Mercury bid at 101.5 in gray; Leucadia, CNET deals emerge; Ford rises on blowout quarter

By Ronda Fears

Nashville, April 21 - Convertible traders said the peak of earnings season conspired with additional comments from Federal Reserve chairman Alan Greenspan to keep players in the shadows Wednesday.

"Earnings season is peaking and that is a relief. Maybe we can see some new deals now," said a buyside trader.

A trio of new deals was on the table by the end of the day, but traders said that since the deals were small, they didn't expect them to stimulate much secondary trading.

Greenspan's comments Wednesday were interpreted to suggest that rate hikes will not be predictable or imminent as traders anticipated. Thus, the result was further chaos in the markets, particularly Treasuries, the buyside trader said.

Computer Associates trading was halted for about a half hour early in the day pending news. Initially, the securities dropped, but when the news emerged that the chief executive would step down from the top spot, investors cheered. Amid an internal audit and government investigations it was seen as a positive move, and a sellside trader said the Computer Associates convertibles were marked up 3 to 4 points as the stock gained about 4.25% on the development.

Over in the distressed quarters of the bond world, Adelphia Communications Corp. convertibles - the 6% and 3.25% issues - firmed to 48 bid, 50 offered after having fallen back down to the mid-40s earlier in the session Wednesday. On Tuesday, a distressed bond trader said the Adelphia converts moved up to 47 bid from prior levels at 44.

Charter Communications Inc. convertibles were described as flat in the mid-90s neighborhood Wednesday. Charter investors have been watching Adelphia's situation closely, particularly to see if its cable assets are sold this year as speculated and, more specifically, at what price.

Mercury bid up, with no offers

At bat after the close was Mercury Computer Systems Inc. with $100 million of 20-year convertible notes talked to yield 2.0% to 2.5% with a 30% to 35% initial conversion premium.

Merrill Lynch & Co. analysts put the Mercury Computer deal 4.84% cheap, at the middle of price talk, using a credit spread of 330 basis points over Treasuries and 35% volatility.

Accounting for relative scarcity of new deals, Merrill convertible analyst Tatyana Hube said she expects the deal will price at the rich end of price talk, or terms might even get tightened.

In the gray market, the Mercury Computer deal was bid at 101.5 but there was no offer, according to a buyside trader.

Mercury Computer shares closed Wednesday down $1.61, or 6.71%, to $22.39.

CNET, Leucadia deals afloat

A couple more new deals - both overnighters - emerged after the close, too, from Leucadia National Corp. and CNET Networks Inc.

Leucadia launched $200 million of 10-year non-callable convertible notes talked to yield 3.75% to 4.0% with a 27% to 30% initial conversion premium via sole bookrunner Jefferies & Co. with final terms expected before Thursday's open.

The New York-based conglomerate is involved in telecom, banking, manufacturing, real estate, wine making, copper mining and reinsurance. Leucadia has been butting head-to-head with Vulcan Energy Corp. in an aggressive play for Houston-based independent oil and gas producer Plains Resources Inc., which has rejected Leucadia's proposals twice. Vulcan Energy is a unit of Vulcan Capital, the private investment group of Vulcan Inc., founded by Microsoft Corp. co-founder Paul Allen.

Leucadia shares closed Wednesday down 90 cents, or 1.67%, to $53, and in after-hours trading the stock was down another 91 cents, or 1.72%.

CNET sold $125 million of 20-year convertible notes printed with a 0.75% coupon and 46.2% initial conversion premium via lead manager Citigroup Global Markets Inc. But a market source said the bought deal might get repriced below par before Thursday's open.

The San Francisco internet company is no stranger to the convertible market but recently has been acquisitive with operations turning more positive. After better-than-expected first quarter results, CNET boosted its guidance for 2004. CNET shares closed Wednesday up 29 cents, or 2.9%, to $10. 28. In after-hours trading, the stock was down 45 cents, or 4.38%.

Ford blowout drives buying

On incredibly better first quarter results than expected, Ford Motor Co. convertibles were driven sharply higher amid a buying frenzy.

The 6.5% convertible preferred added 2.82 points, or 5.32%, to close on the New York Stock Exchange at 55.83 with 3.86 million shares changing hands compared with the three-month running average of 867,973.

Ford stock gained $1.33, or 10.18%, to end at $14.94, also on strong volume.

"The numbers were well above anyone's wildest dreams," Michael Ward, a bond analyst with Credit Sights, said of Ford's earnings.

Ford on Wednesday reported that first quarter net earnings rose to $1.95 billion, or 94 cents a share, from $896 million, or 45 cents a share, in first quarter 2003. Ford said it cut automotive costs in the quarter by about $600 million, whereas the Big 3 automaker previously announced a cost-cutting target of around $500 million for all of 2004.

"This is the best quarter we have achieved since we began our back-to-basics efforts more than two years ago," which aims to build profits to $7 billion by the end of the decade, said company namesake and chief executive Bill Ford Jr., in a prepared statement.

Ford said the company still faces challenges but for the first time since 2000, automotive operations earned more than finance arm Ford Motor Credit Co.

Silicon Graphics resists slide

Silicon Graphics Inc. reported a narrower fiscal third quarter net loss, but some equity analysts were expecting the computer maker to break even, so the stock got crushed. But the convertible withstood the 19% decline in the stock, market sources said, noting that there was a fresh bid on the issue.

The Silicon Graphics convertibles were quoted unchanged with a bid of about 10 points over parity, or 192.5 on a 100 delta.

Silicon Graphics stock on Wednesday plunged 56 cents, or 19.72%, to close at $2.28.

The company said its fiscal third quarter loss narrowed, driven by cost cutting. Silicon Graphics, best known in the 1990s for its high-end computers, reported a net loss of $4.1 million, or 2 cents a share, versus a net loss of $35 million, or 17 cents a share, a year prior. Revenues rose to $230.2 million from $217.1 million. Operating expenses dropped to $111 million from $128 million; thus, gross margins rose to 45.4% from 37.1% a year earlier.

While the equity crowd was disappointed, some convertible players saw it as a buying opportunity. But as the bond price suggests, there were no sellers.

One bidder for the bonds said the quarter came in as he anticipated and he expects Silicon Graphics' credit to improve.

"I am bidding for them but no one is selling," he said. "I think a few orders were pushed out - a timing issue - so I would expect to see some orders soon."

Indeed, on Wednesday after the earnings were reported, Standard & Poor's raised Silicon Graphics subordinated debt to CCC- from CC and senior debt to CCC+ from CCC-, citing improved liquidity and year-over-year EBITDA improvement for three consecutive quarters. With a positive outlook, S&P said if the company maintains operating profitability and positive free operating cash flow, the rating could be raised again in the next 12 months.

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