GATX mixed on dividend cut; Nortel results impress players; Gilead weaker on drug worries

By Ronda Fears

Nashville, Jan. 30 - Convertibles for the most part bucked the negative trend in the broad markets, as several key issues advanced on positive earnings reports and graced players with brighter outlooks. Earnings are expected to slow next week, and players are looking for the pace to pick up in new issues.

"It was winding down late this afternoon, but we were really busy all day. The networkers were just rocking and rolling," said a convertibles dealer.

"Next week, we are looking to be busy, too, hoping that there's going to be some nice new deals come out. Now that the rate shock has been somewhat absorbed, we can move on."

Nortel Networks Corp. declared 2003 as the "turning point," posting 2003 profits versus losses in 2002. That sparked a party that spread throughout the telecom and telecom equipment group, with Lucent Technologies Inc. and Corning Inc. participating in a big way. Those three saw 3 to 4 point gains.

GATX Corp. was a big gainer, and loser, in the convertible market, as the company slashed its common stock dividend - counter to the trend throughout 2003 to boost dividends as a result of tax law changes. The stock fell 15.5% but the 7.5% convertible was seeing a nice pop, adding about 3.5 points on the day while its newer 5% convert fell almost 10 points.

Moving southerly, Gilead Science Inc. saw a sharp selloff, with the bonds plunging 10 points or more as the biotech concern posted a 2003 loss and investors became concerned about its drug inventory levels after the company issued 2004 sales guidance that was less than analysts expected.

Also of note, The Walt Disney Co. and American Tower Corp. were both losers, with big chunks of paper moving, market sources said.

As a new month begins next week and with most of the major earnings reported, players are looking for new deal flow to pick up. Several market sources, on both the buyside and sellside, have expressed disappointment and some degree of surprise that January was as slow as it was, though, so many are reluctant to make a very specific prediction.

Convertible issuance in January was subdued at $3.8 billion - the lowest figure since October's $3.62 billion and sharply lower than December's $8.32 billion. It also was pale compared to $6.7 billion in January 2003. Excluding investment bank synthetics, which include Citigroup's $750 million exchangeable into News Corp., the month's total would have been even more lackluster at $2.93 billion. (See full league tables elsewhere in this edition.)

Gatx sees buyers and sellers

Contrary to the 2003 trend of rising common dividends, GATX on Friday reduced its quarterly dividend by 37.5%, to 20 cents a share from 32 cents a share. It sent the stock plummeting, of course.

But the rail and finance concern's convertibles did not altogether follow the stock lower, traders said.

The GATX 7.5% issue found some high-yield buyers, one dealer said, noting that a popular feature of the issue is that it is non-callable. The 7.5s due in 2007 were quoted closing up about 3.5 points to 113 bid, 113.625 offered.

The GATX 5% issue, on the other hand, is much more sensitive to the stock moves with a conversion premium of around 20%, versus about 75% on the 7.5s, the trader said. Thus, it slid alongside the stock and was quoted down 9.75 points at the end of the day with a 119.125 bid and 119.625 offer.

GATX shares fell $4.15, or 15.5%, to $22.60.

In addition to the dividend news, GATX on Friday reported a fourth-quarter profit, versus a loss in fourth quarter 2002, but forecast 2004 earnings would be flat with 2003. While Gatx acknowledged the benefits of the improving economic climate, it also warned "the pace of our earnings recovery will be gradual."

The dividend cut "better reflects current earnings and recovery expectations," said GATX Chairman Ronald Zech in a company statement.

For fourth quarter, GATX posted net income of $27.6 million or 55 cents per diluted share, compared to a net loss of $29.4 million, or 61 cents per diluted share, in fourth quarter 2002.

For 2003, GATX reported net income of $76.9 million, or $1.56 per diluted share, compared to net income of $300,000 in 2002.

Standard & Poor's said the lower dividend will allow GATX to accelerate debt reduction and invest in its businesses, noting the company ended the year with $212 million of unrestricted cash and a $400 million reduction in balance sheet debt. As a result, its lease-adjusted debt leverage, including non-recourse debt, while still high, declined to 85.2% at Dec. 31 from 87.5% a year before.

Nortel tells rosy tale for 2004

Canada-based Nortel, one of the world's largest telecom equipment providers, surged Friday on the heels of reporting blowout results for fourth quarter and 2003. The company dubbed last year as the turning point and cast a rosy forecast for 2004.

"Nortel was rockin' on the [earnings]," a convertible market source said.

Several of Nortel's peers also shot up.

"With the challenges that we faced in 2003, the company had a tremendous year, truly marking a turning point for Nortel Networks," said chief executive officer Frank Dunn.

"As we enter 2004, we remain committed to our business strategy of technology and solutions leadership in helping our customers transform their networks and implement new applications and services to drive improved productivity, reduced costs and revenue growth.

"While we expect that the percentage growth in the overall capital spending by our customers will be in the low single digits in 2004 compared to 2003, we expect to grow faster than the market by leveraging our particular strengths in voice over IP and wireless data solutions."

Yet, he said for first quarter, the company expects a seasonal decline in revenues compared to fourth quarter.

Fourth quarter revenues of $2.83 billion were up 12% from a year earlier and up 25% from third quarter. Net earnings came to $499 million or 11 cents per share on a diluted basis, reversing the fourth quarter 2002 net loss of $168 million or 4 cents per share and up from net earnings of $185 million or 4 cents per share on a diluted basis in third quarter.

For 2003, the company posted revenues of $9.81 billion compared to $10.57 billion in 2002. Net earnings were $732 million or 17 cents per share on a diluted basis, reversing the 2002 net loss of $3.27 billion or 85 cents per share.

Nortel also said it ended 2003 with a strong cash balance of $4 billion.

Gilead falls on drug concerns

Gilead Sciences Inc. fell sharply Friday after posting a net loss. But traders said the big blow was the company's expected sales for two of its key drugs in 2004, which sparked dual concerns about its inventory levels for those drugs.

"These bonds were just getting slammed," a sellside trader said.

The Gilead 2% due 2007 dropped 10 points to 130 bid, 130.5 offered, while the stock fell $5.88, or 9.69%, to $54.81.

"If they don't see sales growing, and inventory levels out there are getting fuller and fuller, then there's bad news ahead," the trader said.

She said Gilead's key drug sales were good in fourth quarter, but a big part of those sales were stocking up wholesalers' inventory. That, the trader added, would seem to indicate that future sales could be hurt more, until those inventory levels decline.

After Thursday's close, Gilead reported earnings and on the conference call it also said its research and development spending would be about 20% to 30% higher this year, the trader said. And selling, general and administrative spending would also go up by 25% to 30%.

Meanwhile, the trader said Gilead is expecting margins in 2004 to decline because of pricing pressure in Europe.

Gilead reported fourth quarter net income of $192.6 million or 85 cents a share, up from $35.5 million or 17 cents a share in fourth quarter 2002. Revenue jumped 82% to $263.5 million.

For 2003, however, the company posted a net loss of $72 million or 36 cents per share compared to net income of $72.1 million or 35 cents per diluted share for 2002.

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