Market idled by stock slump, summer, lack of new issues

By Ronda Fears

Nashville, Tenn., July 8 - It was another very slow day in convertibles with most of the market tracking stocks lower.

The WorldCom, Inc. hearing in Washington kept the market distracted, which was welcomed since "everything is picked over like the Thanksgiving turkey," as one trader put it.

But the market was also intrigued with Level 3 Communications Inc.'s private placement of $500 million of convertible notes to Warren Buffett's Berkshire Hathaway, Legg Mason and Longleaf Partners.

"Level 3 is the only thing going on in the convertible market today," said Adrian Miller, a convertible analyst at Salomon Smith Barney.

"There's really nothing happening."

In what was perceived as a major coup, Level 3 got a $500 million capital infusion from Berkshire Hathaway, Legg Mason and Longleaf Partners via a convertible.

The fiber optic carrier sold the 10-year convertible notes to yield 9%. The issue is convertible into about 147 million shares, or a little more than 25% of Level 3's outstanding shares.

Level 3 intends to use the money to pursue opportunities in the beaten-down telecom industry, and all three investors have agreed to consider investing more in the future.

It provided a much needed boost to Level 3's securities.

Level 3 shares rose $1.47 to $4.36. The 6% convertibles due 2009 and 6% convertibles due 2010 were both quoted 1 point higher at 31 bid, 35 asked at one shop. Another shop quoted the 2009 issue at 29 bid, 31 asked and the 2010 issue at 28 bid, 30 asked.

Not much convertible trading took place, however, as stocks retreated after a brief run-up Friday amid thin trading.

Nasdaq lost nearly 3% and the Dow Jones Industrial Average dropped 1.12%.

Convert arbs were still adjusting hedges, particularly with regard to biotech and drug names due to the Merck news, and otherwise its was a very slow session for convertible traders.

"We have all our screens tuned into the WorldCom hearings," said a convertible dealer.

"It's just dead today, absolutely northing going on."

The U.S. House of Representatives committee hearing focusing on the WorldCom scandal captured much of the market's attention.

Former WorldCom CEO Bernard Ebbers was subpoenaed to testify, but invoked the Fifth Amendment so nothing was gleaned from him. But the federal lawmakers also heard from credit rating analysts and former Arthur Anderson accountants.

Still, not much was learned from the hearings.

Although the Level 3 news was positive, the negative overhang of the likes of WorldCom's situation held back the market, including telecom and telecom equipment names.

Extreme Networks was among the equipment names heading south. The 3.5% convertible due 2006 lost 2 points on the day to 81 bid, 82 asked as the stock dropped 80c to $9.21.

Software was among the weakest in the tech area, with Mentor Graphics heading the pack lower due to a warning late last week.

Mentor Graphics fell sharply after the maker of semiconductor designing software warned that second quarter results would fall far short of analysts' expectations because several large deals failed to close.

After the close Friday, Mentor Graphics warned that it would post a loss in the second quarter but said it would break even before charges and certain expenses. The company expects a loss, including charges, of about $30 million, or 40c a share, on revenue of about $135 million, versus a profit of 27c share on revenue of $149.5 million in the year-ago quarter.

Mentor Graphics' 6.875% convertible due 2007 fell 10 points on the day to 88.75 bid, 89.5 asked. The stock lost $3.73 to $10.24.

Biotechs and drug names were also hurting from a backlash due to Merck & Co. Inc. disclosing that its Medco pharmacy benefits management business booked $14 billion in revenue it never collected.

Abgenix's 3.5% convertible due 2007 was quoted down 1 point on the day to 68.375 bid, 69.375 asked at one shop. Another quoted the issue at 68 bid, 69 asked. Abgenix shares closed off 67c to $8.40.

On the upswing, however, and sharply, was Manpower Inc.

"Employment stocks were higher, and Manpower got included in that," said a dealer.

"With so many people still looking for a job, this is seen as an area that will be doing well throughout the economic recovery."

Manpower's 0% convertible due 2021 gained 1.625 points on the day. One shop quoted the issue at 62.875 bid, 63.125 asked. Another put it at 63 bid, 63.25 asked. Manpower shares climbed $2.13 to $38.58.

Mirant's new 5.75% convertible due 2007 continued to slide, quoted Monday down 4 points to 93 bid, 93.75 asked. Mirant shares ended down 43c to $5.33.

Convertible investors are struggling to find trading opportunities, traders said, amid the current climate.

"What's not just absolutely fallen out of bed is too rich," said a trader at a convertible fund in New York.

"It's really tough right now."

For June, the Froley Revy convertible bond index declined 2.89% with prices down 3.23% for the month, the firm reported Monday. For second quarter, the Froley Revy index dropped 4.31% on a 5.31% drop in prices. Through the first half of the year, the index is down 3.82% with prices down 5.79%. Current yield for the index was 4.15% at June 30.

Hedgeindex.com puts convertible arbitrage hedge funds year-to-date, as of May 31, down 0.67%.

Merrill Lynch's convertible index was down 7.6% for second quarter, with the underlying stocks down 25%.

Salomon Smith Barney's convertible index is down 8% year-to-date, through June 30, with the underlying stocks down 27.8%.

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