Nextel shines in an otherwise mixed, mostly lower session

By Ronda Fears

Nashville, Tenn., July 16 - It was a mixed bag in the convertible universe, but traders described the session as ending mostly lower. Nextel Communications, however, was the exception, exploding higher as it provided a pleasant surprise with its first ever profits.

"Nextel's news was very good but it will take quite a lot more for people to really become comfortable," said a dealer.

"This is exactly what's needed, though, some solid earnings, not just beating expectations."

A lack of conviction, or perhaps more aptly a lack of trust, kept many players sitting on the sidelines as they studied the corporate earnings that poured in.

"To discuss this awful market environment, I quote Sir John Templeton: 'To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards,'" said John Levin, head of convertible research at JPMorgan.

While players appear to have lots of capital, at least the hedge funds, there is a lack of conviction. Which, Levin noted, makes Templeton's observation so timely and appropriate.

Buyside sources say the lack of conviction is better described as a lack of trust. With earnings streaming across the tape some are no longer making knee-jerk reactions to the headlines, at least in terms of buying.

"People are more apt to hit the sell button right now than buy," said a dealer.

What has not been decimated has been bid up and is rich so liquidity is constrained.

"Obviously volatility picked up last week and again yesterday and a bit today, credit spreads widened a lot until the good earnings from Nextel this morning," said a convertible trader at a hedge fund in New Jersey.

"Now spreads are tightening as the stock market falls. More and more convertible bonds are going farther and farther out of the money making them less interesting to convert arbs."

Moreover, the trader noted, like many others, that the convertible market is picked over and still richer for the most part.

The trader said, however, that hedge funds appear to be having a better month this month.

Certainly, Nextel was having a better day and lots of holders were glad to see the name head north.

Nextel not only beat expectations as it turned profitable, and increased guidance, but it also has been buying back debt and preferreds, with plans to buy back more.

Second quarter net income of $325 million, or 37c a share, was posted, compared with a net loss of $426 million, or 56c a share, in second quarter 2001 and the First Call analyst consensus of a loss of 24c a share.

Nextel also bumped up its forecast for future results.

For 2002, the company now expects operating cash flow to be at least $3 billion, up from prior guidance of $2.5 billion, with profits continuing in third and fourth quarter.

While Nextel reported growing market share, the wireless phone company also bought back $1.1 billion in debt and preferreds, in exchange for 61 million newly issued shares of stock and some $295 million in cash. Since June 30, the company said it has entered into agreements to repurchase another $400 million of debt in exchange for about $205 million in cash.

The company ended the quarter with $2.7 billion in cash and $13.4 billion in debt.

The $1.5 billion debt reduction will save Nextel about $2.5 billion over the next nine years in interest, principal and dividend payments, the company said.

Nextel said it hoped its lower debt and strong operating results will improve its corporate credit rating.

Others agreed, somewhat.

"Despite Moody's Investors Service, Inc.'s threat to review all wireless ratings after the release of second-quarter results, we would be shocked if the rating agency retained its negative outlook on Nextel in light of today's announcement," according to a report Tuesday by convertible analysts Jeanine Oburchay and Brian Park at Wachovia Securities.

Nextel shares gained $1.53 to close at $6.53.

The 6% convertible due 2011 were quoted up about 3.5 points to 61.875 bid, 63.375 asked. The 5.25% due 2010 were quoted up about 1 point to 57.25 bid, 58.25 asked. The 4.75% due 2007 were quoted up about 2.5 points to 63.125 bid, 63.625 asked.

But the converts were quoted several points lower at other shops.

"Broker dealers are really squirrelly right now," said a convertible trader at a hedge fund in New York.

"It's really difficult to get levels. Well it's not really hard. What's hard is to determine where the market really is."

Nextel's good news boosted Motorola, but after the close the phonemaker posted a record net loss due to restructuring charges.

Motorola's 0% convertible due 2013 was quoted up 1.375 points to 74.5 bid, 75.5 asked with the stock ending up 69c to $14.53.

But after the closing bell, Motorola reported a second quarter net loss of $2.3 billion, or $1.02 a share, compared with a net loss of $759 million, or 35 cents a share, in second quarter 2001. That included a previously disclosed $3.4 billion pretax restructuring charge, or $2.4 billion after taxes, which clouded results.

Excluding the restructuring charge, Motorola reported a profit of $48 million, or 2c a share, compared with a loss of $238 million, or 11c a share, in the year-ago period.

In addition to earnings capturing the market's attention, there are several convertibles with upcoming puts.

With puts coming up in the next week or so are Masco Corp., Novellus Systems, US Bancorp, Eaton Vance and Household Finance.

"All of these names have seen their 10-vols spike through the roof," noted Salomon Smith Barney convertible analyst Adrian Miller.

Masco Corp., Novellus Systems, USBanCorp and Household Finance have cash only first puts.

According to Salomon Smith Barney's calculations, Novellus Systems, US Bancorp, Eaton Vance and Household Finance will be put, unless there are sweetenered or other incentives provided.

Masco is still on the fence, he said.

"Continued short term high volatility and equity trading volume is expected," Miller said.

"Perhaps derivative trading and convertible opportunities can be had around these events."

Market players also are hopefully looking for some sign of issuance making a comeback.

Buzz still points to names in crisis as potential new issuers, namely Duke Energy and CMS Energy.

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