Market focuses on spreads, credit protection, volatility

By Ronda Fears

Nashville, Tenn., Aug. 14 - Sentiment improved in the convertibles market somewhat as most of the corporate certifications of financials came in without a hitch, but there was little trading as volatility levels plunged. Mark-ups were credited to tightening corporate spreads, although the strong boost in stocks also helped, and credit protection was a primary focus.

Household International, Inc. was one of the few unfavorable surprises regarding financial certifications, announcing that it would restate earnings by some $386 million from 1994 through second quarter, but most of the convert was put back to the company last week.

Otherwise, players were watching the credit markets and derivatives as stocks soared and volatility slumped.

"Convert arbs are still hurting. One up day in the stock market won't undo weeks of pain. Also many players are getting hurt a little on their interest rate hedge, as rates are falling to 40 year lows," said a convertible trader at a hedge fund in New Jersey.

"There's not much else to say except it's very quiet and the market has been weaker all week. Maybe after today it will be a little better but it doesn't always filter through to converts right away."

Traders said the heavy August vacation schedule also was putting a damper on activity.

The search for credit protection was active, however.

"Demand for credit protection in the credit default swap market has become extreme," said David Goldman, head of research in the Banc of America Securities global markets group.

Telecom is a particularly hot area right now.

In some cases, like SBC Communications Inc., he said investors can pick up 140 to 150 basis points with credit default swaps.

Overall, corporate credit spreads were a bit tighter, however, which one convertible trader said "would be very good for converts as so many converts are spread-sensitive these days and not very equity-sensitive."

Initially, bonds reacted to the corporate certifications by widening, the trader said, but settled in "a tad" tighter on the bid side.

"Certifications sort of lifted that cloud, but there weren't many surprises," the trader said.

"Most of that sort of news was already priced into the market, at least from a credit standpoint, I think."

Household's headlines were initial negative for the stock and bonds but both rebounded before the close.

In a conference call, Household chief executive William Aldinger said the company was committed to meeting its capitalization ratio targets. He said the company would halt share buybacks and portfolio sales.

"To the extent that it is necessary to meet our targets, we will issue capital securities or common stock," Aldinger said, but indicated the company would not come to market with a new unsecured debt issue in third quarter given where spreads are in the secondary market.

All but $1.6 million of Household's 0% due 2021, with a face value of $1.22 billion, was put back to the company last week for a cash price of 81.914. The convert was quoted off slightly to 82.375 bid, 82.875 asked. Household shares closed up 29c to $38.09.

While most of the market was marked up, several energy names declined on the latest Federal Energy Regulatory Commission report on power market manipulation. The agency is pursuing a probe of El Paso Corp.'s activities with Enron Corp. and Avista Inc. with regard to alleged conspiracy to manipulate power prices during the California energy crisis in 2000 and 2001.

"There is a lot of headline risk in this sector," said a dealer.

"This is a politically charged subject, and it's election year. So, this will stay in the press."

Calpine Corp. and Mirant were lower as a result, along with El Paso.

El Paso's new 9% mandatory dropped 1.45 points to 39.65. The old 4.75% convertible trust preferred lost 0.75 point to 28. The 0% due 2021 was off just slightly, quoted at 35.25 bid, 36.25 asked. El Paso shares closed down 70c ot $14.80.

Calpine's 4% due 2006 lost 1.75 points to 44.25 bid, 45.25 asked. Its three convertible preferreds were also lower, as the stock closed off 28c to $3.42.

Mirant's new 5.75% note due 2007 fell 2.125 points to 60 bid, 61 asked. The common shares closed up 6c to $3.16.

But there were several names moving higher in the power group, even some thought of as vulnerable to the California situation.

Duke Energy's new 8% mandatory added 0.5 point to 20.3 and the old 8.25% mandatory gained 0.64 to 21.24 as the stock rose $1.41 to $27.75. And Williams Cos.' 9% mandatory was slightly higher at 7.41 with the stock up 17c to $2.78.

Nextel Communications Inc. paper was seen higher on news of more buybacks.

The company said it cut its debt by another $733 million since the end of the second quarter, spending $205 million in cash and issuing 33 million common shares. Nextel has retired a total of $1.83 billion in debt and preferred securities so far in 2002.

As a result, Nextel said it expects to record a significant gain in third quarter and expects subscriber growth in the third quarter to be consistent with recent strong quarters.

Nextel's converts were higher, traders said, with the stock up 54c to $5.77. The 6% due 2011 were quoted at 57 bid, 57.625 asked. The 5.25% due 2010 were quoted at 53 bid, 54 asked. The 4.75% due 2007 were quoted at 58 bid, 59 asked.

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