Market tone improves but still patchy; Symantec, Calpine gain

By Peter Heap

New York, Sept. 4 - The convertibles market saw indications of a better tone Wednesday, helped by both a rise in stock prices after Tuesday's big fall and some bottom-fishing for bargains.

But the improvement wasn't across the board; some players reported low volume and a number of issues failed to respond to good corporate news.

Significant gainers on the session included Calpine Corp. and Symantec Corp.

"It was a much better day," said Jeremy Howard, head of U.S. convertibles research at Deutsche Bank Securities Inc. "Today felt like the first day back of school."

Unlike the official first day back - Tuesday, which saw the Dow Jones Industrial Average plummet 355 points - Wednesday's session saw not just better price action in the underlying stocks but more market activity.

"It felt like there were a lot of people how had been away over the summer who were putting money to work in the convertible market," Howard said.

Although he saw interest across the board, he noted bottom-fishing for distressed credits, notably in pharmaceuticals and biotechnology. Names trading included Abgenix, Inc., Cell Therapeutics, Inc. and Inhale Therapeutics Systems Inc.

With all-time high yields on some issues, Howard said: "People are thinking in a relatively simplistic way, not all these companies are going bankrupt."

However, not everyone saw better levels of activity. Several market participants contacted by Prospect News on Wednesday reported a dull day, with some still occupied completing month-end paperwork.

Looking ahead, Public Service Enterprise Group Inc. is set to price its $400 million offering of mandatory convertible preferreds after the close Thursday. Talk on the deal is for a yield of 10% to 10.5% and an initial conversion premium of 18% to 22%.

More details emerged on the units Wednesday in a filing with the Securities and Exchange Commission. Among them, the maturity will actually be 3¼ years and there is a short first coupon.

The short first coupon prompted Wachovia Securities, Inc. to update its model and the firm also adjusted its volatility estimate on the stock to 25% from 35%.

Wachovia now sees the deal as 4.74% cheap using a 400 basis points credit spread. The earlier model had put PSEG's offering 1.85% cheap.

Significant movers on the day included Symantec. Its 3% convertible due 2006 jumped around seven points to close at 117¾ as the underlying stock gained $3.09 to $30.76.

The company's chairman and chief executive officer John Thompson told a Credit Suisse First Boston conference that the consumer side of its business is running ahead of expectations.

Also benefiting from conference remarks was LSI Logic Corp. Its convertibles were up to two points higher, with the 4.25% due 2004 closing at 921/2, the 4% due 2005 at 80½ and the 4% due 2006 finishing at 74. The stock rose $0.74 to $7.70. LSI confirmed its guidance the third quarter revenue would grow 10% and forecast a return to profit in the fourth quarter at an analyst meeting in New York.

However automakers' convertibles were unchanged to slightly lower even as reports of strong sales helped their stocks. Ford Motor Co.'s 6.5% convertible due 2032 was seen going home at 44 at one desk, down just over a point, and up ¼ to 45½ at another. Ford's stock added 11 cents to $11.05.

General Motors Corp.'s 4.5% due 2032 was flat at 25 and the 5.25% due 2032 was also little changed at 24. Its stock added 20 cents to $45.75.

Calpine Corp.'s 4% convertible due 2006 added 1½ points to close at 56¾ as its stock gained 58 cents to $4.90.

Deutsche's Howard said the San Jose, Calif. energy company had benefited from bottom-fishing interest and from comparison with Mirant Corp., which warned earnings would be towards the low end of guidance Tuesday.

Mirant's 5.75% convertible due 2007 was down about ¾ point to finish at 653/4.

Howard also said there was considerable interest in XL Capital's #2 convertible, the 0% due September 2021. In a report Wednesday morning Howard analyzed the prospects for the triggering of the conditional additional principal clause in the bond - a provision that effectively adds extra interest for holders.

After Wednesday's close, Howard said his analysis shows the requirement had been met and bondholders will benefit from the provision, which increases the accretion rate by 50 basis points to 3.375% through the September 2003 put.

With the 2002 put coming up on Friday, the next question is whether bondholders will exercise the option or hold on to the bonds.

Howard said that by his calculations the stock is now quite close to the price where investors will retain the bonds.

And he noted XL still has the option to add a sweetener to be sure it will not have to buy back the securities.

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