Convertibles plunge with stock in hectic session, but new deals keep coming

By Ronda Fears

Nashville, Tenn., Jan. 16 - Signals came Wednesday, and loudly, to convertible investors waiting for direction from stocks that plunged as valuation concerns heightened intensely. Intel slashed its budget by 25% and the surprise triggered a sharp slide in chip names like Teradyne, which issued its own warning. Another blow, a warning from Juniper Networks, sent a shockwave through the telecom, networking and telecom equipment sectors.

But the primary market marched on with an overnighter from Continental Airlines after Wednesday's close, which followed an overnight deal from Adelphia Communications that turned into the day's high-flyer. Charles River Labs joins the lineup after Thursday's close. Still nothing new on Ford Motor Co.'s big convertible preferred deal, however, and market sources now are speculating the deal may not be brought to market until February.

"It was a very hectic day," said a convertible trader at a hedge fund in New Jersey.

Traders said buyers were scarce amid the price slide, but said selling was not overdone.

"Valuations had gotten out of line and people were already suspecting that was the case," said a dealer. "Semiconductors and telecom equipment were just slaughtered, which may mean that we see a few daring buyers come in. But really, the whole market went south, afraid that the entire market has been driven up to dangerous levels again."

Teradyne's warning on top of the Intel news affected convertibles significantly, traders said. Although traders stopped short of saying there was a sell-off in chip issues, the session was riddled with selling. Teradyne reported earnings inline with expectations, but the company said it does not see an imminent upturn and issued a warning for the first half of 2002. The Teradyne 3.75% convert due 2006 fell 16.5 points on the day to 131.875 bid, 132.125 offered as the stock plummeted $4.75 to $28.75.

Other chip names like Veeco and Dupont Photomasks fell, also. Veeco's 4.125% convert due 2008 lost 4.5 points to 100.6225 bid, 111 offered with the stock down $2.07 to $33.99. Dupont Photomasks' zero-coupon convert due 2004, which was issued at par, dropped 2 to 91.75 bid, 02.75 offered as the stock fell $2.84 to $46.91.

The negative tone spread on Juniper Networks' warning and traders said there was heavy selling in the telecom, networking and telecom equipment sectors, although Juniper's securities had already priced in enough bad news to weather the session without much movement. The Juniper 4.75% converts due 2007 were quoted flat at 74.875 bid, 75.875 offered and the stock declined $1 to $16.96.

Others in the group fell sharply, though. Even after Extreme Networks beat expectations with a net loss of $10.7 million, or 9c a share, it was pounded along with its peers as the 3.5% converts due 2006 dropped 2.875 to 98.125 bid, 98.875 offered and the stock lost 75c to $14.61. Agilent's 3% convert due 2021 dropped 3.75 to 113.375 bid, 113.5 offered with the stock down $1.65 to $28.80. Brocade's 2% convert due 2007 lost 3.375 to 10.3625 bid, 104.125 offered as the stock lost $1.83 to $34.44. Corning's 3.5% convert due 2008 plunged 7.25 to 115.25 bid 115.5 offered with the stock off 86c to $8.96.

The bad news rippled throughout the market, as investors targeted recent run-ups for selling in order to capture profits. E*Trade had gained ground on the company's recent earnings and outlook, but on Wednesday the 6.75% converts due 2008 - the newest convert from the online brokerage - fell 10.25 points to 120.125 bid, 120.625 offered while the stock lost $1.31 to $10.39.

There were few gainers, but Calpine Corp. firmed on more details about the energy firm's recapitalization efforts even though it cut its 2001 and 2002 earnings estimates. Calpine put several development projects on hold, aiming to cut expenses by as much as $2 billion, and said it expects to earn $1.95 a share before items for 2001 and to post adjusted EBITDA of $1.6 billion.

Calpine's new 4% convert due 2006 rose 4.5 points on the day to 109 bid, 109.5 offered, with the underlying stock up $1.09 to $14.94.

Adelphia's new deal was also higher, and the stock closed off just 44c to $26.81 on the heels of the $500 million mandatory convertible deal. "Adelphia was a high-flyer today. Even the stock held up well and was higher for some time today. Surprisingly, it's been very resilient.," said a convertible market source. The Adelphia 3.25% converts due 2021 added 1.25 points to 97.875 bid, 98.375 offered and the 6% converts due 2006 gained 2.625 to 86.5 bid, 87 offered.

With still no news on Ford's convertible deal, market players are now thinking the deal may be farther off as the company focuses on its restructuring plans and credit ratings. "It's going to be a full road show and with everything that's going on with the company, it could be February or March even before we see this come to market," said a convertible source at an investment bank in New York. "I think it's more likely that we'll get some news toward the end of the month."

After the closing bell, however, Continental sold $175 million of 4.5% convertible notes due 2007 in the overnight market, via sole lead manager Salomon Smith Barney. Continental had reported earnings earlier Wednesday, and the stock closed up $1.71 to $31.10.

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