Market marked down in light trading but Corning soars

By Ronda Fears

Nashville, Tenn., Aug. 2 - Most of the convertible universe was marked down Friday as stocks continued to slide on economic fears but on whole trading volume was low. That said, Corning Inc.'s new mandatory shot up with a lot of the paper changing hands.

"Corning was it today, but we traded a heck of a lot of it," said a dealer.

The new 7% mandatory gained 6.75 points to 106 bid, 106.5 asked, the dealer said, moving up a half point for about every penny gain in the stock.

While some saw the pricing as pretty aggressive, it was popular among those who liked the guaranteed dividends.

"We just stayed away from that one," said a convertible hedge fund manager based in Bermuda.

"It looked pretty aggressive and I'm not really sold on that sector."

A lack of conviction in general persists among players, which coupled with renewed worries about the U.S. economic recovery, the typical summertime lull and it being Friday, trading volume was low.

"August is painfully slow even in a good market," said Jeff Siedel, head of U.S. convertible research at Credit Suisse First Boston.

Behind the scenes, however, there has been maybe more activity than many suspect in regard to issuers buying back their convertibles.

"The really interesting thing that's going on in the market is that companies are buying back their own bonds. In all the time I've been in the market, I've never seen so many issuers buying back their convertibles," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities Inc.

There has been a lot of interest in this activity, he said, and Deutsche has put together a small team of people dedicated to hooking up issuers with convertible holders.

Corning even mentioned that it would use some of the proceeds from its latest deal for such a thing.

Generally everyone walks away from these transactions happy, too.

"It's hard to find natural buyers for some of this paper," so in the case of speculative names, holders are glad to sell out, Howard said.

Issuers can realize a return on capital in the neighborhood of 20% to 25%, he said, so they come out ahead, too.

New issues would help trading volumes, but most onlookers don't expect much other than what's dominated the calendar recently - troubled names looking for balance sheet restructuring, like Corning and Mirant.

"You can't be very bullish on issuance with the markets down here," Siedel said.

"Doing deals down here speaks of desperation."

That could well be the source of some market buzz that Williams Cos. Inc. is looking to do a convertible. Nothing firm has been heard along those lines, but some market watchers said now that the immediate crisis is over for Williams it might look to improve its balance sheet with another convertible.

Other troubled energy names like Duke Energy and CMS Energy also have been the source of new deal speculation.

While William's immediate crisis may be over with the new financing provided by Lehman Brothers and Warren Buffett's Berkshire Hathaway Inc., but one observer noted that you have to be careful about buying convertibles because of movement in other credit markets.

"The fact that Warren Buffett was buying the Qwest bonds or providing bank-type funding to Williams does not persuade me to buy the convertibles," said the market source.

"Bonds, and certainly a secured loan, would be way ahead of the convertibles in a liquidation or bankruptcy situation. Even when you consider that a senior bond is underlying the mandatory, it's unsecured, so the banks and secured bondholders are ahead of you. You're still not that far ahead of the stockholders."

The Williams 9% mandatory retreated somewhat Friday, slipping 0.37 point to 8.25 as the underlying stock lost 40c to $3.40.

Other troubled energy names were mixed. El Paso and AES were higher, while Calpine, CMS and Duke Energy were lower.

Tyco held up in the wake of news late Thursday that its chief financial officer Mark Swartz resigned. Some said the move was anticipated, since the company has selected a new chief executive.

Tyco shares closed up 28c to $13.09 and both convertibles "richened quiet a bit" as they were "much better bid," with Tyco's straight bonds moving up by 1 to 2 points.

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