Market slides sharply, thanks to Nasdaq, but uptick in volatility gives some encouragement

By Ronda Fears

Nashville, July 17 - Convertible trading was not brisk amidst a sharp decline as the Nasdaq tanked Thursday but there were signs of stabilization. Specifically, a surge in volatility was a source of encouragement.

"The market has been out of whack for a while," said Peter Ramsey, head convertible trader at Lehman Brothers, noting a major culprit in the recent big declines seen in convertibles was Mandalay Bay's announcement of a dividend in May, compounded by low volatility.

"Today it certainly felt like things are starting to stabilize."

After the closing bell, the primary market showed signs of life with Constellation Brands Inc. and Allegheny Energy Inc. both announcing mandatory offerings. The Constellation Brands issue is for $150 million and Allegheny's $300 million, with both anticipated for next week's business.

At bat following the close were Medarex Inc. with a $100 million deal and Alloy Inc.'s $75 million offering.

Nextel Communications Inc. announced a $1 billion straight bond offering, somewhat cooling the buzz in convertibles that Nextel Partners Inc. was on the verge of bringing another deal.

Both Nextel Communications and Nextel Partners converts lost about 1 or 2 points, traders said, although Nextel Communications reported what Tim Donahue, Nextel's chief executive, described as a "blockbuster" quarter with operating momentum "accelerating."

In the context of announcing the $1 billion note offering, Paul Saleh, Nextel's chief financial officer, noted that the $5 billion shelf is now effective.

"Currently about two-thirds of our capital structure is callable," Saleh said on Nextel's conference call.

"We have the flexibility to opportunistically access the capital markets to extend maturities and lower our cost of debt."

To some extent, Nextel was a victim of the sentiment that drove the Nasdaq lower, along with a large portion of the convertible market.

With the Nasdaq plunging 2.86%, tech issues were down sharply - particularly semiconductor and software names. All the airline paper took a careening dive as the earnings news was not as promising as had been anticipated. And for the most part, distressed and busted converts also lost ground.

Freeport McMoRan Copper & Gold Inc. was one of the few shiny green spots on the convertible screens with its new converts gaining about 2 points on its spike in earnings as the result of higher gold prices, which moved upward on Thursday as well.

Selling subsided somewhat, traders said, and in fact activity was rather muted Thursday in the face of such a wide swing in stocks.

With a view on the future, a fair amount of encouragement was gleaned from the surge in volatility on Thursday. The VIX, or market volatility index, shot up 2.38%, following a sharp downward trend for the past three months. Vol has been sloping lower for the past year, but had showed promising signs of shifting upward in February, which never panned out.

While credit spreads were the bane of many convertible players during 2002, this year it has been volatility.

"Volatility has compressed so much in our marketplace that a lot of people have been reluctant to dip their toes in. Pure vol players have just been murdered," said Lehman's Ramsey.

"The VIX was a good sign today. The big question is whether we're on a ledge or if we're just stuck in a low vol environment. The credit markets seem to tell us that maybe we're in for a low vol environment. If you think that things are going to pick up, though, you have to take a view."

While there are not a lot of bargains per se in convertibles right now, he said there are opportunities to be weeded out of the batch.

In trading, other dealers said airline paper dove sharply on the heels of earnings headlines hitting the tape, along with Standard & Poor's keeping most airlines credits on negative watch.

Continental Air Lines Inc.'s new 5% converts plunged 5.25 points and the old 4.5s dropped 2 points. The 5s were pegged at 101.25 bid, 102.25 offered and the 4.5s at 77.5 bid, 78.5 offered. Continental shares closed down $1.36, or 8.79%, to $14.11.

Northwest Airlines Corp.'s new 6.625% convert fell 4.75 points. The issue was quoted at 100.125 bid, 101.125 offered. Northwest stock dropped 89c, or 8.2%, to $9.96.

Delta Air Lines Inc.'s new 8% convert lost 3.875 points. The issue closed at 96.625 bid, 97.375 offered. Delta shares ended down $1.80, or 12.12%, to $13.05.

Interest in Mirant Inc. waned with the converts hovering at 41 bid, 42 offered as the bankruptcy case is becoming more active.

Distressed traders also noted HealthSouth Corp.'s 3.25% converts were weaker.

"They've [HealthSouth converts] been slowly drifting downward" over the past week or so since the issue hit a high of around 82 last week, one trader said.

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