Short week gets off to slow start; Disney moves along with Yahoo

By Ronda Fears

Nashville, April 14 - Another slow week was anticipated for the convertibles market, both in trading and new issues, as the earning deluge begins.

There's also the Good Friday holiday, which shortens this week and spring break for many schools in the New York City area.

Yahoo! Inc. continued to gain some ground on the heels of its positive earnings report last week, with its new issue trading higher, and The Walt Disney Co.'s new issue joined the party as well.

"It's slow today but this whole week is going to be slow with the [Good Friday] holiday, and school's out in a lot of places up here" in the New York City area, said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

"I had my own seat on the train coming in this morning and that should tell you something.

"In London - they are out Friday and Monday - they are talking about pretty much closing down tomorrow [Tuesday]."

There was nothing in the way of new issues emerging, however, and sources said the pipeline would likely be slim this week, given the holiday.

"Everyone's waiting for the weekend, even though we just got back," said a capital markets source at one of the top convertible underwriters.

"We don't have anything for this week and I'm not hearing about anything from anyone else."

Still, a couple of buyside sources said there is some buzz that one or two deals might come to market this week, and others on the sellside said that might make sense.

"The market seems to be holding its own," said Jonathan Cohen, convertible analyst at Deutsche Bank Securities Inc.

"Stability is a good thing if you're issuing."

It is noteworthy to mention, as well, that General Electric Co. on Monday filed a $5 billion shelf registration for debt, warrants and stock issuable on conversion of debt. Not only is it an unusually limited kind of shelf filing, but registrations often don't mention convertibles at all other than in the small print.

Certainly, demand remains high, buyside sources said, with new capital continuing to stream into the convertible asset class.

Performance probably is a logical driver, as Merrill Lynch reported Monday that hedge funds "continued to rack up performance at the start of the second quarter after a very strong first quarter, where convertible hedge funds were up over 5%."

In the first 10 days of April, the Merrill Lynch convertible hedge fund index, a proxy for large convertible hedge fund performance, rose 0.8%.

Preferreds were the best performers, driven by Ford and Calpine's convertibles, as spreads on the names continued to contract sharply, noted Yaw Debrah, head of Merrill Lynch U.S. convertible research, in the report.

The strong performance of coupon bonds, the vast majority of which are trading near their fixed income values, was aided by continued gains in the high-yield market, he said, which was boosted by floods of new cash into that market sector.

The performance of zero-coupon bonds was slightly negative, he said, as declining volatility in the equity markets reduced their valuations.

The decline in historical volatility in the equity markets - as the Nasdaq 90-day historic volatility came in from 28.4% to 27.3% and the S&P 500 narrowed from 23.4% to 22.7% - was mirrored in the convertible market, with the implied volatility of the convertible market decreasing from 52.1% to 50.4%.

"This is still well above the mid to low 40 levels of the first half of 2002 when the economy and equity markets were perceived to be improving," Debrah said, adding that with the Iraq war entering its closing stages and oil prices tumbling, "in the absence of unforeseen systemic disturbances such as a major terrorist strike, it is difficult to see volatilities remaining at their present elevated levels."

The market is still rich, he said, and in fact at record levels because of the tightening in high-yield credit spreads.

The discount between actual and theoretical value declining from 0.8% at the start of the quarter to 0.65%, he said, which puts it "near an all time high for market richness."

Though April 10, high-yield spreads are in 47 basis points to 661 bps from 708 bps for the quarter, he said, "as a flood of new money to high yield funds is pushing up valuations."

"The potential for spreads to tighten further, as default rates decline, makes high yielding coupon bonds one of the most attractive sectors of the convertible market today," Debrah said.

Outside of the most recent new issues - Photronics Inc. in addition to Yahoo and Disney - traders are noting more and more activity in high-yield names, particularly those in distressed ranges.

Charter Communications Inc. and Williams Cos. Inc. were a coupled mentioned on Monday.

Charter was moving higher as the hopefuls continue to think there will be a restructuring plan emerge, while Williams headed south on concerns about cash flow following massive asset sales.

Williams announced Monday that it was selling its Texas Gas Transmission Corp. pipeline unit to conglomerate Loews Corp. for $1.045 billion - $795 million in cash plus $250 million of Texas Gas debt.

"There is a positive aspect to Williams raising cash, but they are selling assets that are cash cows and while it wasn't at bargain basement prices, it certainly was a good deal, which even Loews acknowledged on its conference call," said a trader at a convertible fund based in New York.

Williams said it expects to take a first quarter impairment charge of $110 million to $120 million for the sale. Including the Loews deal, the company has $2.1 billion worth of assets in the midst of being sold or sales that have closed.

Williams' shares fell as much as 1.5% on the news, but recouped all the losses by day's end. The stock closed unchanged at $5.40.

The Williams 9% mandatory ended off slightly, by 0.04 point to 10.05.

Texas Gas owns and operates a 5,800-mile pipeline system that transports natural gas from the Gulf Coast, east Texas and north Louisiana to other points in the southern U.S., Williams said, and has the capacity to deliver 2.8 billion cubic feet of natural gas per day.

Like much of the merchant energy sector since the collapse of energy trader Enron Corp., Williams has suffered from credit downgrades and has been forced to sell many of its assets at a loss to raise cash.

Loews chief executive James Tisch said on the conference call that the timing was ideal for buying utility assets, given how distressed many of those companies are.

"This is a very opportune time now to buy a business that has very good visibility of cash flow and is a very consistent earner," Tisch said.

"It's a very attractive value right now."

Standard & Poor's placed the ratings of Loews Corp. on negative watch, including the Diamond Offshore Drilling Inc. exchangeable at A+, following the announcement and also noting concerns about the increased level of risk in the U.S. cigarette industry, via its Lorillard Tobacco ownership.

Separately, however, S&P put Texas Gas ratings (B+) on positive watch, reflecting the separation from Williams and its new affiliation with the financially stronger Loews, as well as a strong business profile at Texas Gas.

Charter's converts moved up on renewed hopes of a Paul Allen bailout gleaned from the announcement Monday by Comcast Corp. and Allen's investment vehicle, Vulcan Inc., that they have agreed to delay for 30 days the amount of time Comcast has to exercise the put option for its stake in Charter inherited from its merger with AT&T Broadband.

The transaction had been scheduled to close Monday.

Traders said another seed of hope was harvested from reports that Allen and Comcast are in talks to allow Allen, a majority stakeholder in Charter, to essentially give cable systems in Texas or New England instead of the $725 million that it would cost to pay the put.

Charter's convertibles were both up about a 0.25 point, traders said, with the 5.75s quoted at 29.25 bid, 30.25 offered and the 4.75s quoted at 26.125 bid, 27.125 offered.

Charter shares closed up 5c, or 4.6%, to $1.13.

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