Convertibles mixed, still very thin; GenCorp, Documentum bring overnighters

By Ronda Fears

Nashville, Tenn., April 1 - Convertibles were described as mixed and trading as still very thin although Adelphia Communications Corp. was sharply lower again. Sierra Pacific Resources also plunged on heavy selling after failing to get approval for deferred energy costs, which sparked downgrades in the credit to junkland.

Thus, new deals provided some diversion with GenCorp Inc. and Documentum Inc. both bringing overnight deals.

"If it wasn't for trading Adelphia today, we wouldn't have been trading anything," said a convertible trader at an investment bank in New York. "Adelphia is now in a full-blown credibility crisis."

Adelphia said it was conducting a review aimed at clarifying the surprise disclosure last week of some $2.3 billion of off-balance sheet debt and asked for an extension by the SEC to the deadline for filing its annual report with regulators.

"We recognize that in the current financial environment, shareholders are looking for greater clarity and transparency from the companies in which they choose to invest," said Adelphia chairman John J. Rigas.

"We at Adelphia recognize and respect that desire for greater clarity and transparency, and are committed to providing it in a timely manner."

Still, with more questions than answers, investors were selling off the paper. Dealers had seen some buying last week on the weakness but that came to screeching halt Monday, as some noted Morgan Stanley had a report out advising caution especially with regard to the Adelphia 3.25% convertibles.

"We are not sure now really how much debt is involved with the Rigas entities, or co-borrowing arrangements. There are some analysts suggesting that the figure could be substantially more than the $2.3 billion already mentioned," said a trader at a convertible fund in New York.

"We don't really want to be the ones left holding the bag, you know, so we were selling it today. It was not a big portion of our portfolio, so we just decided to bail out and take our lumps."

Investors and analysts are questioning the security that supports the phantom debt, noting that many of Adelphia's assets are controlled by the Rigas familty through subsidiaries and so-called managed entities. The danger in that, one observer noted, is that it essentially means Adelphia is encumbered either directly or indirectly.

"If these managed entities depend on the Rigas assets that are Adelphia cable properties, then that itself encumbers Adelphia, but it probably is not enough to service that level of debt, so the debt could fall back on Adelphia," said a buyside analyst at a convertible hedge fund in Connecticut.

"There just are a lot of questions that need to be answered and the fact that this is just now coming out doesn't bode well for Adelphia or its management."

Adelphia's 6% convertible notes due 2006 (B3/B) fell 2.375 points to 71.25 bid, 71.5 offered and the 3.25% convertible notes due 2021, which are putable in May 2003 at par, lost 1.625 points to 87 bid, 87.5 offered.

The newest Adelphia 7.5% mandatory convertible due 2005 dropped 1.5 points to 15.125 and the 5.5% convertible preferred was down 3.125 points to 62.5.

Adelphia shares closed down $1.78 to $13.12.

Calpine also weakened a bit Monday as it announced it would pay the April 30 put on the 0% convertible debentures due 2021 in cash, which would require an outlay of about $685 million if the entire issue is put back to the company.

Also, Calpine said it will restate 2001 earnings after learning certain emission reduction credits it purchased were not available, and said that reduced diluted earnings per share by 3c to $1.85 before extraordinary items and $1.87 after extraordinary items.

The Calpine 4% convertible notes due 2006 dropped 2 points to 93 bid, 93.75 offered as the stock ended down 19c to $12.51.

Xerox Corp. was another, saying it had reached an agreement with the SEC to restate 1997-2000 financials and to adjust 2001 results, plus pay a $10 million fine. The adjustment, the company said, will affect the timing and allocation of lease revenues recognition and could involve a reallocation of equipment sales revenues in excess of $2 billion over the period in question.

The Xerox convertible was marked up along with the stock, which one trader said moved up on equity analyst comments that it appeared to be at or near fair value. The Xerox 7.5% convertible trust preferred due 2021 was quoted up 1.625 points to 71.375 bid, 71.625 offered with the stock ending up 33c to $11.08.

"There was a little bit of buying in the mandatories and preferreds, on weakness, not just Xerox," said a convertible trader at an investment bank in New York.

Sierra Pacific Resources saw a dramatic reaction to surprising news that Nevada regulators had disallowed recovery of $437 million of its Nevada Power's requested $922 million in deferred energy costs, saying some power purchases were not prudent. The news sent Sierra Pacific debt into junkland on downgrades by S&P and Moody's, which both cited concern about the company's solvency in light of the news.

The Sierra Pacific mandatory convertibles due 2005 fell 17.25 points to 37 as the common shares plunged nearly 40%. The shares closed down $5.98 to $9.11, but traders said the stock was down as much as $7 during the session.

But for the most part, trading was still very quiet, traders said.

Thus, many eyes were watching the new deals that emerged Monday, although both were very small.

GenCorp had planned a full road show with pricing after Thursday's close, but on strong demand the deal was upsized by 25% and pricing accelerated to overnight.

GenCorp was pitching an upsized $125 million of five-year convertible subordinated notes talked to yield 5.75% to 6.25% with a 21% to 25% initial conversion premium in the overnight Rule 144A market. The deal was increased from $100 million and the pricing accelerated due to strong demand.

GenCorp shares closed down $1.22 to $14.50

Documentum launched an overnight deal right after the closing bell, marketing $100 million of Rule 144A market five-year convertible senior notes talked to yield 4.0% to 4.5% with a 20% to 25% initial conversion premium.

Documentum shares ended down 84c to $2.461.

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