Buyers seen for junky converts; new Arris, UTStarcom climb; Tyco, ADP plunge in sell-offs

By Ronda Fears

Nashville, March 13 - Convertible dealers at several major investment banks described the day as slow, but traders at some of the smaller boutiques that handle mostly high-yield and distressed convertibles were busy.

"We were very busy today. We're still seeing people willing to put money to work in some of the more distressed paper, and that's a little surprising," said Michael Vaughn, head convertible trader at Credit Research & Trading Co.

"It's been a surprising backdrop to the events of this year, and in sharp contrast to what we were seeing at the end of last year."

That said, however, he added: "I keep reading that a lot of people in converts are starved for paper, so it's not surprising that people are reaching farther out on the risk curve."

Majority participants in the junkier or distressed converts, he said, are the hedge funds.

With better returns than most of the outright convertible funds, hedge funds also are widely thought to have been raking in most of the new capital entering the convertible market.

Arris Group Inc. injected a tiny bit of new paper into circulation Thursday, after aggressively pricing its deal, upsizing it slightly to $105 million.

Indicative of the strong demand for new paper, the new Arris convert shot up to 108 in the immediate aftermarket.

UTStarcom Inc.'s new paper also was firmer, rising 2 points after the networking equipment maker upped its outlook for first quarter and the year.

Several junkier convertible issuers were also higher - Mirant Corp., El Paso Corp., Charter Communications Inc., Amazon.com Inc. and XM Satellite Radio Holdings Inc., to name a few.

Tyco International Ltd. was the high-profile plunge of the day, as investors showed "zero tolerance, just like the new Tyco CEO," as one dealer put it.

Tyco chief executive Edward Breen, saying he had a "zero tolerance policy," announced the president of Tyco's fire and security systems division had been fired and lowered its profit outlook because of accounting problems in that department.

Breen was quoted as saying at an analyst conference in New York on Thursday that if he finds anything wrong, heads will roll, because he was not putting up with anything.

Tyco also announced Thursday it would close 300 plants over three years and cut $1 billion in costs by 2006.

But investors also showed no tolerance, the dealer said, fearing that the accounting problems that have plagued Tyco over the past year are not over. Tyco executives also said the U.S. Internal Revenue Service is auditing the company's tax filings for 1997 through 2000.

"People are very leery of this company right now, new management aside," the trader said.

"It's like they say, once bitten, twice shy. People were just ready to sell out today, afraid there are more landmines out there."

Tyco's new 3.125% convert plummeted 5.875 points on the day to 87.75 bid, 88.25 asked and the 2.75% convert lost 4.375 points to 90.625 bid, 91.25 asked on heavy selling.

Tyco shares closed down $1.74, or 12.4%, to $12.29.

Automatic Data Processing Inc. also saw a big dive, traders said, but less volume in selling.

ADP declined after the company lowered its outlook for the second time this year. The company reduced its outlook for fiscal 2003 earnings per share to a range of $1.68 to $1.73 and said it now sees flat revenues.

The ADP 0% convertible fell 8.375 points on the day to 70.5 bid, 72.5 asked while the stock ended down $3.20, or 10.5%, to $27.25.

Teco Energy Inc. also was lower after Moody's put the credit on review for downgrade.

The Moody's review "has the potential to trigger additional capital requirements related to debt agreements," said Merrill Lynch & Co. equity analyst Steven Fleishman. Also, he said in a report that it may force a dividend cut by Teco and/or another equity issue.

While credit concerns have weighed on investors, traders at firms that focus on the junkier and even distressed convertibles are seeing plenty of flow - in addition to CRT.

"XMSR continues to get better. It has been improving since its recent financing," said a trader at a boutique that specializes in high-yield and distressed convertibles.

In late January, XM Satellite Radio closed on a $475 million funding package consisting of $225 million in new capital from private investors and $250 million in payment deferrals and related credit facilities from General Motors.

XM Satellite also completed an exchange for 92% of its 14% senior secured notes due 2010, giving those noteholders cash and new 14% senior secured discount notes due 2009 plus 25.5 million warrants to purchase common stock, exercisable at $3.18 per share.

The XM Satellite 7.75% convertibles due 2006 were quoted Thursday at 68 bid, 70 asked. The stock closed up 31c, or 7.4%, to $4.52.

"This might be a little too enthusiastic a reaction, as there should be concerns about its ability to deliver on its business model," the trader said.

"But the recent Barrons article helped fuel speculation and price improvement, but the jury is still out."

Buyers handed Arris a vote of confidence regarding its new deal, although sellside analysts said it priced very rich - as much as 5% over fair value.

The Arris convert, which sold aggressively outside the premium range, gained 8 points from par and 6 points from the last bid in the gray market late Wednesday before final terms were struck.

It was quoted closing at 108 bid, 108.75 asked while the stock ended up 15c, or 4.25%, to $3.68.

UTStarcom also got a boost after upping its outlook.

The company said it now sees first quarter EPS of 27c versus its previous guidance of 23c. For the year, the company also raised its EPS outlook to $1.37 from $1.27.

The $350 million convertible last week and its repurchase of 8 million shares from Softbank with some of those proceeds also should be accretive to EPS by another 7c, the company said, bringing total 2003 revised EPS guidance to $1.44.

UTStarcom's 0.875% convert added 2 points on the day to 102.25 bid, 103.25 asked. The stock closed up 63c, or 3.6%, to $18.04.

Comverse Technology Inc. was another notable gainer, after indicating it may post a profit in fiscal 2003 on the heels of a pleasing fourth quarter report late Thursday.

The Comverse Tech 1.5% convertible added 1.75 points to 90 bid, 91 asked. The stock ended up $1.83, or 19.25%, to $11.34.

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