AMR revives $300 million deal; Best Buy off on earnings; building data lifts Masco despite dividend hike

By Ronda Fears

Nashville, Sept. 17 - Like sitting at a late-summer drive-in theater showing old B-movies such as "Return of the Living Dead," convertible players watched yet another new deal replay on their screens late Wednesday - this time from AMR Corp.

The American Airlines Inc. parent trotted out a revived new deal from six weeks ago, following InVision Technologies Inc.'s revived deal on Tuesday from a month ago. Both had been pulled during the first half of August when the buyers' strike in convertibles resulted in the new issue spigot drying up almost entirely.

AMR's deal was a bought deal, and at least two buyside sources speculated it would be reoffered below par at the open Wednesday, although bookrunner Citigroup did not confirm that.

AMR sold $300 million of convertibles to yield 4.25%, up 32% - considerably more aggressive, at least in yield, than the $250 million deal in early August that was talked at 6.25-6.75%, up 40-45%.

"With the terms so aggressive, you just have to think that they will have to reoffer this below par," one buyside trader said.

AMR shares closed Wednesday up 10c, or 0.77%, to $13.15 but in after-hours trading were seen down 50c, or 3.8%, to $12.65.

InVision's deal priced considerably wider than guidance for the deal a month ago. InVision sold its revived convertible deal, issuing $100 million of 20-year convertible senior notes at par to yield 3.0% with a 15.73% initial conversion premium. In mid-August, the deal had been talked to yield 2.25% to 2.75% with a 27.5% to 32.5% initial conversion premium.

Meanwhile, traders said the secondary market was not so exciting, either.

As dividend increases continue to provide a focus in the convertible market, Masco Corp. upped its common dividend by 14% on Wednesday but its securities gained in the face of that due to overall strength in the building sector.

Countrywide Financial Corp. also was firmer on the continued strength in building, which has served to buoy mortgage activity. The lender also recently raised its outlook for earnings.

However Best Buy Co. Inc. reported fiscal second quarter numbers and guidance for the remainder of 2003 that disappointed the market; thus, the converts fell alongside the common stock.

While Best Buy is a retailer for tech products, makers of the products themselves have given market participants cause for concern due to the rapid run-up in those stocks. Yet, analysts said there could be positive signs for Advanced Micro Devices Inc. and the name saw a sharp gain Wednesday.

Still, convertible traders and market watchers said there is little reason to blow any horns, as activity is only moderate amid the drastic slowdown in new issues.

"In the last week at least, everything that's trading is basically sideways," said one market source, citing a general lack of value opportunities in the convertible market.

But the source said there could be more new issues in the pipeline now that interest rates seem to have stabilized.

A trader referred to the convertible market Wednesday as a "flatliner," explaining that it not only was dead but little changed as well.

Continued strength in the housing sector was evidenced by near record levels in both housing starts and building permits data that was released Wednesday. And, there was a bounce back in mortgage activity. The Mortgage Bankers Association index showed that applications rose 5.8% in the latest week.

As a result, just about every name associated with homebuilding got a gain. Hurricane Isabel, which is still lurking off the Mid-Atlantic coast, also continued to help that sector.

Masco was among those mentioned, but it also gained as a result of raising its outlook for the third quarter. The converts participated with the stock gains, traders said, despite the company boosting its common dividend by 14%.

The Masco 0% due 2031 rose 0.25 point to 44 bid, 44.25 offered while the stock closed up 31c, or 1.26%, to $24.86

Masco said it expects third quarter earnings will be "modestly above" its previous forecast range of 48-51c a share, excluding extraordinary items.

Countrywide, a big mortgage lender, saw a "gigantic" spike in its converts as the stock soared $2.82 on Wednesday, or 3.9%, to $75.79.

Countrywide's gain came on the heels of the company boosting its 2004 earnings estimates, which spurred several equity analysts to raise targets on the stock. Piper Jaffray, which has a strong buy recommendation on the stock, upped its target to $110 from $105. For 2003, Countrywide is looking for earnings per share of $13 to $15.

The Countrywide 0% convertible due 2031 was quoted up 2.125 points to 95.625 bid, 95.875 offered.

Best Buy reported fiscal second quarter results in line with analysts' expectations, showing a strong increase in business. It too provided guidance that the company referred to as an increase, but traders said the company's outlook was "about the same as the consensus analyst forecast" so it was a disappointment to the market.

Best Buy's 2.25% due 2022 dropped 1 point to 107.375 bid, 107.875 offered and the 0.684% due 2021 lost 0.5 point to 76 bid, 76.5 offered. The stock closed down $1.18, or 2.24%, to $51.48.

Fiscal second quarter comparable store sales were up 7.5%, Best Buy said, versus only a 2.6% rise a year before.

The electronics retailer said that based on recent performance trends, it raised its guidance for earnings from continuing operations for fiscal 2004 to a range of $2.35 to $2.40 per diluted share. A convert dealer said that compared to the current analysts consensus estimate of $2.38 per share.

He said the market was also disappointed that year-to-date comparable store sales were up 5%, only a slight improvement from 4.4% in a year ago, but he said the recent quarter results "seem to suggest there's light at the end of the tunnel" in terms of electronic sales rebounding.

Along with the rebound in electronic sales, many believe that there will be a stronger gain in orders for electronic components - such as chips.

In that area, some analysts say there is cause for hope.

At Advanced Micro Devices, for example, analysts at Oppenheimer say the fourth quarter is looking up. A convert trader said the line of positive thinking on AMD links directly to the fact that Intel spent almost no time discussing the imminent launch of its next generation desktop processor, which "does nothing but say something positive for AMD's Athlon processors."

AMD's 4.75% due 2022 rose 0.875 point to 93.375 bid, 93.875 offered. The 4.5s gained 4.125 points to 187.75 bid, 188.25 offered. The underlying stock closed up 26c, or 2.12%, to $12.50.

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