Convertibles marked lower in lackluster session awaiting news on Ford deal

By Ronda Fears

Nashville, Tenn., Jan. 14 - Convertible traders said the secondary market was a bit lifeless Monday as stocks went south and market players eagerly awaited more information on Ford Motor Co.'s $3 billion convertible preferred deal. Price talk has yet to emerge on the Ford deal, and the overnighter that many had anticipated did not come through. Thus, the negative tone in stocks kept trading thin for convertibles.

"It was a typical lackluster Monday. There's nothing to hang your hat on, but the Merrill call on weighting for asset allocations and the Lehman call on wireless phones were putting pressure on the whole market, and Greenspan's remarks on Friday didn't help anything," said a convertible trader at a hedge fund in New Jersey.

"It was very quiet. The market is just very weak right now. There was some activity in a few special situations, like Northrop Grumman."

Merrill Lynch suggested cutting back on stock allocations to 50% from 60%, warning equity valuations seem extreme. Lehman Brothers downgraded the wireless phone sector, warning subscriber growth will be slower than expected due to the weak economy. Those events, along with earnings warnings from big names like Anadarko Petroleum Corp. pressured stocks and the Nasdaq dropped 31.75, or 1.57%, to 1990.71 and the Dow Jones Industrial Average fell 96.32, or 0.96%, to 9891.21.

In addition to Nextel and Sprint PCS heading south, communications satellite names like American Tower and SpectraSite were also lower.

Anadarko Petroleum warned that fourth-quarter earnings would fall short of Wall Street's expectations because of the slowdown in oil and gas drilling and lower energy prices. The stock was lower for most of the session, but saw a late afternoon pick-up and closed up 10c to $49.06. Convertible traders said the Anadarko zero-coupon convertible closed flat as a result, at 65.25 bid.

While there was a host of negative earnings news, the online broker E*Trade Group reported after the closing better-than-anticipated earnings and traders were preparing for a pop in the name on Tuesday as the stock was moving higher in after-hours trading although it closed lower on the day.

Market watchers still expect a heavy roster of new deals to develop but the overnight deal that was abuzz late last week fizzled and no other plans emerged. Nothing surfaced on the Ford deal either, which has been expected to price midweek.

"The underwriters are being very coy on the Ford deal. We haven't heard anything on it, not even whether it's going to be a mandatory or not. That's understandable. It's going to be a huge registered deal," said a convertible trader at a hedge fund in New York.

"Ford may crowd out a little bit, but we are still expecting a lot of new paper this week. If stocks continued to tank, it may slow things down, too, but that's yet to be seen."

Negative news was prevalent and weighed on the market, but many watchers expect a leveling-off soon.

Kmart Corp., beleaguered with speculation that the discount retailer's will file bankruptcy, continued to drag down Fleming Cos. Inc., as Moody's on Monday placed all Fleming's ratings under review for downgrade, including the $150 million 5.25% convertible senior subordinated notes due 2009 rated B2, because of the food distributor's relationship with Kmart. Moody's downgraded Kmart on Friday and S&P lowered its ratings on Kmart, including cutting Kmart's convertible preferred stock to CCC- from B, and put the ratings on watch with negative implications.

"We are disappointed by Moody's action," said Neal Rider, executive vice president and chief financial officer of Fleming, in a company statement. "Our assessment of risk associated with Kmart apparently leads us to a much different conclusion. We look forward to the opportunity to provide Moody's with a full review of the relevant facts concerning our business arrangement with Kmart and intend to meet with them as soon as possible."

Fleming also said its business relationship with Kmart remains strong, and that receivables from Kmart currently vary up to $70 million, or less than 0.5% of Fleming's annualized sales. Moody's said Kmart is Fleming's most important customer with more than 20% of sales. Fleming stressed that Kmart is current in its payments.

In addition to reaffirming its earnings expectations of between 61c to 65c per share for fourth quarter 2001, which will be reported Feb. 13, Fleming said it expects to report that it reduced debt by $75 million from third quarter levels and anticipates it will reduce debt in 2002 by another $100 million to $150 million.

But Fleming's convertible continued a downward spiral that began with the Kmart troubles months ago. The 5.25% issue due 2009 (B2/B+) was quoted down 0.5 point Monday to 79 bid as the underlying stock dropped 52c to $17.05.

L-3 Communications said Monday it will buy a Raytheon defense aviation electronics and communications unit for $1.13 billion cash and, on the news, S&P revised its outlook on L-3 Communications Corp. to stable from positive although it affirmed the company's BB corporate credit and B+ senior subordinated debt ratings. S&P said the transaction initially will be debt-financed, with L-3 looking to issue some equity in the first half of 2002. Significant borrowings related to the large acquisition have substantially consumed financial flexibility at the current rating, S&P said, noting that the ratings already reflect a slightly below-average business risk profile and somewhat elevated debt levels for L-3.

That was enough pressure, along with L-3 stock sinking by 84c to $88.17, to push the L-3 Communications 5.25% convertible due 2009 down 1.5 points to 127.25 bid and the Raytheon convertibles was down 0.5 point to 55.5 as Raytheon shares dropped 34c to $31.58. Most of the defense sector was higher, however. Northrop Grumman's 7.25% convertible preferred added 1 to 109.75 bid with the stock up $1.62 to $97.62.

New issues were mixed. Williams Cos. Inc. new mandatory convertible dipped 0.10 point to 25.74 as the stock lost 36c to $25.14. Best Buy's 2.25% convertible due 2022 edged down 0.125 point to 99.625 bid, 100.125 offered as the shares dropped 24c to $72.46. Radian's new convertible was off 0.25 point to 100.875 bid, 101.375 offered with the stock down 33c to $43.80. Axcelis Technology Inc.'s 4.25% convertible due 2007, however, was up 0.875 point to 102 bid, 103 offered with the shares up 23c to $14.79.

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