In sloppy trading, seesaw day ends flatly; Shaw, Duke drop on earnings bombshells

By Ronda Fears

Nashville, Jan. 13 - Trading was sloppy and the session marked with a seesaw pattern, but traders said convertibles on whole ended on a flat note.

Of course, the big movers of the day were heading south.

Shaw Group fell after posting a 12% drop in fiscal first quarter profits. And in the energy sector, Duke Energy Corp. lead the pack after revising its 2002 and 2003 earnings estimates lower.

With just one new issue to chase so far this week, however, it was a slow start. And frustrating as players noted the rich market keeps getting richer.

"Everything is very rich," said John Siebel, head of trading at Silverado Capital Management.

"We need about 10 Tyco-sized deals to get some rationally priced deals."

Some players are anticipating at least one and maybe two more new deals this week, along with State Street Corp.

Nothing has been announced yet, however.

Little was being said about the State Street deal, either. The roadshow began Monday and pricing is set for Tuesday.

Although the deal uses a new convertible Spaces mandatory structure designed by Goldman Sachs, which is a bookrunner and a joint lead manager with Deutsche Bank Securities, one source said it looked similar to the convertible Prides mandatory structure minted by Merrill Lynch & Co.

"We think the State Street deal is effectively just another three-year mandatory," said Barry Nelson, a fund manager at Advent Capital Management.

"We see the complicated structure as reflecting tax considerations."

Wachovia Securities, Inc. analyst Kimberlee Brody puts the deal about 7.17% cheap, at the midpoint of guidance and with the stock at $40.19, using a credit spread of 50 basis points over Treasuries and 40% volatility in the stock, plus noting a 1.29% current yield on the stock.

The three-year deal is talked to price at a yield of 6.75% to 7.25% with an 18% to 22% initial conversion premium.

State Street shares closed up 24c to $40.47.

Players were taking heart that the credit markets in general remain fired up. And credit spreads continue to tighten.

Ford Motor Co.'s financing arm was reported to be in the ABS market with a $3 billion deal.

Ford's 6.25% convertible trust preferred ended up 0.45 point to 44.85 and the common closed up 8c to $10.38.

General Motors Corp. also gained ground, although there were reports out Monday with analysts predicting softer sales for the Big 3 automakers.

Tim Patrick, high grade automotives credit analyst at Banc of America Securities, said that while the automakers look better going into 2003 there are still concerns looming. Not the least of which, he said, is pension funding costs.

Bad news, however, drove the energy sector sharply lower.

Duke cut its 2002 earnings per share estimate, saying it expects to report a figure about 10c below the $1.95 to $2.05 range provided in October. The company is scheduled to release 2002 earnings on Jan. 28.

For 2003, the company expects EPS of $1.35 to $1.60, down from its previous forecast of flat with 2002.

A big sell-off sent the Duke 8% mandatory down 1.7 points to 15.3 while the 8.25% mandatory lost 2 points to 15. The stock closed down $3.13 to $17.87.

Merrill Lynch changed its recommendation on the stock to sell.

Salomon Smith Barney had been in the process of removing the Duke 8% mandatory from its recommended portfolio, noted convertible analyst Stuart Novick.

"We were actually removing the 8% DECS from our recommended portfolio before this news, because the leverage of the issue no longer makes sense," Novick said.

"It would underperform the common on the upside and on the downside. The only way the [8% mandatory] would outperform is if the company decided to slash its common dividend, which from what I gather is still not something they're considering."

El Paso Corp. and Mirant Corp. were among the energy names following Duke south.

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