Charter, EDS, El Paso, GM, others fall on plethora of ill-boding news

By Ronda Fears

Nashville, Tenn., Oct. 2 - Cheering ended abruptly Wednesday, and really most players were not expecting the market rally to last another day, as the convertibles market's focus returned to eroding credit quality.

Several events like downgrades of El Paso Corp.'s subordinated debt to junk, Charter Communications Inc.'s earnings warning and a rumor that General Motors Corp. would cut its common stock dividend weighed on the market.

Credit spreads were tighter early on but softened as the slide in stocks contributed to a slight widening, a dealer said.

Flow was described as heavy but there still seemed to be more sellers than buyers.

"The convert arb market was stronger, because there are no new issues and people are forced to put money to work," said a convertible trader at a hedge fund in New Jersey.

"Volatility has crept up in the last month, but until we believe volatility is sustainable or something else moves us, we are sellers. With volatility higher and implied volatility on converts even higher, the market's gotten rich."

The GM buzz had the market in a quandary about whether it was good news or bad, but overall the general perception of a dividend cut along with other news on the auto industry was negative.

On the one hand, cutting the dividend would be good for convertible holders as it meant the company was preserving cash, a trader said.

On the other, the fact that GM would have to cut the dividend could be a signal that it's in trouble.

Both GM converts slipped 0.25 point.

The 4.5% convertible due 2032 was quoted by a dealer at 23.625 bid and the 5.25% due 2032 at 22.25. GM shares ended down $1.92 to $38.72.

Spreads on El Paso were said to have widened sharply on the Moody's downgrade, which cut the senior unsecured debt to Baa3 from Baa2 and subordinated debt from Baa3 to Ba1, and kept both on review for possible further downgrade.

El Paso's 0% convertible due 2021 fell 1.625 points to 28.875 bid, 29.875 asked and the new 9% mandatory plunged 2.25 points to 16.25. A dealer said the company's 7.75% straight bonds were seen down 6 points.

El Paso shares closed down $1.90 to $6.90.

Credit quality concerns were punctuated Wednesday by a Moody's report that assigned liquidity ratings to 37 junk issuers, of which at least 25 names were convertible issuers as well.

Charter was one of those names, with a mid-level liquidity rating, and following the company's warning, Moody's put the ratings, including the two convertibles at B3, on review for possible downgrade.

Charter's warning late Tuesday of lower cash flow growth and a drop in cable subscribers sent its bonds into a freefall back to levels previously triggered by the Adelphia Communications Corp. bankruptcy.

The Charter 4.75% convertible due 2006 fell 7 points to 35.75 bid, 37.75 asked and the 5.75% convertible due 2005 lost 6.5 points to 42.75 bid, 43.75 asked. The common closed down 42c to $1.58.

Charter's 8.625% junk bonds were seen late in the day down 5.25 points, according to a market source, after losing 3 points late Tuesday.

Also lower on selling, although without any specific news, was Cephalon Inc.

Cephalon's 5.25% convertible due 2006 was quoted down 2.5 points to 92.625 bid, 93.625 asked and the 2.5% due 2006 down 1.375 points to 83.625 bid, 84.625 asked.

Cephalon shares ended down $1.10 to 41.29.

After the closing bell, Advanced Micro Devices Inc. warned of a hefty operating loss and sharply lower-than-expected revenue in the third quarter, citing a weak personal computer market.

Before the news, which halted AMD shares in after-hours trading, the stock closed up 10c to $5.37 but was seen at $4.50 afterward. The 4.75% converts due 2022 were quoted unchanged at 58.125 bid, 59.125 asked.

EDS and Affiliated Computer Services Inc. were both lower as EDS' Proctor & Gamble deal remains up in the air, traders said, and EDS also was getting pressure on news that there is an informal SEC inquiry into its stock hedges.

Traders said buying interest in EDS, however, mitigated the blow while ACS dropped sharply.

The EDS 0% convertible due 2021 was quoted down 0.5 points to 71.5 bid, 72 asked and the 7.625% mandatory down 1.75 points to 19 while the stock closed down $1.74 to $13.35.

The ACS 3.5% convertible due 2006 was quoted down 6.625 points to 119.5 bid, 120 asked with the stock ending down $3.50 to $41.06.

The Redback Networks Inc. trade remains a mystery, as company spokeswoman Anne Smith confirmed the company did not who made the trade last week. The 5% convertible due 2007 was quoted up 1 point on the bid side to 16 but with the ask price still at 18. The stock closed up 1c to 38c.

Previously Redback's 5% convertible due 2007 had been trading at about 36, then Friday there was a $100 million block of the bonds traded at 33, after which the bonds were marked down to 15 bid, according to a market source.

The convert was quoted Tuesday at 15 bid, 18 asked.

The trade Friday followed Redback's guidance on Thursday for revenue and a net loss that would fall below analysts' expectations.

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