Ciena paper expands despite outlook cut; automakers, Legg Mason down; Tyson Foods to price offering

By Rebecca Melvin

New York, Sept. 4 - Convertibles were mostly lower Thursday, although some of the losses weren't as steep as those suffered in stocks, as headlines about slowing company sales and higher jobless claims fanned concerns about the slowing global economy, market players said.

Ciena Corp.'s shorter-dated convertibles expanded 1.25 points amid a sharp sell-off of its underlying shares after the communications equipment maker reported a fiscal third-quarter profit drop and reduced its fourth-quarter outlook.

"They were hopeful that it's a short-term slowdown and that demand of telco service providers will pick up as they restart spending to upgrade and build out their networks," a New York-based sellside analyst said, referring to a company call Thursday.

Meanwhile, Nortel Networks Corp. saw its shares and convertibles jump briefly in early trade amid a rumor that IBM might be interested in acquiring the large telecom equipment maker.

"I don't think it's very credible, which is probably why the securities came back to end almost unchanged," the sellside analyst said of the rumor.

The convertibles of General Motors Corp. and Ford Motor Co. were both lower, but not as steeply as their underlying shares.

Legg Mason Inc. fell after its shares were downgraded by Credit Suisse to "underperform" from "neutral" based on valuation and its outlook for redemptions. The Legg 7% mandatories changed hands at 41.25 versus a stock price of $43.

In the primary market, Tyson Foods Inc. announced plans to price $450 million of five-year convertibles next week, and market players eyed it gratefully for not being a financial name.

Any financial paper pricing successfully in the convertibles market will have to come very cheap, sources agreed.

"... no one's going to buy them," a New York-based sellside desk analyst said of the financial names. "We haven't seen one in a couple of months; those securities haven't held up. Would you buy another Lehman preferred? There's already $4 billion of the stuff, trading in the 60s. I don't know who is going to buy them, unless they are real cheap."

The proposed deal from Tyson was talked to yield 3.25% to 3.75%, with an initial conversion premium of 27.5% to 32.5%.

Outside the United States, two would-be issuers in Canada withdrew proposed deals, including Homeland Energy Group Ltd., which just announced an offering of convertible senior unsecured debentures Wednesday via a syndicate led by TD Securities Inc., and Opal Energy Corp., which had a longer-standing planned offering of $35 million of convertible senior secured notes.

Ciena weathers stock sell-off

Ciena's 0.25% convertibles due 2013 were a little better on a dollar neutral basis by about 1.25 points, indicated at 66.25 at the end of the day, versus a share price of $13.09, compared with 73.6 on Wednesday versus a share price of $17.43.

At the beginning of the day, they were quoted at 69 versus a share price of $14.50.

Ciena's 0.875 convertibles due 2017 were more or less unchanged on a dollar neutral basis, closing at 56 versus a share price of $13.09, compared with 65 versus a share price of $17.43 on Wednesday.

Shares of the Linthicum, Md.-based telecom equipment maker (Nasdaq: CIEN) sank $4.34, or 25%.

The credit will be impacted long term if sales continue to slow, but demand is expected to pick back up. In the meantime, the company has a "decent cash balance" to weather the downturn.

The company reported Thursday that profits fell to $11.7 million in the quarter ended July 31, down from $28.3 million in the year-earlier period.

Third-quarter revenue rose 24% to $253.2 million, but total operating costs rose as well.

In addition, it cut its fourth-quarter sales outlook to $190 million to $210 million, lower than the same 2007 quarter and lower than estimates.

The company said troubles stem from order delays being experienced from many of its Tier One service provider customers in addition to existing customer-specific challenges. Ciena customers include AT&T Inc. and Sprint Nextel Corp.

A more "guarded approach" to capital expenditures from its customers was attributed to the current uncertain macroeconomic environment.

Nortel pops up on rumor

Rumors that crossed the tape early in the session were obviously quickly discounted, according to one sellside analyst. A news service picked up a story on a web site that IBM was going to snap up Nortel.

Nortel is generally rumored to be an acquirer rather than an acquiree, the analyst said. "And it doesn't make that much sense why IBM would want to get into the networking business, especially given all the problems [Nortel] is having, but there was news that it signed an agreement to collaborate for new products."

"That rumor crossed around 10:30," and then shares and convertibles climbed until about noon.

Nortel and Ciena are competitors, although Nortel has a lot of wireless exposure and Ciena is mostly wireline.

Nortel Networks' 1.75% convertibles due 2012 were quoted at 93.625 bid, 94.625 offered versus a share price of $6.10.

Nortel Networks' 2.125% convertibles due 2014 weren't seen in trade but were indicated to close at 64.325 versus a share price of $5.81 at the close.

Shares of the Brampton, Ont.-based telecom networking equipment maker (NYSE: NT) closed down 9 cents, or 1.5%.

GM, Ford slip

August auto sales might have been better than expected at 13.9 million, and better than July's abysmal 12.8 million, according to a CreditSights report, but investors remained concerned about the prospects for General Motors and Ford in light of the slowing economy and slowing sales.

"We highlight that while July could have been a trough for sales, August numbers are still very weak from a macro standpoint and are barely tracking ahead of replacement demand," CreditSights' analyst Hitin Anand wrote in a report published Thursday.

GM's 6.25% convertibles due 2033 (NYSE: GPM) closed down 35 cents, or 2.9%, at $11.65 versus a closing stock price of $10.68. That compared with $12 versus a stock price of $11.27 at the close Wednesday.

GM's 5.25% convertibles due 2032 (NYSE: GBM) dropped 15 cents, or 1.3%, to $11.58 versus a closing stock price of $10.68. That compared with $11.73 versus a stock price of $11.27 on Wednesday.

Shares of the Detroit-based carmaker (NYSE: GM) lost 59 cents, or 5.2%.

Ford's 4.25% convertibles due 2036 closed at 65.5 bid, 66 offered versus a share price of $4.39 Thursday. That compared to trades at 67.5 on Wednesday. Earlier in Thursday's session the Ford bonds changed hands at 67.325 versus a share price of $4.50.

Shares of the Dearborn, Mich.-based automaker (NYSE: F) fell 18 cents, or 4%, to $4.36.

Tyson to price $450 million

Tyson Foods plans to price its offering on Sept. 10 after the market close, according to a syndicate source.

The large Springdale, Ark.-based processor and marketer of chicken, beef and pork will sell the convertibles via J.P. Morgan Securities Inc. and Merrill Lynch concurrently with an offering of 20 million shares of common stock.

On Thursday, Standard & Poor's lowered the corporate credit ratings on Tyson and Tyson Fresh Meats Inc. to BB from BBB-.

The rating agency said ratings remain on CreditWatch with negative implications, where they were placed on June 19, reflecting concerns that Tyson faces even higher near-term commodity costs than expected due to heavy rains and flooding in the Midwest that damaged crops.

The agency assigned a BB- senior unsecured and 5 recovery rating to Tyson's planned $450 million senior convertible note offering due 2013 and placed the senior unsecured rating on CreditWatch with negative implications. There is a $67.5 million greenshoe.

Proceeds of the convertibles and stock offerings will be used to repay borrowing under Tyson's accounts receivable credit facility and for general corporate purposes.

Pro forma total debt-to-EBITDA ratio is expected to be mid-3 times.

The convertible senior notes will be non-callable for life, with no puts.

Shares of Tyson (NYSE: TSN) closed down $1.30, or 8.6%, to $13.88.

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