Nortel deal seen done at lowest stock price ever; Tyco, Adelphia spiral as low bidders emerge

By Ronda Fears

Nashville, Tenn., June 7 - Headlines that boded ill for Tyco and Adelphia sent their converts crashing lower, where traders said some buyers emerged. The negative tone, however, idled much of the remaining market as investors face a quandary in search of quality.

"With the negative headlines hitting the tape every couple of days you get very nervous," said a convertible trader at a hedge fund in New York.

"There's really nowhere to turn in terms of a traditional flight-to-quality. Financials are hurting, healthcare, insurance, manufacturing, even industrials. Homebuilders are doing well, but you've got to figure they have, or are close to, topping out."

Thus, new deals were at the forefront of market buzz, with Nortel taking much of the limelight. Phelps Dodge, however, did a bought deal through JPMorgan, which was being placed throughout most of the session.

No one could be entirely certain, but Nortel's new $714 million deal is widely thought of being the done with the lowest stock price on record, at $1.41 a share.

At least, that is, for companies issuing convertibles that have stock. There have been a couple of convertibles sold in the past year or so linked to when-issued stock, or in advance of the issuers' initial public offering of common stock.

"I cannot recall a situation where the stock was lower," said a trader at a convertible fund in New York.

"There have been a couple of cases where the stock went to zero shortly after the convertible deal, or where there was no stock yet, but I don't think there's been any lower than $1.41 at the time of issue."

Analysts also believe it is a record low.

Putting the debate about credit spreads and cost of borrow to short the stock aside, buyers flocked to the Nortel convertible.

"If this company is in business in a couple of years, this is a home run. By the same token, that may not be the case," said Stuart Novick, convertible analyst at Salomon Smith Barney.

"You're really only talking about some intraday noise that can put you in the money. I think there were a lot of people thinking, 'What the heck,' it won't take much to be in the money."

Indeed, Nortel shares closed up 23c to $1.64 - just a nickel shy of the upper threshold conversion price.

But, the issue cannot be converted early until Aug. 15, so the market will be eagerly watching Nortel for the next couple of months.

Three other new deals were injected into the market also, including the surprise from Phelps Dodge.

JPMorgan bought the $200 million 6.75% mandatory convertible, with a 20% conversion premium, and $400 million of common shares.

Phelps Dodge shares were getting hit because of the deal, closing down $2 to $39.01.

FPL Group and Provident Financial also had new deals price.

Nothing large has been put on the calendar, but bankers note that the summer is coming on and deals could slow a bit.

"There's money still out there. It's an issuer-driven thing," said one banker, referring to the volume and type of deals coming to market.

"With financing in convertibles as a market of last resort, sort of, you've got to think that's going to make people nervous at some point."

Indeed, but traders said there also is a great deal of pain and nervousness surrounding the secondary market. Some are keeping capital in cash, some are buying Treasuries but most are still searching for quality.

"There's a lot of headline risk. I tell people to try to position themselves where they understand the risk they are taking. The Adelphia deal was kind of fraud, and it's hard to combat that," said Tom Sugiura, convertible analyst at Bear Stearns.

"In converts right now, it's volatility plays. From an outright point of view, it's tough. Right now there's some rebalancing going on. It's sort of summer, so there's not an incredible amount of action."

In addition to Tyco and Adelphia's plunge Friday, paper linked to Sprint PCS also continued to dive.

Charter Communications also was still heading south.

But traders said there was a bounce in the retail sector, including J.C. Penney.

Williams saw no impact from the downgrade by Moody's and, in fact, traders said there was some buying in the converts on the weakness.

The Williams 9% convertible preferred edged up 0.125 points to 14 while the stock closed off by 23c to $8.70.

Moody's noted weak cash flow generation relative to Williams' debt and business risks and low asset returns and said that Williams' net debt reduction has been minimal because the debt paid down has been largely offset by obligations assumed from its former telecom subsidiary, Williams Communications Group Inc.

Moody's downgraded Williams' senior debt to Baa3 and the convertible to Ba1, saying the outlook is negative desite Williams' newest plan to reduce debt by $3 billion through a combination of $1 billion to $1.5 billion of additional asset sales and a $1 billion to $1.5 billion common stock issuance this fall.

Williams' new debt reduction plan would result in lower leverage that is more in line with its expected cash flows and business risk, Moody's said, but reaching the $1 to $1.5 billion debt reduction target may be a challenge as the asset sale timing, proceeds and cash flow impact are uncertain.

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