Convertibles lower amid telecom selloff on Qwest drawdown

By Ronda Fears

Nashville, Tenn., Feb. 14 - Convertibles were lower, despite the Dow Jones Industrial Average closing over the 10,000 threshold, and the overall market tone was tense as Qwest Communications underscored widespread credit concerns by taking down its entire $4 billion bank line because it could not roll over its commercial paper. The Qwest news, which included downgrades to the investment grade credit, on top of Nortel and Global Crossing's bankruptcy, sent investors scrambling to unload telecom paper.

It also cast a pall over the primary market, as buyers became suspect of issuers bringing new paper to the table. Qwest, however, said it will proceed with plans to sell up to $1.25 billion in convertibles soon, although S&P, Moody's and Fitch cut its ratings on Thursday, citing limited financial flexibility and near-term liquidity concerns in light of the bank drawdown.

"You could say there was an intense reaction today, not just to Qwest, it's the entire package of bad news that has been coming down the pike ever since Enron blew up," said the head convertible trader at a major investment bank in New York.

"No one wants to be holding a lemon when the squeeze gets put on, and it will. There's an enormous amount of debt that is coming due and suddenly, people are realizing that there are a number of companies that may not be able to pay up. Qwest itself has over $1 billion in the next few months."

Sources said the weight of the creditworthiness concerns may put a harness on new issues as well, or at least swing terms toward buyers until stocks show a stronger, more comforting recovery.

"Right now it's really tough to bring a new deal. Stocks are not where they need to be, and the concern about liquidity and defaults and bankruptcies have just made the market very nervous about new debt," said a syndicate official at one of the leading convertible underwriters, which is also pitching to win the lead post on Qwest deal.

"But deals can always get done at the right price. What will more likely be the thing that would dry up issuance is that issuers will not want to do pony up what the buyers demand."

Buyside sources said it makes them nervous when terms are too generous, as they see it as a red flag signaling that the company is desperate. That causes concern that the issuer may be in trouble to the point of not being able to pay back debt.

"A lot of people have been burned and are not very quick to take anything for granted anymore, like that an issuer will be able to make payments, no matter what their financials look like," said a convertible hedge fund trader.

"Look, Enron had a great set of books in February when they sold $2 billion worth of convertibles. Well, maybe the books weren't that great, but certainly no one saw the end coming. So, you know, when the bombs are going off all around you, you tend to run for cover."

Traders said the market's nervousness about credit quality escalated into a sell-off that slammed the telecom and telecom equipment sectors. Virtually everything that hadn't been cleared because it is in bankruptcy or extremely distressed was up for sale, spanning the group from local carriers to wireless phones and fiber optics. The groups together account for some 20% of the convertible market.

Lear Corp. isn't in anything close to the telecom sector but its deal got done at the cheap end of guidance, which sources said was due to the general unease about market conditions right now. The company, which makes seats and other automotive components, sold $200 million in proceeds of 20-year zero-coupon convertible senior notes at 39.106 to yield 4.75% with a 25% initial conversion premium. In the immediate aftermarket, the new Lear convertible (BB+/Ba1) edged up about 0.5 point from issue price to 39.75 with the stock down $2.64 to $38.96 in the wake of the overnight deal.

Also pricing after Wednesday's close, Computer Network Technology Corp. priced at the middle of guidance but the issue lost ground quickly and sharply in the immediate aftermarket. The $125 million of convertible subordinated notes due 2007, which sold with a 22% initial conversion premium, dropped 6.75 points from par to 93.25 bid, 93.75 offered with the underlying shares down $2.01 to $13.70.

The market's other recent addition to the market was also lower. Cymer's new 3.5% convertible subordinated notes due 2009 lost 1 point to 102.5 bid, 102.875 offered with the stock down 64c to $38.90.

Traders noted, however, that although the Cymer and CNT convertibles declined, semiconductors and electronics were mostly higher on the day, albeit only slightly.

"There wasn't really much going higher. The Dow closed over the 10,000 mark but the index wasn't up by much and the Nasdaq was lower," said a convertible trader at a major investment bank in New York.

"Some of the techs had the best gains that were seen today, but a lot of them were down quite a bit, too."

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