Convertibles weaker: ProLogis, Equity Residential, Sprint Nextel lower; Hologic little changed

By Rebecca Melvin

New York, Dec. 11 - Convertibles were mostly weaker Thursday as equities dropped amid dimming prospects for a U.S. automaker bailout and as negative corporate and economic news continued to hit the tape, convertibles players said.

"It's weaker. People aren't chasing stuff," a New York-based sellsider said of the convertibles market Thursday.

Among financials, which extended declines, real estate investment trusts were hard hit.

Fear focused on the possibility that without government intervention, one or more of the Big Three U.S. automakers wouldn't survive and would contribute to rising unemployment. It is estimated that the Big Three and related businesses account for 3.5 million U.S. jobs.

The Labor Department reported Thursday that initial claims for unemployment benefits rose more than expected last week, to a seasonally adjusted 573,000 from an upwardly revised figure of 515,000 in the previous week. Wall Street was expecting initial claims of 525,000.

"It's all part of it," the sellsider said, regarding what was behind the weakness in convertibles, which had seen improvements earlier in the week.

Traders said activity was reduced amid a lack of sellers.

"It's tough to find a seller of anything investment grade. We've got one holder who said, 'I will sell my entire book before I sell this to you,'" a New York-based sellsider said. "I guess they've ridden it down so far, they're determined to ride it back up."

ProLogis convertibles were active and lower as the company's shares plunged 25.5%. The combination of tough financing, the depressed real estate market and rising unemployment does not bode well for the Denver-based REIT or for REITs in general, one sellsider said.

Equity Residential Properties, a Chicago-based apartment REIT, which trades regularly in the convertibles market, was also lower, but not significantly compared to the 20.5% drop in the underlying shares.

Sprint Nextel Corp. came in a little as its shares sank 14% to $2.08.

Hologic Inc. was another name that has been in trade this week but was looking steady Thursday amid a 2% decline in its shares.

Dormant primary market

The high-yield market had a new issue this week, which priced and rose in secondary trading. But the deal wasn't seen having implications for the convertible primary market, which many do not see resuscitating until the new year.

El Paso Corp. priced a $500 million issue of 12% five-year senior notes (Ba3/BB-) at 88.909 to yield 15.25% via Morgan Stanley & Co. Inc.

The deal got a very robust reception that played to an order book that was for the most part filled with traditional long-only high-yield accounts.

"I don't think it has too much bearing on the convert market," a New York-based sellside desk analyst said, adding, "It's nice from an overall capital markets standpoint, though!"

"Anything at all is positive ... but my guess is that it won't be until the first quarter of 2009 that we see any deal in converts," a West Coast-based sellsider said.

A third sellsider that weighed in said, "It's one issue; can't make a judgment on that basis."

ProLogis, Equity Residential lower

ProLogis' 2.25% convertibles due 2037 moved down in trade to about 32.25 on Thursday from 34.25.

Its sister issues, ProLogis' 2.625% convertibles due 2038 and ProLogis' 1.875% convertibles due 2037, moved down to the lower end of the 31 to 33 range.

But all three issues held up better than their underlying shares, which dropped $1.82, or 25.5%, to $5.60.

Volume was pretty high in ProLogis, a sellsider commented, but it's always high because of the three issues.

Chicago-based Equity Residential saw its 3.85% exchangeable senior notes due 2026 at 83.25 bid, 83.50 offered, which was within the range that the paper typically trades in, a sellsider said.

Equity Residential stock settled down $7.00 at $27.43.

"It's a high-volatility stock," the sellsider said, noting that it has been swinging from $20 to $30 "for some time."

Although the paper had traded at 84.15 bid, 84.625 offered recently, Thursday's price was still seen in the upper end of the range.

On Nov. 20, the Equity Residential exchangeables traded at 78.5 bid, 79 offered.

Hologic holds steady

Hologic's 2% convertibles due 2037 were seen little changed at the close at about 56.69.

One trader reported the paper trading at 57 versus a share price of $13.00 on Thursday, and another trader said there were trades at 56.50 versus a share price of $13.10 on Wednesday.

On Nov. 24, the Hologic paper traded at 53 versus a share price of $11.80.

Shares of the Bedford, Mass.-based company settled down 29 cents, or 2.2%, at $12.79 on Thursday.

Sprint trades in a little

Sprint Nextel's 5.25% convertibles due 2010 were seen in trade at 82.375 Thursday, and they had also traded at 81.6 and at 83.5.

"They were quoted in the Street earlier; somebody was selling them. They've been better for sale recently," a sellsider said.

Shares of the Overland Park, Kan.-based telecom company fell 24 cents, or 14%, to $2.08.

Moody's Investors Service cut its senior unsecured debt rating on Sprint Nextel to junk Thursday, citing the company's weakened position in the national wireless market.

But the rating change didn't faze traders. "A lot of the downgrades are not surprises. Is it significant that Eastman Kodak got cut by S&P? It's a corporate credit. If they were real surprises, then that's a different story," a sellside trader said.

"You've got to look at the environment. We're valuing equities differently. Today's $2 stock is yesterday's $5 stock."

"The biggest difficulty in credit work to me is valuing assets, because it's difficult to value assets in a good market, let alone a bad one," the sellsider said.

What are needed to turn things around so that assets can be valued would be transactions, he said.

"Simply put, transactions would be a catalyst so that people have reference points," the sellsider said.

Mentioned in this article:

Equity Residential Properties NYSE: EQR

Hologic Inc. Nasdaq: HOLX

ProLogis NYSE: PLD

Sprint/Nextel Corp. NYSE: S

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