Convertibles rebound in frantic session of earnings news, Ford deal getting launched

By Ronda Fears

Nashville, Tenn., Jan. 17 - There was a fairly strong rebound Thursday, convertible traders said, following the recent profit taking on fears that valuations were once again out of hand. Investors were still selling, traders said, but there were also some buyers stepping in. There were several events spurring activity, including pricing guidance on Ford's big convert that has been put on next week's business. Tyco also was battling market buzz that had the company issuing a new convertible, which the company refuted.

The primary market is not exactly at a loss for new deals, anyway. Continental Airlines and Adelphia Communications both had new paper in play, although they were mixed in trading, and Charles River Labs priced an upsized deal after the close.

"It was frantic today, a bit sloppy," said a convertible trader at a major investment bank in New York. "There is so much news out there with earnings, not to mention the additional flare-ups like with Tyco. People are just frantic trying to stay on top of it all and not miss something really big. The Tyco rumor turned out to be just that, it seems. There was no catalyst really for them to issue another convertible."

Traders said buyers came in, although not en masse, because there still was some selling taking place in several tech-related sectors like semiconductors. But for the most part, traders said converts trailed stocks that were heading north.

Vague talk about Tyco led to the company refuting rumors that it will issue a convertible or that its chief financial officer was leaving; but the company said it was considering buying back more shares as a result of the recent stock price decline.

"I would be heavily discounting another Tyco convertible right now. People are just very nervous about anything that's not absolutely transparent," said Jeremy Howard, head of convertible research at Deutsche Banc Alex. Brown.

Tyco International's converts were very active, however, traders said. The stock dropped $1.64 to $45. 07. The Tyco zero-coupon convertible due 2020 (Baa1/A) closed down 1.375 points to 71 bid, 71.375 offered and the zero-coupon convertible due 2021 (Baa1/A) was down 0.5 to 72.25 bid, 72.625 offered.

Calpine Corp.'s convertibles were hit pretty hard after the company filed an updated debt shelf that boosted its limit by $850 million to $2.5 billion.

"It was just curious that Calpine filed this shelf after scaling back capex and how they talked about scaling back in the conference call yesterday, which would be favorable to the converts" said Stuart Novick, convertible analyst at Salomon Smith Barney. "We downgraded the stock today but ultimately there's going to be some value to these converts."

Calpine Wednesday lowered its 2001 and 2002 earnings estimates and 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. The new Calpine 4% convertible due 2006 (BB+) dropped 4.5 points on the day to 105 bid, 105.5 offered with the common stock down $99c to $13.95.

Continental Airlines' new deal slipped in the immediate aftermarket, losing 1.75 points from par to 98.25 bid, 98.75 offered as the stock fell $2.65 to $28.45. There was not a great deal of flipping on the paper, traders said, because about 60% of the deal was placed with outright convertible investors and 40% to hedge funds.

"It was placed in some strong hands and is not expected to be going anywhere fast," said a hedge fund trader in New Jersey.

Adelphia's new 7.5% mandatory convertible was said to be flat at 26.25 bid, 26.5 offered as the stock dropped 76c to $26.05. The Adelphia 3.25% converts due 2021 gave up 0.875 point to 97 bid, 98.5 offered and the 6% converts due 2006 retreated by 1 to 85.5 bid, 86 offered. The 5.5% perpetual convertible was down 1.25 to 95.625.

News on Ford's convertible deal occupied a lot of the market's attention.

The Ford deal is talked to yield 7.0% to 7.5% with an 18% to 22% initial conversion premium. The 20-year convertible trust preferred will be non-callable for five years and was rated BBB- by Standard & Poor's during the session. Goldman Sachs is book-runner, with joint leads JPMorgan, Morgan Stanley and Salomon Smith Barney. The deal is set to price after the close Thursday, Jan .24, after a full road show. Ford shares closed off 25c to $14.70.

After the close final terms were also out on the Charles River Labs deal, putting the coupon at 3.5% with a 30% initial conversion premium. The underlying stock closed up 10c to $29.90.

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