Ford, GM better on short covering; airlines also firmer; techs rally but Computer Associates off after bell

By Ronda Fears

Nashville, May 26 - Short covering fueled a fair amount of the gains seen Thursday in convertibles, but traders said basically everything was better because market technicals have improved due to a halt in heavy selling. Ford Motor Co. and General Motors Corp. particularly benefited from short covering, traders said, along with airlines.

"People wanted to get a head start on the weekend. Around noon tomorrow [Friday] it basically will be over," said a sellside convertible trader, noting that convertibles will be open for trading for a regular session along with stocks although bond trading will close early at 1 p.m. ET.

Ford and GM convertibles were better, traders said, but a big drop in volume for those issues was noted. Ford's 6.5% convertible preferred added another half-point, settling at 40.25, while GM's three $25 convertible bonds were up a quarter-point to half-point.

Technology issues also rallied overall on Thursday, as did several biotech issues. Computer Associates International Inc. settled the day essentially unchanged but was seen after the closing bell lower on a disappointing earnings report.

Calpine Corp. convertibles were very quiet Thursday after "a ton" traded up Wednesday on details of stepped up debt reduction plans, and in its stead another power firm, Mirant Corp., was finding buyers who pushed the 2.5% issue up by 1 to 2 points Thursday.

Computer Associates disappoints

Computer Associates reported after Thursday's close that its fiscal fourth-quarter profit fell, as the company had warned.

Although the figures were not a surprise, given the company's warning a month ago, it still sent Computer Associates shares lower in after-hours trading by nearly 2%. The stock closed off 18 cents, or 0.62%, at $28.66 and was seen post-close lower by as much as 54 cents, or 1.88%.

Computer Associates' 1.625% convertible was seen late in the day at 148 with the stock at $28.80, versus one sellside shop closing the issue Wednesday at 148.125. A convertible trader on the buyside said the converts probably won't trade too much lower with the stock, noting the issue's popularity is largely due to having call protection through maturity in 2009.

The corporate software giant reported that fiscal fourth-quarter ended March 31 net income declined to $17 million, or 3 cents, from $89 million, or 15 cents a share, a year earlier as revenue rose to $910 million from $850 million. Excluding unusual items, the company said profit would have been 20 cents a share - in line with the company's revised forecast in mid-April of 19 cents to 20 cents a share.

Techs party ahead of big weekend

Tech names on whole, though, were sharply higher amid a buying spree that took its cue from stocks. Rambus Inc., Advanced Micro Devices Inc. and Mercury Interactive Corp. were three tech names specifically mentioned Thursday by sellside market sources.

"Techs are hot right now, it's not just short covering with these names," a sellside trader said. "They have just reached a point where buying makes sense."

Rambus' zero-coupon convertible was pegged at 83 with the stock at $15.25. The company, which designs computer memory chip interface technologies, saw its stock gain 33 cents on the day, or 2.19%, to $15.39 with no news on the tape.

AMD, another chip name, also got a lift Thursday with the 4.75% convertibles moving up around 1.25 points to 98 as the stock gained 20 cents, or 1.24%, to settle at $16.36.

Software firm Mercury Interactive also had no news out, but the sellsider pointed out that the stock has been upgraded by several big investment banks, like UBS and Goldman Sachs, in the past week or so. Mercury's convert traded at 102.5 late Thursday with the stock at $46.00, but the shares pulled back to close at $45.64, still up 8 cents on the day.

Biotechs feeling better

Biotechs that have been pummeled recently also firmed Friday, with ImClone Systems Inc. seeing some action. Market sources also mentioned DOV Pharmaceuticals Inc., ViroPharma Inc., Impax Labs and Guilford Pharmaceuticals Inc. gaining this week, as well.

"Several of these little biotech issues are clawing back," a sellsider said.

ImClone's 1.375% convertible moved up Thursday to 82 with the stock at $33.50, versus a sellside shop taking them out Wednesday at 80.5. The stock ended at $33.68, up 31 cents, or 0.98%.

In some cases, news was fueling a better appetite for buying biotech issues. Guilford was mentioned in that vein, since the company said Tuesday that it is implementing a restructuring plan to reduce costs and streamline its product focus. Guilford said it will cut some jobs, which will result in an estimated $1.3 million in charges over the next nine months but long term will lower costs by about $6 million a year.

Guilford's convertible has moved up from the low 70s to the high 70s, a sellside desk analyst said. The stock on Thursday gained 2 cents to $2.54.

XM, Sirius attend party

XM Satellite Holdings Inc. traffic, at least in the convertibles, lightened up Thursday as the company held its annual stockholder meeting, but the bonds were firmer, a trader said. Sirius Satellite Radio Inc., its rival in the space, also gained ground amid the rally in stocks.

More of the XM bonds moved Wednesday, a sellside source said, but they were still marked up Thursday as the stock rose 77 cents, or 2.5%, to $31.64. He noted Sirius convertibles were a bit firmer, too, as that stock "was higher with the tide," but he said it seems "everyday the tide seems to be shifting a bit more toward XM" as the pick of the two rivals.

In one camp, fans of XM point to its 4 million subscribers, which accounts for a slower rate of growth than Sirius as it just passed the 1 million subscriber mark. In another camp, Sirius fans assert that its faster rate of growth will eventually bring its valuations, which are expensive based on subscription figures, into accord with XM.

Sirius shares gained 15 cents on Thursday, or 2.66%, to close at $5.79.

CreditSights analysts said in a report Thursday that the dramatic growth in digital satellite radio is undisputed but suggest Sirius shares are just too rich, recommending XM over Sirius. In recent reports, the firm also has calculated that XM's cost of adding subscribers is less than Sirius.

"There is no question about the growth potential for the company. Is Sirius' business model able to deliver this growth to shareholders? Not at this valuation. Sirius has a large market opportunity as one of two digital satellite radio services in the U.S.," the credit analysts said in the report.

"While Sirius will be able to grow the revenue line with subscriber additions, we identified three red flags in the business model that point to greater uncertainty regarding the timing of positive cash flow. The deal with Howard Stern and other high-profile content deals serve as a drag on the business model."

Airline paper rises

Delta Air Lines Inc. was joined by virtually all the airlines in moving higher on short covering, but convertible sources mentioned AirTran Holdings Inc., AMR Corp. and Continental Airlines Corp. most often in referring to traffic in airline converts Thursday.

"All the airlines got a nice lift today," one sellsider said. "Risk is diminishing, so that has kicked in all the short covering."

America West Holdings Corp.'s funding for its acquisition of bankrupt US Airways Corp., namely vendor financing, has improved the scope of alternatives available to airlines needing to shore up liquidity levels, like Delta and Northwest Airlines Inc., moving the group higher.

"If you look at the dollar prices, the convert market is telling you that there is still some bankruptcy concern at Delta and Northwest, they are in the 30s and 40s," said a sellside market source earlier in the week. "The market feels a lot better about Continental and AMR [parent to American Airlines Inc.]; they are in the 70s and 80s."

Virtually all the airline paper was better with the underlying stocks, but none as solidly as Delta. Delta's 8% convertibles traded up to 37.5 on Thursday, versus settling Wednesday at 35.625. The stock shot up 46 cents on the day, or 13.78%, to $3.81. Delta's short-dated junk bonds climbed 3 to 4 points, with the 7.7% issue due 2005 at 82 bid.

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