XL holds up against stock slide on warning, boost to reserves; new Getronics euro issue zooms

By Ronda Fears

Nashville, Oct. 17 - A pall fell over the markets Friday, but traders said convertibles were holding their own as the underlying stocks skidded. XL Capital Ltd. was particularly strong as the stock plunged as much as 10% during the session on an earnings warning resulting from a boost to reserves in the U.S.

DoubleClick Inc. took a blow from a miss on its earnings and reduced guidance for 2004, with the new 0% convert plunging 14 in dollar points. The numbers countered positive earnings from Yahoo! Inc. last week, and spilled negative sentiment throughout the tech sector.

MedImmune Inc. shares also were hit by news that mega-retailer Wal-Mart will not be selling its FluMist, and its converts dropped 1-2 points. In the biotech group, CV Therapeutics Inc. suffered a blow from a big miss on its earnings and the new 2% convertible lost 2.5 points in tandem with the stock drop.

Ford Motor Co. pulled back from gains on its earnings, traders said, and lots of the airline paper was weaker as well. AirTran Holdings Inc.'s 7% convert fell another 3-4 dollar points, but a buyside trader said the issue was virtually unchanged on swap, at about 38 points over parity. Northwest Airlines Corp., however, was 2.5 points better on its earnings.

"It got real quiet this afternoon," said a buyside convert trader at a huge hedge fund in New York. "I guess the city was up watching the game last night [when the Yankees cinched another trip to the World Series]. Options expire today, so that was keeping some people busy elsewhere, too."

There certainly was action in Europe, which some U.S. participants were getting involved with during the first half of the day. One such buyer pointed directly to Getronics NV's new euro convert, noting a "gigantic yield for a euro."

Getronics sold the €100 million of 5.5%, up 22.5% converts on Wednesday and the issue has already "zoomed by nearly 14 points," said the buyer, who runs a convert strategy from the Bahamas.

The new Getronics five-year convert was quoted by a source in London up 6.25 points on Friday to close at 113.25 bid, 114.25 offered with the underlying stock at €1.55. ABN-Amro Rothschild was sole bookrunner on the Regulation S deal for the Netherlands-based tech concern.

"Getronics was quite a deal," said Luke Olsen, head of convertible research at Barclays Capital Markets in London.

"Remember these guys were all but defaulted until they restructured their (convertible, as it happens) debt several months ago. They repaid some of the principal and termed out the rest - €250 million, I think - amortizing it through 2008."

The new Getronics issue refinances the old convertible debt. Getronics had two 0.25% converts maturing in 2003 and 2005.

"It shows how incredible this market is," Olsen said, noting that the euro convert market has been hot since Labor Day.

"In fact, despite the new deal converting into something like 15% of its [Getronics'] share capital, the shares rocketed about 16% on the day and the bonds closed 6 or 7 points above issue price [in the first day of trading], I think.

"I'd like to know the last time a new issue saw that kind of price action."

There may be some capital markets action from XL Capital, too, or at least Standard & Poor's is expecting some in light of the insurance company's news that it took a big reserve addition for its U.S. unit and now will not meet third quarter expectations.

XL said it will post a loss in its North American reinsurance operations primarily from new casualty claims for the 1997 to 2000 underwriting years. As a result of these losses, the company expects its third quarter net income to be reduced by $184 million before taxes, or $1.16 per ordinary share.

At 9 a.m. ET on Monday, XL has scheduled a conference call to discuss specifics of the issue with analysts. The company will report third quarter results after the market close Oct. 29.

"Many primary insurers are continuing to see loss development beyond historical patterns due to the marked expansion of liability in the U.S. tort system," said XL chief executive Brian M. O'Hara in a statement Friday.

As a result, XL Capital expects these losses to shave about $160 million, or $1.16 a share, from third-quarter earnings. Analysts expect the company to earn $2.05 a share in the latest quarter.

The development caused S&P to put XL's ratings on negative watch, and the rating agency said it expects XL to replenish the reserve losses through capital markets activity once XL's internal reserve audit is completed.

XL stock plunged - as much as $8 a share, or 10% - but recovered some ground during the afternoon. The stock closed down $6.03, or 7.59%, to $73.37.

The XL converts, however, held up against the pull for the most part. The two zero-coupon issues, which mature in May and September of 2021, were both off by 0.125 point.

"Both of them trade right around the put price, but there's a little more risk priced into the May issue," said a dealer.

The XL 0% due May 2021 was quoted at 63.5 bid, 63.75 offered; the put in May 2004 is at 64.188.

The XL 0% due September 2021 was quoted at 61.5 bid, 62 offered; the put in September 2004 is at 61.553.

High-yield convert traders also said Calpine Corp. was active this week, with the 4% bonds due 2006 losing another 0.25 point or so on Friday. The bonds lost about 3 points over the course of the week, one trader said, but "the convertible preferreds keep feeling better because of company buybacks."

Calpine shares closed Friday off 7c, or down by 1.39%, to $4.97. The 4s were pegged at 94.5 bid, 95 offered.

Hedge fund traders also mentioned some risk arb activity in Cephalon Inc. and Documentum Inc.

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