Lockheed dips on dividend boost, Titan purchase; Chubb rebounds ahead of Isabel

By Ronda Fears

Nashville, Sept. 16 - Concerns about dividend risk spread anew through the convertible market Tuesday after Lockheed Martin Corp. boosted its common dividend, hitting names like Bunge Ltd. and AmeriSourceBergen Corp.

But Lockheed's converts also dipped as a result of its $2.4 billion acquisition of Titan Corp. The total price tag includes Lockheed assuming $580 million of Titan debt, with the remaining $1.8 billion split equally in cash and stock.

As a result of the merger, Titan said it will redeem its convertible preferreds and that issue soared 3 points.

Elsewhere, traders said that hurricane Isabel's ongoing threat to the Mid-Atlantic coast was still giving a lift to home improvement names like Lowe's Cos. Inc., and noted a strong rebound in insurance names like Chubb Corp. as buyers emerged on the weakness following reports of potential destruction from Isabel.

Chubb's 7% convertible due 2005 regained 0.35 point, or 1.3%, to 27.25 and 7% due 2006 added back 0.49, or 1.81%, to 27.49 on the New York Stock Exchange. The stock rose 80c, or 1.25%, to $65.05.

The Federal Reserve leaving interest rates pat was no big surprise but some market sources were a bit surprised by the FOMC's position keeping a bias toward easing, which was interpreted to be slightly more Treasury friendly.

Still traders said the convertible market was not overly busy.

"Today was a little bit busier than yesterday," said Robert Barron, head of U.S. convertible research at Deutsche Bank Securities.

"More people are stepping in, tiptoeing back in, but there's still a little concern about valuations running the risk of getting stretched again."

Without a strong new issue market, though, onlookers advise that convertible valuations are likely to richen unless there is a large exodus of capital from the asset class. There have been unsubstantiated rumors to that effect for more than a month, but it will probably be several months before that is confirmed or proven wrong.

The resurrection of InVision Technologies Inc.'s small $100 million from last month - at wider terms - was seen as a hopeful stirring in the primary market, but capital markets sources are increasingly bearish on the outlook for the remainder of 2003.

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.

The "breakfast deal" priced before Tuesday's open without indicative terms, but wider than guidance for the deal a month ago that put the yield at 2.25% to 2.75% and initial conversion premium between 27.5% and 32.5%.

In mid-August the company, which provides Transportation Security Administration certified explosives detection systems used at airports for screening checked passenger baggage, scrapped a $100 million offering of 20-year converts as the climate turned against issuers.

"We were all told there was going to be a gangbuster calendar in September and then for all of fourth quarter," said a fund manager in Connecticut.

"Now we're hearing it's going to be slower and slower but still a good year for convertibles."

A capital markets source at one of the busier banks said issuers are looking harder at raising capital in the equity market, as stocks remain strong, and that is hurting potential new deals in the convertible market.

He specifically pointed to Sandisk Corp.

Sandisk announced Monday that it would sell 7.8 million shares of stock, aiming to fetch about $500 million. The stock Tuesday climbed $2.06, or 3.37%, to $63.23. The 4.5% converts, which are deep in the money, gained 9.75 points to 347 bid, 348 offered and one trader noted some speculation that the company might look at forcing conversion or redeeming some of those bonds early. The issue is callable in November 2004.

Titan's call of its convertible as a result of the Lockheed merger sent that issue up 3 points to 20 - the redemption price - as Titan common shares rose $4.33, or 25.53%, to $21.29.

Lockheed was weaker on the day, in part due to the acquisition and also because of the increase to its common dividend. Market sources noted, though, that the common dividend was not raised for the current quarter, but the upcoming December quarter. The defense giant boosted the quarterly common dividend to 22c from 12c.

Lockheed's 30-year floating-rate convertibles dropped 0.625 points on the day to 101.625 bid, 101.875 offered. With proceeds from that $850 million issue, in early August, Lockheed planned to purchase for cash up to $1.15 billion of its outstanding 7.25% notes due 2006 and the 8.375% debentures due 2024 originally issued by Loral Corp.

Bunge and AmeriSourceBergen have been on recurring lists of convertible names subject to weakness as a result of dividend risk, so both were lower Tuesday in the wake of Lockheed's headlines.

Bunge also lost ground due to lowering its earnings guidance, traders said. The company cut its outlook for 2003 due to the summer drought that has devastated U.S. soy crops.

The Bunge 3.75% due 2022 fell 4.875 points to 105.5 bid, 106.5 offered while the stock dropped $2.74, or 9.1%, to $27.37.

AmeriSourceBergen was also weaker due to some pullback in the biotech sector because of valuation concerns, one trader said. The ABC 5% due 2007 lost 1.5 points to 122.25 bid, 123.25 offered as the stock ended down 89c, or 1.53%, to $57.47.

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