Ocwen getting large outright orders; Lucent, telecom zeal fades; Delta skids off highs

By Ronda Fears

Nashville, July 21 - It was a roller coaster ride Wednesday but a common remark by convertible players, even a complaint by some, was that the bonds were holding up against some sharp declines in the underlying stocks.

"Where the stock was way off, you were looking for an opportunity to maybe buy into the weakness," said a convert trader at a New York sellside boutique, mentioning Mercury Interactive Corp., Invitrogen Corp. and ImClone Systems Inc. specifically, all three of which saw their stocks suffer double-digit losses. "But the [convertible] bonds are dollar neutral or a little better."

A trader at one of the bulge bracket convertible desks agreed that convertibles were "holding their own" in the face of the stock market slump. He said it was a combination of some new players in the convertible market coupled with a reluctance to sell, given the dearth of new issues and a shrinking market.

"We are seeing several big, new players moving into ConvertLand. These are mostly big equity funds, very sophisticated investors," the dealer said, noting that these new participants really began to show a presence in the convertible market in the middle to latter half of last week.

"Convertibles gives them some insurance should the stock market lag expectations, as we've seen come to pass today," he added.

On complaints from the buyside that the new participants put a damper on the market's liquidity as those players tend to be buy-and-hold investors, he said: "Well, there's initially some added liquidity in the market because they are buying, but the trade-off is that they are helping prop up valuations."

Outrights keen on Ocwen deal

Ocwen Financial Inc.'s pending convertible was a specific example of increased outright interest.

The issue was nowhere to be seen in the gray market ahead of pricing after Thursday's close - rather than Wednesday - but market sources said there was super outright interest in the issue.

Ocwen is pitching $125 million of 20-year contingent convertible notes talked to yield 3.0% to 3.5% with a 30% to 35% initial conversion premium, and is hoped to serve as an icebreaker for more issuers to go ahead with plans despite possible new accounting rules for CoCo converts.

"Large outright financial hedge funds love this company and are buying this issue in size," said a convertible trader at a sellside shop in Connecticut. "It will pop."

Indeed, new paper was a hot - though scarce - item.

Titan International Inc.'s new deal popped on Wednesday, after slipping to 99.625 bid right out of the gate Tuesday in sympathy with weakness in the transportation sector on Ford Motor Co.'s earnings. The 5.25%, up 36.78% convert rebounded Wednesday to close at 102 bid, 102.5 offered while the stock ended up 32 cents, or 3.31%, to $10.

GM softer on dividend theory

General Motors Corp. trended lower as the day went on with the broader markets after seeing a nice gain early on from its earnings report. But convertible traders said the GM converts, which are very liquid issues even without news, never really participated with the stock gain because of fear that the top U.S. automaker would be increasing its common dividend.

"There was a feeling that they would boost the common dividend, some trepidation, so we saw some selling into the strength on the earnings," a dealer said.

GM's earnings beat analysts' expectations and the company affirmed its earnings outlook for 2004, saying it continues to expect to report $7 per share of profit this year.

GM shares closed off a quarter or 0.57% to $43.35. The convertible bonds were off similarly with the 6.25s at 28.25 and the 5.25s at 24.5.

Like Ford Motor Co., though, GM executives expressed concern about market share in the ever-shrinking global market, noting tougher competition for U.S. sales from foreign automakers.

"While earnings at GM North America improved, overall sales, market share and financial results were well below our expectations," said GM chief executive Rick Wagoner. "For sure, the competition is tough, but we also must move faster to implement our strategy."

Ford's stock slipped 7 cents, or 0.48%, to $14.53 but the 6.5% convertible preferred edged up 0.05 point to 52.8 on very low volume.

Telecom issues steady, firmer

Lucent Technologies Inc. on Wednesday reported its fourth straight quarterly profit and said it expects 2004 sales will grow in the mid-single digits rather than the prior forecast of low-single digits gains. That came on the heels of strong earnings from Corning Inc. and initially propelled the telecom sector higher.

Telecom stocks, however, went south under selling pressure but traders said the convertibles were just slightly lower or even better bid.

Lucent's 2.75% converts around midday were holding to gains in the area of 2 to 2.25 points with the 2023 issue at 133 bid, 133.25 offered and the 2025 issue at 139.75 bid, 140 offered. But by the end of the day those gains were given back, plus some, with both issues ending off by about 0.75 point. The 2023s were closed out at 131.25 bid, 131.5 offered and the 2025s at 138 bid, 138.5 offered.

Corning's 3.5% due 2008 actually rose by about a point on buying from high-yield crossover players, a dealer said. He said the convert traded at 133, on an 80% hedge, after closing Tuesday with a bid of 131.75. Corning shares fell 55 cents Wednesday, or 4.33%, to end at $12.14.

"Lucent, I think, has exhibited great turnaround strategy execution and a specific plan of action to stay on track," the trader said. "This is probably a knee-jerk reaction that will reverse itself real soon."

Ciena takeover buzz fizzles

Ciena Corp., once a darling among the telecom convertibles, dropped as much 1.25 points on the bid side, traders said, as the market perceived the rumors that Siemens AG was eyeing the Linthicum, Md.-based networking story as a takeover candidate.

Bids on the busted Ciena 3.75% convertible due 2008 dropped to 86.75, down 1.25 point, by one sellside dealer's account, but another said there was a bid of 87.25 at the close. Early Wednesday, the issue had been quoted at 87 bid, 88 offered.

Ciena shares sank with the rest of the telecom group, plunging 20 cents or 6% on the day to $3.09.

"The whole sector was looking good before the bell, lots of green, because of Lucent," one of the sellside traders said. "Ciena was still looking pretty good, on the stuff from last week that Siemens might be buying the company, but that played out real quick."

A trader at a high-yield desk that traffics in the Ciena convertible said that as rumors about Ciena as a takeover candidate fizzled the market became more concerned that bankruptcy might be a possibility sooner rather than later.

"I heard various rumors of both Cisco and Siemens being interested in Ciena, but neither really makes sense or would be wise because of Ciena's financials," the trader said.

But Ciena could be appealing for the right buyer "because it has optical networks that could be beneficial before the next fiber optics boom because of broadband expansion in cell phones. But they [Ciena] are tracking way below their revenue guidance, something like 30%.

"Certainly, there is more speculation now that if a buyer doesn't step up soon or they come up with some drastic plan then Ciena is a bankruptcy candidate."

Six Flags buyers up for ride

A recent dip in amusement park operator Six Flags Inc. on its weak second quarter results announcement last week has brought out some buyers with strong stomachs for the ride.

The New York-based theme park company said last week that earnings were hampered by a 4% drop in attendance, which on Monday prompted Standard & Poor's to put its ratings on watch for a possible downgrade of up to one notch.

Earlier in the week, Six Flags shares took it on the chin and its convertible preferred followed suit in a big sell-off.

That attracted some buyers.

"The preferred is a screaming buy," said a convertible fund manager in New York. "Capex has plunged and the company's free cash flow is soaring. There's no way it passes the dividend on a trivial preferred issue, so the preferred gives a big yield for those with the clarity of vision to see the attraction."

The 7.25% convertible preferred due 2009 was unchanged Wednesday at 20.40 on the New York Stock Exchange amid very heavy volume with 197,000 shares changing hands versus the running three-month average of 19,780. Since Monday the issue had fallen 0.50 point.

Six Flags shares ended Wednesday up 7 cents, or 1.5%, to $4.75.

Delta converts skid with stock

News on the tape that suggested an agreement might be nearing between Delta Air Lines Inc. and its high-paid pilots on a wage concession package caused the converts to spike alongside the underlying stock, but the weight of the negative tone in the broader markets brought the securities down sharply.

"The last I saw the 8s was 50.5 bid, 52 offered and the 2.875s were offered at 56. They were up earlier but faded with the stock," said a sellside trader.

"The high print that I know of on the 2.875s was 61.125 and the 8s was 55" when Delta stock was at $6.25.

Delta shares came off that high, too, closing out at $5.49, which was still higher than Tuesday by 9 cents, or 1.67%.

Delta's junk bonds reacted similarly, initially jumping on the pilot news, but ended unchanged to only moderately higher.

According to reports, the pilots union at Delta offered to take pay cuts of 23%, doubling its concession offer to help the troubled No. 3 U.S. carrier cut costs as it tries to avert bankruptcy, but was still far short of what the company is wanting.

The union's new concession package, valued at $655 million to $705 million a year, compares to the company's request that the pilots take a reduction in wages amounting to $800 million.

Delta's chief executive Gerald Grinstein, however, said the offer is a foundation for meaningful talks. The air carrier is aiming to devise a dramatic restructuring plan by August.

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