Converts flat in light trading on bankruptcy fears, ahead of Fed

By Ronda Fears

Nashville, Tenn., Aug. 12 - Convertibles were described as flat amid very light volume ahead of the Federal Reserve meeting this week and heightened concern about bankruptcies with U.S. Airways' Chapter 11 filing.

The U.S. Airways news sent Continental Airlines lower with heavy selling, alongside most other major airlines. It also cast an uneasy sentiment on the market, what with flagging corporate profits despite signs of economic recovery. The latter also has injected doubt among those hoping for an interest rate cut from the Fed.

"It was really dead today. There was some spotty trading, on earnings and stuff like that, but nothing going on that you could sink your teeth into," said a convertible trader at a major investment bank.

"We're in the so-called dog days of summer, plus the Fed meeting. So the market is pretty much stalled."

Weakness in the dollar and the realization that it's unlikely that the Fed will cut interest rates, despite recent hopeful commentary from Wall Street pundits, also helped keep buyers on the sidelines.

Volatility slacked off somewhat, although it was still on the rise, traders said, and there was noticeable activity in mandatories given the lack of activity elsewhere.

"I think our mandatory traders were the about the only ones trading, certainly they were the busiest today," said Jeff Siedel, head of U.S. convertible research at Credit Suisse First Boston.

"Generally, people are much more involved with the mandatory product right now. There's delta in that product. And mandatories have accounted for 25% of new issues this year."

Outside of several mandatories seeing trading activity and a few zero-coupon converts, Continental reeled on U.S. Airways' bankruptcy filing on Sunday, as did other large airlines.

Continental's 4.5% convertible bond due 2007 dropped 2.875 points to 56 bid, 56.5 asked as the stock fell 92c to $8.20.

"The U.S. Airways headlines just sort of renewed widespread fear about bankruptcy, in lots of areas in the market," said a convertible trader at a hedge fund in New York.

A dealer said credit spreads slacked off from the sharp widening recently, but Ford paper was still under pressure amid heavy selling.

Dump and pump strategies are forcing Ford spreads wider, though, said Banc of America head of global markets group research David Goldman. He said he would suggest caution with regard to the credit.

"Remote as the probability might be that Ford will lose its investment-grade rating - last week's rumors were entirely unfounded - credit investors have learned over the past year that the way to stay ahead of the pack is to sell any name on any bad news before everyone else does," Goldman said.

"Problem is that this trade has become so profitable that market shorts have taken over from fundamentals. Dump and pump is the flavor of the day in credit markets, as good news is ignored while bad news is pumped up. Pressure in Ford's 5-year issues was greatest last week following the rumors, evidence that selling pressure from CDS [credit default swaps] and other shorts is contributing to the overall weakness in Ford's technicals."

Ford's 6.5% convertible trust preferred due 2032 dropped 0.60 point to 45.65 amid "a landslide of sellers," as one trader put it. The common stock closed down 20c to $11.64.

Sprint PCS-linked converts were lower slightly after news late in the afternoon from Sprint Corp. that it closed a new $1.5 billion bank revolver and revised terms on another credit line to remove credit rating requirements.

The new $1.5 billion revolver replaces an existing $2 billion credit line that would have expired in August 2003. The company also amended a more than $1 billion credit line that is backed by accounts receivables so that any ratings downgrades or changes will not limit access to it.

Sprint also reiterated that it believes that it has enough money to cover its expenses for the foreseeable future and said it expects to be free cash flow positive in 2003.

Sprint PCS shares closed off 23c to $4.18 and the five convertible issues linked to the Sprint tracking stock for its wireless operations were slightly lower as well.

Comcast's converts, however, were mostly unchanged along with the stock.

Traders said there could be some activity in the name Tuesday, however, on maneuvering related to a potential debt exchange. But, traders said many Comcast holders will likely want more information before buying or selling ahead of the event.

"There could be something happen with Comcast, but it would be pure speculation at this point," one dealer said.

AT&T Corp. and Comcast Corp. said in an SEC filing on Monday they may exchange up to $11.8 billion in debt as part of the planned merger of Comcast and AT&T Broadband.

The companies said a decision to proceed with the exchange offer will be based on market and business conditions over the next several months and finalization of terms.

An offer would involve two types of transactions. The first involves an exchange of some AT&T notes for new notes that would be backed by the AT&T Comcast, which would reduce the amount that AT&T Broadband would otherwise be required to pay its parent. The second transaction is essentially a refinancing of existing debt involving an exchange of other AT&T notes for new notes that would remain obligations of AT&T.

The managers for the exchange offer are Credit Suisse First Boston, Goldman Sachs, JPMorgan, Merrill Lynch and Morgan Stanley.

Comcast's 0% convertible due 2020 was quoted up slightly at 76.75 bid, 77.125 asked.

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