Market backslides, shifts focus to new deals

By Ronda Fears

Nashville, Tenn., April 17 - As stocks retreated, the market turned its attention to new deals. Traders said the Capital One mandatory was trading up in the gray market, despite tightened guidance, and there was some buzz about the prospects for other new deals but nothing emerged.

"Several names have been tossed around," that might be bringing new deals, said a convertible trader at a hedge fund in New York.

"There is more people thinking that new deal activity will pick up now that the first quarter is over. But we're hoping for better terms. New deals have gotten pretty rich, but that's because the market is really starved for new paper and no one can hold to exercise any pricing power."

Capital One was at bat after the close with a $500 million mandatory. New price talk tightened the yield to between 6.25% and 6.5% and the premium to between 21% and 23%. Original guidance put the yield at 6.25% to 6.75% and premium at 18% to 23%.

That squeezed about 1% of cheapness out of the deal, according to analysts, with it now estimated at 3% cheap, assuming a credit spread of 300 basis points and 37% volatility in the stock.

Still, traders said the issue traded at 0.25 point over issue price in the gray market and offers were as high as 0.75 point above par.

Capital One shares ended up 15c to $63.91.

Greater Bay's zero-coupon deal was not slated to price overnight, but is coming to market after the close Thursday. It was said to be pricing near fair value at the midpoint of price talk of a yield between 1.75% and 2.25% with an initial conversion premium of 24% to 28%, assuming a spread of 250 basis points and 30% volatility. With that credit spread and 32.5% volatility, it was said to be about 1.87% cheap.

Greater Bay shares closed down $1.29 to $34.26.

With stocks failing to extend gains from Tuesday, trading activity cooled as market participants studied earnings reports and contemplated re-positioning portfolios, dealers said.

"Initially, the market started off pretty hot. Greenspan's comments seemed to be market-friendly, but then the fact that the Fed can wait to raise rates because the economic expansion is not yet strong enough really cooled things off," said one trader at a major investment bank.

"We were busy today, but not like yesterday."

There are still bargain hunters scouring the market, the trader said. Also, he said dedicated convertible investors are more active with some sector shifting to increase equity exposure in areas like chips and even a few telecom names like Motorola and Nextel.

Amid a wide disparity in earnings performance, chips were mixed, however.

Teradyne exceeded expectations with its earnings but lost ground after the conference call when the company noted much of its growth projections would come from its current backlog rather than new orders, said a buyside convertible analyst.

Teradyne posted a net loss of $77.1 million, or 42c per share, on sales of $248 million, versus earnings of $54 million, or 30c a share, on sales of $605 million. But the operating loss of 40c per share beat the consensus analyst estimate by 1c.

The company said it expects second quarter revenues of $280 million to $310 million, or a 13%-25% sequential increase. That optimism was tempered, the buyside analyst said, because while first quarter net orders increased 65% sequentially to $210 million the projected growth reflects "the present backlog, not necessarily increased orders."

Teradyne, which makes chipmaking quipment, also said that if current conditions persist it could return to profitability in fourth quarter.

"Some people are very bullish on Teradyne while others are skeptical. I think it probably combined to create a stalemate," the buyside analyst said.

Teradyne's 3.75% convertible due 2006 was quoted down 1.875 points to 167 bid, 167.375 offered as the stock lost 59c to $38.90.

A few telecom names were higher, however. Nextel and Motorola, specifically, on hopes of a turnaround in mobile phone sales.

Wireless phone giant Motorola Inc. said it still expects to return to profitability in the third quarter, after reporting that its net loss in first quarter narrowed to $49 million, or 20c a share, from a loss of $533 million, or 24c a share, in first quarter 2001. Revenues dropped to $6.02 billion from $7.68 billion, but the company said it is projecting better mobile phone and semiconductor performance.

For 2002, Motorola expects to turn a profit of about 4c per share, excluding special items, chief operating officer Ed Breen said on a conference call with analysts.

A net loss of 4c per share, excluding special items, is anticipated for second quarter, but the company said the mobile phone unit is expected to show a profit in the quarter while sales are expected to be flat with a year earlier.

Motorola's 0% convertible due 2013 added 2.75 points to 78 bid, 79 offered.

The Liberty Media 3.5% exchangeable due 2031, which converts into Motorola shares, gained 3.625 poitns to 78.75 bid, 79.25 offered.

Motorola shares closed up $1.33 to $16.33.

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