Buyers emerge in search of sweethearts, but Universal Health gets jilted on news

By Ronda Fears

Nashville, Feb. 14 - The convertible market was looking to pickup downtrodden issues in an opportunistic fashion Friday, and traders said volume was decent ahead of the three-day holiday weekend.

Universal Health Services, however, was the disaster du jour as its chief financial officer departed amid a snag with independent auditor KPMG. That sent its securities spiraling, with the convert losing ground in tandem with the $6.96 plunge in the stock.

However most of the market was better bid with buyers looking for bargains.

On the heels of good news from Dell Corp., chips was the most notable focus of buyers, traders said.

Micron Technology's new issue was getting the lion's share of interest since it offers so much more upside stock participation than the bulk of issues that have been circulating for longer.

"The new Micron came at 2.5s up 40% and they're now something like 4s up 55%," said a dealer.

"You have to remember that the average premium of all the semiconductor converts, and there's probably about 45, is over 600%. Only five or six of the semicon converts are under 100%. Micron warrants and the converts were very active."

Micron's new 2.5s added 2 points on the day to 91.25 bid, 91.75 asked while the stock closed up 46c to $7.22.

In another area of opportunity, convertible investors are looking at putable issues in 2003.

"The short-term puts offer a near-term opportunity in this uncertain environment," said Venu Krishna, head of U.S. convertible research at Lehman Brothers.

Tyco International Ltd.'s 0% convertible due 2020 is now getting eyed ahead of its November put, particularly since the 0% due 2021 has been taken out.

Interpublic Group's 0% convertible due 2021 is another, since the company earlier this week succeeded in getting a new bank line and prospects appear promising for selling its research unit, Krishna said.

"It's an interesting play right now," he said.

If Interpublic shares stayed flat and liquidity improved, such as from the asset sale, then there could be a situation created under which the company would provide a sweetener for holders not to put the issue in December. It could be as much as 5-6 points, he said, and likely in the form of cash.

A situation also could arise similar to that recently seen with Omnicom, he said, where holders could sell into the rally if a sweetener is thought to be coming, and then buy it back immediately after the effective date as the issue weakens.

Interpublic's 0% convertible due 2021 gained 1 point Friday to 79.75 bid, 80.25 asked with the stock up 62c to close at $9.47.

Most of the market was actually flat, traders said.

New issues saw some of the biggest gains, though, and there were a few high-profile declines.

Universal Health was the big loser of the day as it announced the shocking resignation of its CFO, which overshadowed the company's positive earnings late Thursday.

"This caught a lot of people off-guard," said a trader at a convertible fund based in New York.

"On the conference call, apparently everyone at UHS was bending over backward to assure people that the books were okay, but no one wants to be caught in the middle of a landmine if this really blows up."

CFO Kirk Gorman on the conference call insisted that there are no problems or questions surrounding the company's financial statements.

Gorman said his leaving is the result of a disagreement with KPMG on several issues, including the required level of technical accounting expertise for CFOs and, of a more philosophical nature, the requirement to personally vouch for the company books.

General perception is probably leaning in favor of a belief that Universal Health's financial statements are sound, the trader said, but the situation and the surprise of it was unsettling enough to force a sell-off.

Universal Health's 0.426% convertible due 2020 fell 7 points on the day to 52.625 bid, 55.125 asked while the stock closed down $6.96 to $34.99.

Standard & Poor's, which rates the convert at BBB- and has the credit on positive outlook, said it does not anticipate a change in the company's prospects or financial strategy resulting from the departure that would suggest any adjustment to its rating or outlook at this time.

Late Thursday, Universal Health reported fourth quarter net income of $43.9 million, or 69c a share diluted, up from profits of $927,000 or 2c, in fourth quarter 2001. Revenues rose 15% to $835.5 million and EBITDA gained 23% to $110.7 million.

For 2002, the rural hospital operator posted net income of $175.4 million or $2.74 per share diluted, versus profits of $99.7 million, or $1.60 per share diluted, in 2001. Revenues increased 15% to $3.26 billion and EBITDA grew 17% to $434.6 million. Cash flow from operations for the year was $333 million, up 12% from the prior year.

Universal Health chief executive Alan Miller said the company anticipates growth in 2003, although no specific guidance was provided, with some of that potentially from acquisitions.

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