Selling prevails as AOL, Ford put skids on recovery hopes

By Ronda Fears

Nashville, Dec. 3 - As the broader market retreated, traders said profit taking was the theme in convertibles as hopes for a recovery in stocks faded with a warning from AOL Time Warner Inc. and weak sales at Ford Motor Co.

"I really think the overall consensus is that we've reached the bottom of the [economic] cycle, but there will be an overhang of negative news that creates trading opportunities along the way," said the head convertible trader at a major investment bank.

"The convertible market is very rich right now, and we're seeing some people beginning to take advantage of that. Some of the selling, I think, is also in anticipation of a strong new issue calendar this month, and there's probably a little bit of portfolio rebalancing going on" due to the year-end.

The market was generally described as "holding up rather well" against the sharp drop in stocks and wider credit spreads as corporate bonds weaken in response to the stock decline and a healthy corporate calendar.

"The volatility [in credit markets] has come in quite a bit. The credit default spreads on Verizon, for example, have come in to about 150 bps from 600 bps over Libor," said Rao Aisola, head of convertible research at Bear Stearns & Co.

Otherwise, he added: "It was basically a sideways trading day. The consumer is holding up the economy, so everybody is looking to the retailers for the cues. We would look at this as an opportunity to sell into the strength."

Indeed, traders said that was the case with several retail names that have been on the rise recently, like Gap Inc. and J.C. Penney Co. Inc.

Gap's 5.75% convertible due 2009 was quoted down 1 point to 126.75 bid, 127.25 asked with the stock closing down 24c to $15.75.

J.C. Penney's 5% convertible due 2005 was quoted down 2 points to 108.5 bid, 108.75 asked as the shares ended down 78c to $23.79.

Headlines related to AOL and Ford, as well as Hewlett-Packard Co. and Nokia Inc. really turned moods negative.

AOL warned on Tuesday that advertising sales at America Online will drop as much as 50% next year and overall EBITDA could drop 20% to 25%. AOL convertibles dropped sharply as a result, giving back some of the gains seen in the rally of the past month.

The Tribune/AOL 2% exchangeable due 2029 was quoted down 2.75 points to 70 bid, 71 asked.

The AOL 0% convertible due 2019 was quoted down 0.75 point to 54.5 bid, 55 asked.

AOL shares closed down $2.36 to $14.21.

Ford fell more dramatically after the automaker reported U.S. sales fell 16.6% in November from a year ago and said it would cut fourth quarter production due to rising inventories of unsold vehicles.

Although Ford said it still expects to meet its earnings estimates for fourth quarter of a slight profit and asserted its turnaround plan remains on track, traders said there was a general "lack of faith" in the credit.

Ford's 6.5% convertible preferred due 2032 dropped 3.5 points to 41.5 bid, 41.625 asked as the stock lost $1.49 to $9.96.

Also, traders said the weakness beginning to crop up in the construction industry put pressure on Lennar Corp., although the company reported Tuesday that new home orders in November were up 39%.

"There are finally some real signs that home building will be slowing down," one dealer said.

The National Association of Realtors said Tuesday that after setting records in 2001 and 2002 home sales are projected to slip in 2003 but remain historically strong.

Lennar's 0% convertible due 2018 fell 3 points to 69.625 bid, 70 asked and the 0% convertible due 2021 lost 1.125 points to 44.5 bid, 45 asked. The stock closed down

Warnings from Hewlett-Packard and Nokia impacted tech and telecom issues as well as chips and software names.

Chipmaker Advanced Micro Devices Inc.'s new 4.5% convertible due 2007 was quoted down 7 points to 144.5 bid, 144.75 asked and the old 4.75% convertible due 2022 down 2.375 points to 68 bid, 68.5 asked. AMD shares closed down 81c to $8.12.

Sanmina-SCI Corp. got a lift, however, from news that it plans to issue $450 million of senior secured notes and take out a new $250 million senior secured credit facility as part of its refinancing plans. The company said a portion of the notes also will be used to repay the outstanding balance under its receivables securitization facility, refinance or restructure other debt, and to fund further expansion of its business and working capital.

The Sanmina-SCI convertibles traded up, particularly the 3% convertible due 2007 because it is callable in May 2003 at 101.71 and could be a target in the refinancing plan.

A source in the high yield market said the new Rule 144A issue is expected to begin a road show on Thursday with pricing anticipated Dec. 18 or 19, although indicative terms were not yet available.

A dealer also noted distressed buyers in cable, "but there's not been any real profit taking yet, overall, despite the recent run" in the sector.

There were some markdowns however, notably in EchoStar Communications Inc. and Charter Communications Inc.

EchoStar's 5.75% convertible due 2008 was quoted down 1.125 points to 84.5 bid, 85.5 asked and the 4.875% due 2007 down 1 point to 83.25 bid, 84 asked as the stock lost 77c to close at $19.90.

Charter's 5.75% convertible due 2005 was quoted down 1.875 points to 31.125 bid, 32.625 asked and the 4.75% due 2006 down 0.5 point to 26.5 bid, 27.5 asked. Charter's junk bonds were down about 2 points, a dealer said. Charter shares closed down 18c to $1.64.

Weakness in Charter might be attributed to another executive resignation, the dealer said. Charter said Tuesday that its senior vice president of Midwest division operations, Bill Shreffler, resigned for personal reasons.

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