El Paso sinks on liquidity worries; market sidelined, noting spreads widening

By Ronda Fears

Nashville, Feb. 12 - War fears again were blamed on a fair amount of convertible players sitting on the sidelines. New issues were active, but little else as participants used words like "stale," "rich," and "tough" to describe the market.

"Bids were few and far between today, but we didn't see a heavy amount of selling, either," said a dealer.

"We're sort of at a standstill."

Heightened security alerts within the U.S. has put many people on edge and traders are leery about making any move until war breaks out, whether in Iraq or North Korea, he said.

"There's also the matter of what to do with these credits in this market," he continued.

"Spreads are all over the place this week. They were mostly wider today, especially in the better credits."

Some players are glad to see the market cheapen a bit, but note that it's still rich.

"We are seeing a few, and I mean a few, things cheapen up some, but the market overall is still overvalued," said a convertible trader at a hedge fund in New York.

"We've got a long way to go, and it looks like it's going to be a very long year. We need at least three new deals a week, really probably a new deal a day if they're for $150 million, to make it interesting."

The overnighter marketed and issued by Deutsche Bank, which converts into USA Interactive, was sold at a premium and came as a two-part floater, each paying Libor plus 20 basis points.

The Deutsche Bank Luxembourg/USA Interactive fetched $1.06 billion in proceeds with a total face value of $805 million.

Tranche A was sold at 134.5, with a 52.59% initial conversion premium. Tranche B sold at 125.2, with a 67.86% initial conversion premium. Both are par redemption bonds.

According to a convertible trader, tranche A was estimated at theoretical value of 137.5 and tranche B at 128.5, but she did not know the spread or volatility inputs used to arrive at those valuations.

USA Interactive shares closed down $1.78 to $22.47.

Sierra Pacific Resources' new 7% converts continued to climb, adding 1.75 points to 109.75 bid, 110.75 asked. One trader, however, noted that the issue traded as high as 111.875 during the session. The underlying stock was unchanged at $3.75.

In addition to activity in Sierra Pacific and other new issues, several other energy names were modestly active but getting sold off sharply.

El Paso Corp. dropped again sharply on liquidity concerns in the wake of drastic credit rating downgrades, which the market was speculating will cost the company more in the way of collateral with its banks.

"The [El Paso] converts lost 2 to 3 points and the junk bonds 4 to 5. Obviously, the market is more skeptical about recovery levels," said a convertible trader at a boutique in Connecticut.

"We're not seeing any buyers for this paper, though. El Paso is in distress and we don't really see a huge amount of distressed buyers right now.

"People are concerned more so now because it's thought they could have to put up more collateral because of the downgrades. At this point, El Paso can't spare a dime, so anything that costs them more money is going to show up in the bonds prices quickly."

El Paso's 0% convert dropped 2 points on the day to 26.25 bid, 26.75 asked and the 9% mandatory plunged 3.25 points on the day to 21 bid, 21.25 asked.

El Paso shares fell $1.07 to $3.65.

In addition to the rating pressure, El Paso was suffering from the negative backlash of its chairman stepping down.

Fellow energy names Duke Energy and AES Corp. slid in sympathy with El Paso.

Duke's newest 8% mandatory lost 0.85 point to close at 11.7 while the older 8.25% mandatory lost 0.7 point to close at 11.55. Duke shares fell $1.21 to $13.96.

The AES 4.5% convert dropped 1.875 points to 50 bid, 52 asked while the stock ended off 13c to $2.83. AES is due to report earnings early Thursday and a conference call is scheduled for 9 a.m. ET.

Elsewhere, traders noted the General Motors converts suffered slightly from a downgrade to the underlying stock, and there was a small amount of buying in a few semiconductor names on recent weakness.

"We traded a little FEIC, moving the 51/2s up about 3 points," said a dealer.

"There had been a pull back on some of the recent negative news for semiconductor equipment names, like Applied Materials."

Indeed, Wachovia Securities convertible analyst Henry Voskoboynik said weakness in semiconductor stocks could create an attractive entry point for a few converts. His picks were ASM Lithography, FEI Co., Veeco Instruments and LTX Corp.

FEI's 5.5% convert due 2008 was quoted up 3 points to 86.375 bid, 86.875 asked. The stock closed down 27c to $14.08.

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