Airborne soars on rising profits, Nortel gains on new deal buzz, Micron paper continues to slip

By Ronda Fears

Nashville, Jan. 31 - It was a surprisingly busy day in convertibles, traders said, spurred by some nice earnings and stronger stocks than expected in the face of what appears to be an ever-nearing U.S.-led war against Iraq.

"We had a nice, steady flow all day, which was a little odd on a Friday," said a dealer.

"Early, I think there was some profit taking in a few of the tech names but this afternoon the thinking about heading into the weekend long changed and we started seeing the market better bid."

That said, another dealer noted that some convertibles investors were taking a cue from the corporate bond market where there was a flight to Treasuries.

"We heard people talking about some of the big [corporate] deals having trouble, like GE and Georgia-Pacific," the dealer said.

"That sort of spooked some people out of the market. They didn't want to be caught long on Monday."

Airborne Inc. climbed as it reported higher profits for 2002, even though the package delivery service warned that 2003 operating performance would come under pressure.

Techs and telecoms seesawed through the session as the Nasdaq started off negative and moved into positive territory around midday, but retreated to close in the red.

Nextel Communications Inc. gained sharply in response to an upgrade of its outlook from Moody's Investors Service to stable from negative.

The Moody's upgrade to Nextel's outlook fueled a nice gain for the converts, which are routinely one of the more active names in converts.

Nextel's demonstration of competitive strength in a deteriorating market combined with the substantial reduction in financial risk, Moody's said, lead to a new view of the ratings outlook as stable.

Nevertheless, Moody's said it remains concerned about the wireless industry in general as subscriber growth continues to slow and the general economy remains weak. Moody's said it also expects Nextel's free cash flow profile to likely come under pressure longer term.

Nextel's 6% convertible due 2011 gained 2.125 points to 94 bid, 95 asked. The 5.25% due 2010 added 0.625 point to 78.875 bid, 79.625 asked. The 4.75% due 2007 rose 1.375 points to 91.25 bid, 91.75 asked.

Nextel shares closed up 47c to $12.62.

New paper, however, was mixed with Micron Technology Inc. sinking a bit and International Game Technology edging a bit higher.

Micron's new 2.5% convertible due 2010 lost 0.625 point to 99.5 bid, 100 asked with the stock closing off 11c to $8.21.

International Game Technology's new 0% convertible due 2033 added 0.25 point to 60 bid, 60.126 asked as the stock ended up 88c to $78.87.

"The markets in general are stuck," due to the uncertainty surrounding the possible war in Iraq, said Derrick Wenger, director of convertible research at Jefferies & Co.

"I was surprised to see equities up as strong as they were today."

Convertible players have reacted to bits of news, earnings and the like, Wenger said, "but outside of that, what would normally be going on is stalled."

That - normal activity - includes a heavier new deal flow.

Nortel Networks Corp. was bid up about 3 points on a rumor late Thursday that it was prepping a big mandatory deal, according to a market source.

A dealer said Friday that the Nortel 4.25% convertible due 2008 continued to rise, even though the buzz died and was dismissed as "hopeful thinking."

The Nortel 4.25s were quoted up 1.25 points to 71.25 bid, 71.5 asked. The stock ended off 5c to $2.37.

Also, Merrill Lynch's equity analyst Sundar Varadarajan upgraded Nortel's stock to a speculative buy following "solid fourth quarter 2002 results and increasing evidence that the company is executing well on its restructuring plans."

Airborne also gained sharply, on its earnings.

"It [Airborne] is one where I liked the credit and where it's priced," said Jefferies' Wenger.

Airborne's 5.75% convertible due 2007 climbed 7.25 points to 109 bid, 110 asked. The stock ended up $2.58 to $15.39.

Airborne posted a 2002 net profit of $14.8 million, or 31c a share, versus a net loss of $19.5 million, or 40c a share, in 2001 with revenues gaining 3.8% to $3.34 billion. For fourth quarter, the company posted net earnings of $12.2 million, or 25c a share, versus net earnings of $2.2 million, or 5c a share, in fourth quarter 2001.

Going forward, however, Airborne executives talked about it getting tougher to keep up that performance level, as 2002 saw huge cost-cutting efforts.

"We expect pressure on operating performance in the first quarter of 2003 compared to the fourth quarter of 2002," CEO Carl Donaway said in a company statement.

"Revenues will likely adjust down, reflecting the seasonal ramp-up experienced in the fourth quarter. International business already began to decline in December from peak seasonal levels, and certain market related events that benefited the international segment in the fourth quarter are not expected to carry over into 2003."

CFO Lanny Michael added that Airborne also expects operating performance pressure in 2003 from higher operating costs, due in part to higher ground delivery shipment volumes, increased pension and insurance costs and higher fuel costs.

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