth quarter to be about 10-12c per share on a diluted basis. In October, Fleming reaffirmed guidance for fourth quarter, projecting earnings from continuing operations of 35-45c per share.

Fleming is scheduled to report 2002 results on Jan. 23.

Another notable move to the south was seen in KeySpan Corp.'s mandatory.

KeySpan said its $473 million stock offering would dilute common stock by 7% and reduce EPS expectations for 2003 to $2.45-$2.60 from $2.65 to $2.80.

The 8.75% convert fell 2.2 points to 49.95 while the stock lost $1.91 to close at $33.95.

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