Convertibles lower on worries about tech valuations, Tyco rebounds

By Ronda Fears

Nashville, Tenn., Jan. 22 - On worsening concern about the run-up in tech stock valuations, convertibles retreated again Tuesday along with stocks. But Tyco captured a great deal of the market's attention, although the company's breakup took many by surprise and most were still at a loss as to whether it was good news or not. Traders said there were more sellers than buyers in the market Tuesday and many players were on the sidelines, waiting for new paper. In addition to the Ford deal this week, Sunrise Assisted Living Inc. and Health Management Associates Inc. both launched smaller deals on Tuesday.

"Tyco took up two-thirds of a lot of people's attention. It was a pretty big shock. Of all the rumors that had been bandied about, this never crossed anyone's mind. We're talking about more than $7 billion in convertibles, so people were listening," said a convertible trader at hedge fund in New York.

"It's not real clear yet whether this is good, better or worse than what we have now with Tyco. The jury's still out on that."

Traders said convertibles were marked down sharply Tuesday as stocks hit the skids again, but volume was only moderate. Stocks fell on earnings news and a warning from Merrill Lynch & Co.'s chief U.S. strategist Richard Bernstein that technology valuations are still at pricey levels. The Nasdaq fell 47.80, or 2.48%, to 1882.54 while the Dow Jones Industrial Average dropped 58.05, or 0.59%, to 9713.80.

Tyco's breakup gave the stock a lift as well as the convertibles and traders said the yield spread on Tyco narrowed by almost half. The Tyco 0% convertibles due 2020 (Baa1/A) gained 1.625 points on the day to 73.25 bid, 73.75 offered and the 0% convertibles due 2021 (Baa1/A) rose 1 point to 73.375 bid, 73.8975 offered as the stock gained $1.10 to $47.55. A derivatives trader said the spread on the five-year puts tightened by 80 to 100 basis points and the four-year puts narrowed by more than 100 basis points.

Tyco wasn't the only name conducting damage control Tuesday.

After Kmart Corp. filed bankruptcy, Fleming Cos. Inc. issued a statement addressing the situation.

Mark Hansen, chairman of Fleming, said that Kmart's reorganization can be an opportunity to close under-performing, high-cost stores and redirect capital to superstores, which he said the food distributor typically delivers around five times the volume of merchandise to versus the traditional Kmart discount store. But while Kmart is Fleming's largest customer in terms of sales volume, the company said business with other retail customers continues to grow at a significant rate. Non-Kmart business accounted for more than 10% sales growth in third quarter, Fleming said, and will continue to grow at a sustained rate of at least 5% per year for the foreseeable future.

While Fleming did not update its guidance, the company said it is in the process of fully evaluating what, if any, effect Kmart's filing may have on its previously stated 2001, 2002 and 2003 guidance.

"It is our belief that store closures may be a component of Kmart's plan," Hansen said. "To put this in perspective, our analysis indicates that the least productive 10% of the Kmart store base likely constitutes less than 6% of Fleming revenues attributable to Kmart, no more than 2% of total Fleming revenues and approximately $0.05 per share in earnings."

Fleming's 5.25% convertible notes due 2009 (B2/B+), which are under review by the major rating agencies, added 4.125 points on the day to 83.875 bid, 84.875 offered and the stock rose $1.88 to $19.15.

Kmart's troubles also have hit American Greetings in recent weeks. On Tuesday, American Greetings stock slid 72c to $13.02 and the 7% convertible notes due 2006 (BB+) dropped 4.625 points on the day to 118.625 bid, 119.375 offered.

Tech issues were sharply lower, traders said, with telecoms and telecom equipment makers getting the brunt of the blows. While techs were falling, Amazon.com gained on turning a profit, however. Amazon posted fourth quarter earnings of $5 million, or 1c per share, versus the year-ago net loss of $545 million, or $1.53 per share. That sent Amazon stock soaring up by $2.44 to $12.60 and the 4.75% convertibles due 2009 (Caa3/CCC+) gained 5.625 points to 55.625 bid, 57.125 offered.

But telecoms and equipment makers were hit after Lucent Technologies Inc. said it will cut at least another 7,000 jobs, or by 11%. Lucent also said it anticipates sequential second-quarter growth in revenues of 10% to 15% in second quarter, but it apparently fell on deaf ears. The company also reported a narrower net loss of $423 million, or 14c a share, versus $464 million, or 14c, a year earlier, with sales down to $3.58 billion from $4.35 billion.

The Lucent 8% convertible preferred due 2031 (B3/B-) dropped 1 point to 128.5 bid, 128.875 offered as the common shares added 25c to $6.94. Falling in sympathy were Corning, Brocade, Motorola, Viacom, Texas Instruments and a slew of others.

Corning's 3.5% convertible due 2008 (Baa1/BBB) lost 1.5 points to 110.625 bid, 110.875 offered with the stock off 17c to $8.46. The Texas Instruments 4.25% convertible due 2007 (A-) dropped 2.5 to 106.375 bid with the stock down $1.79 to $25.75.

Motorola was falling in advance of earnings, which were reported after the closing bell. The company reported a fourth-quarter net loss was $1.2 billion, or 55c a share, versus net earnings of $135 million, or 6c a share. For the year, the net loss was $3.94 billion, or $1.78 a share, versus $1.32 billion, or 58c a share. But, Motorola predicted that after losses in the first two quarters of 2002 it will see profits in the second half of the year and a profit for the full year. The Motorola zero-coupon convert due 2013 (Baa1/BBB) was down 1.5 points to 72.5 bid, and the Liberty Media 3.5% exchangeable due 2031 (Baa3/BBB-), which converts into Motorola shares, fell 2.125 points to 71.75 bid. Motorola shares closed down 72c to $13.53.

Johnson & Johnson also slipped Tuesday after the company posted a rise in earnings to $1.1 billion, or 36c per diluted share, compared with $936 billion, or 30c per share a year earlier, and that the company's chief executive Ralph Larsen, is stepping down. The J&J 0% convertible due 2014 (Aa1/AAA) lost 1.5 points to 150.25 bid, and the 0% due 2020 was off 0.75 to 83 bid. The underlying stock closed down 58c to $59.12.

The primary market got back to business Tuesday with two new additions to the roster.

Health Management Associates launched $275 million of 20-year convertible subordinated notes in the Rule 144A market, after reporting fiscal first quarter net profits rose 26% to $50.5 million, or 20c per share. Details were sketchy late Tuesday, however. Health Management shares ended lower by 46c to $19.34.

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