McData plunges around 17 points on warning, Wal-Mart fails to inspire buying in retail

By Ronda Fears

Nashville, Aug. 25 - With even more people on vacation this week, convertible traders are not expecting much action. Monday was no disappointment really, and some sources said they are perceiving players to be taking a more defensive position in light of uncertainty in the broader markets.

"The bond market is sort of a wildcard right now and stocks are at a critical point in terms of technicals. Last week spreads tightened considerably for us [convertibles] because of all the high yield paper in our universe," said a buyside trader in New Jersey.

"I don't think there is a massive exodus going on in convertibles; everyone is just a bit skeptical, not quite as trigger-happy as, say, during second quarter when any deal could be sold and no one was really concerned, or not overly concerned, about cheapening."

The one exception Monday was heavy selling in McData Corp., which sent the converts tumbling more than 17 points, on its weaker earnings and a lower-than-anticipated outlook for the current quarter.

Otherwise there was not much to get convert players excited.

"We're like a lot of the other desks this week, light staffed and not expecting much to happen," said a junior convert trader at one of the big firms.

Capital market sources also say it will be quiet in the primary market this week but expect a nice stream of new issues to resume following the Labor Day holiday.

Even giant retailer Wal-Mart failed Monday to inspire much activity in retail paper by boosting its projection for third quarter sales by as much as 6%.

"It was difficult to come in this morning, knowing it would be a slow day," said one of the portfolio managers at a huge hedge fund in New York.

"There's not much going on to inspire me right now. It's nice for Wal-Mart that they see better sales but that really isn't a vote of confidence on the economy or most of the pack of retailers. I'm really feeling like defensive issues will be what people are looking for right now."

Another buyside source in the trading area said there is still some selling in names with dividend risk, which he considered a defensive-type activity, specifically AmeriSourceBergen Corp. and American International Group Inc. He noted, too, that Interpublic Group of Cos. Inc.'s new 4.5% convertible was still getting bid up.

AmeriSourceBergen's 5% due 2007 dropped another 2.75 points or so to 124 bid, 124.75 offered. The stock ended down 61c, or 1%, to 58.70.

AIG's 0.5% due 2007 also was down about 2.75 points to 94.125 bid, 96.125 offered while the underlying stock closed off 2c to $59.57.

IPG's 4.5s due 2023 added another 1.75 points, after gaining several points last week, to 139.75 bid, 140.25 offered. The stock rose 25c, or 1.78%, to $14.31.

McData was the biggest mover of the day and the most excitement within the convertible market, however. The company posted net income of $9.1 million, or 8c per share, for fiscal second quarter, compared to a net loss of $3.9 million, or 3c per share, a year ago, and revenues shot up nearly 39%.

But the company issued guidance for fiscal third quarter that lagged what Wall Street analysts were forecasting. The company expects profits of 5c-7c a share and revenues of $105 million to $110 million compared to analysts' average forecast of 7c a share.

The McData 2.25% due 2010 plummeted 17.25 points on the day to 125.625 bid, 126.625 offered. The stock fell $2.26, or 17.85%, to $10.40.

Other names mentioned by traders were Western Wireless Corp., RF Micro Devices Inc., AtheroGenics Corp., Xerox Corp., Health Management Associates Inc. and Sepracor Inc.

"There were just some odds and ends, bits and pieces trading," said a dealer.

"As far as I know, there wasn't any news driving anything outside of McData and HMA."

Health Management Associates announced an agreement to buy five hospitals from Tenet Healthcare Inc. The price tag was not disclosed, but Tenet said it expects gross proceeds of around $550 million.

Standard & Poor's said the company will likely finance the purchase from cash, including some of the proceeds from its recent convertible issue and some possible additional debt. In late July, Health Management Associates sold $500 million of convertible notes, with some of the proceeds earmarked to redeem its outstanding 0.25% convertible notes due 2020.

Health Management Associates did not explain how it would fund the acquisition but chief executive Joseph V. Vumbacco said the five hospitals meet the company's acquisition criteria and Health Management Associates anticipates a cash-on-cash return of the investment in four years or less.

The new Health Management Associates 1.5% convertible due 2023 on Monday gained about 0.25 point to 103 bid, 104 offered as the stock gained 33c, or 1.56%, to $21.42.

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