Allied Waste issues dumped; Interpublic mandatory eyed; Mercury rises ahead of Oracle

By Ronda Fears

Nashville, Sept. 14 - Allied Waste Industries Inc. convertibles were getting dumped heavily Tuesday after the company lowered its guidance for the second time in as many months - for a collective 6% to 8% decline in operating income.

Elsewhere, Interpublic Group of Cos. Inc.'s convertibles, the mandatory at least, was again easier Tuesday in the wake of WPP Group plc's $1.52 billion merger offer for Grey Global Group. And, traders said IPG was getting eyed on the weakness by players who see it as a takeover candidate, despite Standard & Poor's putting Interpublic Group credit on negative watch.

Mercury Interactive Corp. was higher ahead of software giant Oracle Corp.'s earnings, which were scheduled to be released after the closing bell and widely anticipated to provide reason for optimism in the software group. Mercury Interactive stock spiked about 1.5% and the convertibles approached par as both issues gained about a point. As it turned out, Oracle reported a 16% earnings gain, beating analysts' estimates, and said it was comfortable with its fiscal second-quarter guidance.

Antidepressant drugmakers Wyeth and Bristol-Myers Squibb Co., which both have floating-rate convertibles in play, were steady in the face of a U.S. Food and Drug Administration advisory panel recommending stricter warnings on antidepressant labels about the increased risk of suicidal behavior, particularly in children.

Otherwise, traders said secondary market action was "decent." Bids, however, subsided somewhat as players digested the lackluster retail sales report from the U.S. Commerce Department and another surge in oil prices weighed on sentiment as Hurricane Ivan threatens to break onto shore in the Gulf of Mexico.

Volatility was a focal point, sellside traders said, as the old VIX market volatility index added 2.89% and the VXN Nasdaq volatility index rose 1.93%. While the VIX is still very low at 13.55, which is the lowest in over eight and a half years, and the VXN is not much better at 19.51, one trader noted that it's not necessarily a sign that the stock market is feeling bearish.

The trader noted an industry report that showed the last time the VIX was as low as it is now, in early 1996, it was a very good time to be in stocks. Also, the report said historical data showed that in regard to a contrarian use of the VIX, it is more of a bullish signal when very high but not as much a bearish signal when very low.

Allied Waste issues dumped

At the Deutsche Bank Securities global services conference Tuesday, Allied Waste reduced its outlook for 2004 operating income by about 3% to 4%, which followed a 3% to 4% cut to its outlook for operating income in late July.

Allied Waste reaffirmed 2004 revenue guidance of 2% growth, but the Scottsdale, Ariz.-based trash hauler's paper got dumped on the headlines.

The Allied Waste 6.25% mandatory due 2006 plummeted 4.5 points, or 7.9%, to 52.45 on the New York Stock Exchange amid heavy volume, and a sellside trader said the 4.5% convertible bonds fell 1.5 points to 89.625 bid, 90.125 offered. Allied Waste's junk bonds were heard down by about a half-point.

Allied Waste shares also plunged on heavy volume, losing 94 cents on the day, or 9.18%, to $9.30.

In an SEC filing, the company said it intended the presentation to show how its efforts to maximize operating cash flow and continue to repay debt would advance the company over the long term toward achieving investment-grade debt ratios.

But following the company's warning, Moody's said it may cut the Ba3 senior credit ratings of Allied Waste because of weaker operating earnings and cash generation.

Business conditions experienced in June continued into July and August, which lead to the reduced guidance again, said Tom Van Weelden, chief executive of Allied Waste, in the presentation.

"General economic activity continues to offer only modest growth opportunities," Van Weelden said. "In this environment we will focus on growing our business through a selective integrated market pricing strategy."

Allied Waste said in the presentation that debt had been reduced to around $7 billion from $9 billion when it acquired Browning Ferris Industries Inc. in 1999, a buyside market source said.

"They maybe have done pretty well insofar as debt reduction is concerned but what the market really wants to see is for them to cut costs," the buyside source said.

Interpublic mandatory eyed

Traders said there were a lot of inquiries about New York-based Interpublic's 5.375% mandatory due 2006 after softening on the WPP/Grey Global news. The issue was slightly lower at 42.5 bid, 42.625 offered as the stock ended down by 4 cents to $11.05. Interpublic's 4.5% convertible bonds were off another quarter-point or so at 121.25 bid.

Convertibles in the advertising space were mixed in the wake of WPP's $1.52 billion half cash/half stock offer for Grey Global, and traders said market players began looking at the potential for further contraction in the sector.

"The speculation is that IPG could be a merger candidate," a sellside trader said. "They have been having problems there, [IPG] the accounting issues, SEC investigation, but even the S&P negative watch seems to indicate or suggest that they may be getting close to being totally resolved."

S&P put Interpublic's BB+ senior ratings, and others, on negative watch, saying it has intensifying concerns about senior management turnover at Interpublic, coupled with material weakness in internal controls at a time when Interpublic is working to turn around a number of its businesses and stabilize operating trends.

Interpublic's current management team took over about a year ago, and the company is now six months into a 24-36 month turnaround plan following an SEC accounting-related investigation that began in January 2003 and the slump in the advertising industry during the economy downturn.

The material weakness in Interpublic's internal controls, along with other material weaknesses associated with balance sheet and systemwide monitoring, could potentially result in accounting errors, S&P said in a report Tuesday.

S&P said it would meet with Interpublic management to evaluate its progress in addressing transitions in senior financial management, executing the restructuring program and remedying internal controls.

Mercury Interactive near par

Mercury Interactive was bid up in advance of Oracle's headlines, which were fodder for a more optimistic view on the software group, traders said. Mercury shares gained 58 cents, or 1.56%, to $37.77 and its convertibles were up around a point, or "right at about par."

"It [Mercury Interactive] was oversold," said a buyside trader in New Jersey. "There is a little bit of concern about them not setting a date to report earnings yet, and there has been a big mix-up about the numbers among a couple of sellside shops, but now the Oracle news makes me feel better about it."

Oracle beat analysts' projections with a 16% gain in fiscal first-quarter earnings and is standing by its outlook for second quarter while a number of technology firms have warned about upcoming earnings.

"If they [Mercury Interactive] miss, of course the stock will get crushed, but we are hoping for a positive pre-announcement," the buyside source said. "They should be setting a date soon; probably the earnings will come in around mid-October."

Also after Tuesday's close, the Mountain View, Calif.-based software firm said Doug Smith, its chief financial officer and marketing and corporate development executives are scheduled to present at Goldman Sachs & Co.'s West Coast "bus trip" on Wednesday morning and the call webcast.

They have not announced the date of the earnings. They reported them last year on Oct. 22, 2003. This year they are projected to release them Oct. 20, but that has not been confirmed. They still need to close the quarter. They have two weeks and two days.

Drug issues shrug off probe

Makers of antidepressant drugs, Wyeth and Bristol-Myers Squibb Co., essentially shrugged off the high-profile FDA hearings about potential risks the drugs pose to pediatric patients. Late Tuesday, the FDA panel suggested stronger warning labels on antidepressant packaging.

Wyeth's convertible floater was steady at 100.5 bid, and Bristol-Myers' convertible floater edged up about a quarter-point to 99.625 bid. The stocks were up slightly, with Wyeth at $24.27 and Bristol-Myers at $38.73.

Other antidepressant drugmakers Forest Laboratories Inc., GlaxoSmithKline plc, Eli Lilly & Co. and Pfizer Inc. were firmly higher or just slightly lower on the FDA news.

The FDA had already asked drugmakers to advise doctors to closely monitor all users of antidepressants for signs of worsening depression, such as suicidal thoughts. These drugmakers have also been the focus of a probe by New York state attorney general Eliot Spitzer into the promotion of antidepressants to the medical community for pediatric use.

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