Profits taken in defense names, buyers seen for insurance

By Ronda Fears

Nashville, Tenn., June 21 - It was more of the same as convertibles gave way to another slide in stocks and volume was still described as light.

In the primary market, sources were not looking for much activity until after the Fourth of July holiday.

"It's the first day of summer and it's Friday. A lot of people took off early. A lot of people are on vacation, gone," said a convertible trader at one of the major investment banks in New York.

"The next couple of weeks, maybe three, are going to be really slow. It's going to be a long summer."

Further declines dotted the convertible landscape - particularly for tech, telecom and cable. Agere's new issue was sharply lower as well as former parent, Lucent.

Agere's 6.5% due 2009 fell 6.25 points to 88.5 bid, 89 asked while the stock lost 23c to $2.02.

Lucent's 7.75% convertible trust preferred due 2017 dropped 1.75 points to 64.75 bid, 65.375 asked and the 8% due 2031 dropped 1.25 points to 67.375 bid, 67.875 asked. Lucent shares closed off 8c to $2.34.

The telecom avalanche also spread into more of the ancillary names like Amdocs, which provides billing software to telecoms.

Amdocs plunged after the company late Thursday announced layoffs and slashed its guidance, which prompted several downgrades to the stock.

"We saw a good deal of selling in telecom," said a dealer.

"A lot of people hate to sell at these prices but the general feeling is that it's going to get worse before it gets better."

The Amdocs 2% convertible due 2008 held up well compared to the huge stock drop due to a whopping 826% conversion premium, traders said. The convert was quoted off 0.75 point to 86 bid, 86.5 asked while the stock fell $5.96 to $8.60.

Traders said there was good two-way action in defense names like Raytheon, Northrop and L-3 Communications. Some took profits and others bought on expectations that the U.S. defense budget will rise sharply next year.

Northrop's 7.25% mandatory closed down 1.21 to 134.9 with the stock ending down $1.26 to $128.69.

L-3's 5.25% due 2009 was quoted down 1.125 points to 154.5 bid, 155 asked and the 4% due 2011 down 1 point to 125.25 bid, 125.75 asked. L-3 shares closed off 51c to $57.39.

L-3 is selling $750 million senior subordinated notes and 14 million shares of stock, in part to finance a $500 million bridge loan, buyback its 10.375% senior subordinated notes and to repay its bank revolver.

Moody's assigned a Ba3 rating to the new L-3 notes and affirmed the Ba3 ratings for the $420 million of 4% convertibles and $300 million of 5.25% convertibles.

Moody's also moved L-3's outlook to positive from stable.

There was some selling in healthcare issues, too, as well as in the drug group. Johnson & Johnson dropped precipitously in reaction to Procter & Gamble getting initial clearance to market the heartburn drug Prilosec over the counter.

The J&J 0% convertibles, both the old Alza converts, dropped in tandem with the stock. J&J shares closed down $2.04 to $53. The 2014 convert fell 5 points to 135 bid, 135.5 asked and the 2021 issue lost 2.25 points to 75 bid, 75.125 asked.

King Pharmaceuticals also fell sharply Friday after U.S. regulators said the active ingredient in its thyroid treatment, Levoxyl, could be made by generic drugmakers.

King Pharma's 2.75% due 2021 dropped 4.25 points to 84 bid, 84.5 asked. The stock lost $4.30 to $20.50.

Another notable loser in the tech group was International Rectifier Corp., a maker of semiconductors that manage power in electronic devices.

International Rectifier fell after a downgrade by an analyst who said the company's fiscal 2003 guidance was too aggressive in the face of an uncertain recovery for chip business.

The company reaffirmed its fourth quarter outlook, which puts revenues gaining sequentially by 10%.

Banc of America Securities, however, downgraded the stock to underperform, saying the company's earnings projections appear ambitious and that there could be additional downside risk given the prevailing lack of visibility and uncertain slope of recovery in key end markets.

International Rectifier's 4.25% due 2007 plunged 7.25 points to 81.5 bid, 82 asked. The stock lost $9.85 to $27.50.

A few buyers were seen for mandatories, however, particularly insurance names like MetLife and Prudential, traders said.

MetLife "looks attractive for several reasons, particularly in light of the recent sell-off," said a convertible trader at a hedge fund in New Jersey.

The trader noted that MetLife shares have fallen almost 20% in the past six weeks or so, despite no change in fundamentals and without any major news.

The MetLife convert gained 2.95 points to 90.95 as the stock gained $1.15 to $29.72.

Xerox Corp. also gained some ground back after announcing Friday that it has finally refinanced its $7 billion bank revolver.

Xerox said it has repaid $2.8 billion of the revolver and extended the maturity date for the remaining $4.2 billion. The new credit pact consists of three term loans totaling $2.7 billion and a $1.5 billion revolving line of credit. The first term loan of $700 million must be completely repaid by its final maturity this September.

"It was a much needed relief," said a trader.

"This will give Xerox some breathing room for a while."

The Xerox 7.5% convertible trust preferred due 2021 added 6 points to 61 bid, 61.25 asked as the underlying common stock rose $1.12 to $8.97.

El Paso sold a $500 million mandatory with a 9% dividend and 20% conversion premium, smack in the middle of guidance, and it was not upsized as some had speculated. El Paso also sold 45 million shares of stock at $19.95, for another $897.75 million.

The new 9% convert was quoted up 0.5 point from par to 51. El Paso's 4.75% convertible preferred was up 0.3 to 36.3. The common closed up 75c to 20.70.

There is nothing slated to price and no firm prospects, other than the Goodrich Corp. mandatory. That deal, however, may not come to market until fourth quarter, when Goodrich's acquisition of the aeronautical unit of TRW Inc. is due to close.

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