Profit-takers keep convertibles market in flat zone

By Ronda Fears

Nashville, Tenn., Sept. 25 - Convertible traders said selling by profit-takers after the stock market's huge rebound restrained any further gains. Thus, the market was described as flat, reflecting stocks. Selling was also taking place as potential new issue buyers prepared for the market's first new deal since the terrorist attacks on the U.S. two weeks ago, traders said.

Community Health Systems Inc. launched its $250 million issue, which is pricing alongside a 12 million common stock sale, and plans to price it on Oct. 9, via sole book-runner Goldman Sachs.

"We saw this coming, the profit taking, and really it wasn't as bas as some had feared," said a convertible trader at one of the major investment banks based in New York.

As stocks closed the day on a flat note as well, and Treasuries gained on optimism that a dive in consumer confidence would lead to another interest rate cut, traders said convertibles were moderately busy with just about as many buyers as sellers.

"We think it was a good day in that there were more outright accounts getting back into the market," said a convertible trader at another of the major investment banks based in New York. "Ending flat during these times is good, if you ask me. We're not really looking for another big rebound soon. If earnings don't crush the market, there are other matters looming that will keep the outlook a bit bleak."

Stocks resisted another bullish session on the consumer confidence news and worries about corporate profits. The Dow Jones Industrial Average edged up 16.67, or 0.19%, to 8620.53, and the Nasdaq composite eked out a 2.15 gain, or 0.14%, to 1501.95.

Treasuries gained on a consumer confidence report that showed the largest monthly drop since the Persian Gulf crisis, fueling hopes of another Federal Reserve interest rate cut next week. At 1500 ET, two-year notes were up 5/32 to 101-15/32, yielding 2.84%, the five-year notes were up 2/32 to 103-9/32, yielding 3.85%, and ten-year notes gained 2/32 to 102-9/32, yielding 4.71%. Thirty-year bonds rose 1/32 to 97-5/32 to yield 5.57%.

The Conference Board said consumer confidence fell to 97.6 in September from a revised 114.0 in August, the biggest drop since October 1990.

Healthcare issues were on the rise Tuesday, dealers said, because they were seen as a somewhat safe haven for debtholders right now. "Everyone still gets sick, no matter what," as one dealer put it.

That helped Community Health Systems' stock gain ground, although the company launched the new convertible deal, which typically causes the underlying stock to decline on the event. But, sources said Community Health Systems' shares also were propped up by a primary offering of 12 million shares of common stock alongside the convertible.

Pricing guidance on the Community Health Systems $250 million of seven-year convertible subordinated notes puts the yield between 4.5% and 5.0% and the initial conversion premium in a range of 21% to 25%. The registered deal was filed about a month ago, and was delayed by the Sept 11 terrorist attacks on the U.S. Originally, market sources said the deal was hoped to get price before the end of September. Now, the deal is the first to launch since the catastrophe.

Community Health Systems common shares closed Tuesday up $1.76 to $30.29.

Brokerage, finance and fund management issues also rose on buying Tuesday, traders said. Lehman Brothers reported earnings that fell to $309 million from $4457 million for third quarter, but Goldman Sachs gave the stock an upgrade, which stirred confidence in the sector. Finance companies got a lift from prospects of refinancing rising on lower interest rates.

The Merrill Lynch zero-coupon convertible due 2031 (Aa3/AA-), which sold at 51 in May, gained 0.25 point on the day to 48.5 bid, 49 offered. Merrill Lynch common shares slipped 6c to $38.71. Countrywide Credit's zero-coupon convertible due 2031 (A3/A), which was issued at 74.14 in February, added 0.125 point to 70.375 bid, 71.375 offered while the stock added 7c to $41.77.

Oil and gas issues continued to lose ground. Deutsche Banc Alex. Brown convertible analysts said in a report Tuesday that the investment case for the major oil is still too soon to revise due to the current events. The group suggested not to take an overweight stance, but to remain neutral for now.

Exodus Communications Inc.'s securities came under heavy pressure again Tuesday as bankruptcy buzz once more rocked the Web hosting firm, and the credit was downgraded. The cash-strapped company could file for bankruptcy protection from creditors as early as this week, The Wall Street Journal said. Standard & Poor's lowered its ratings on Exodus' convertibles to CC from CCC, and stated the outlook is negative. S&P cited both deteriorating operating performance, vulnerable financial position and looming liquidity concerns, as well as a management exodus. Exodus Chief Executive Ellen Hancock resigned from the company about a month ago. While Exodus has suffered from so many of its Internet customers going out of business, S&P also criticized its aggressive acquisition program. Last year, Exodus bought the Web hosting business of Global Crossing Ltd. in a $6.52 billion stock deal and has accumulated over $3 billion in debt to help fund acquisitions.

The Exodus 5% convertible notes due 2006 (C/CC), a $250 million issue that sold at par in February 1999, fell 5.75 points on the day to 17.5 bid, 18.5 offered. The 4.75% convertible notes due 2008 (C/CC), a $500 million issue that sold at par in December 1999, dropped 1 point to 15 bid, 16 offered. And the 5.25% convertible notes due 2008 (C/CC), a $575 million issue that sold at par this February, lost 1.5 points to 15 bid, 16 offered.

Exodus common shares Tuesday lost 33c to 17c.

AES Corp. is expected to feel a backlash, traders said, from its profit warning after the market close Tuesday. AES said it has cuts its expectations for annual earnings per share from operations to a range of $1.25 to $1.45, due to continued weakening of the Brazilian real currency relative to the U.S. dollar, the sustained and continuing decline in United Kingdom electricity prices. This would result in earnings below last year's $1.46 a share and compares to the $1.60 to $1.90 estimate range by First Call analysts.

"This year will be an economic setback for AES and we take full responsibility for the expected poor results,'" said AES Chief Executive said.

AES stock closed Tuesday down 85c to $24.25. End

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