Convertibles flatten out, DDi at bat

By Ronda Fears

Nashville, Tenn., March 26 - Convertibles flattened out Tuesday along with stocks but traders said flow was rather slow as most players sat in the wings. With such little going on the secondary market, buyers were looking at a tiny new deal of DDi Corp. with skepticism.

While DDi's new deal was said to be priced very cheap, traders said that in and of itself scared off a lot of people. The new $75 million deal was bid down 4 points below par in the gray market Tuesday afternoon just an hour or so before the scheduled pricing.

"The DDi deal has a bit more baggage than some people want to carry," said a convertible trader at a hedge fund in New York.

"A lot of arbs are playing the deal. The volatility is great and the terms are super cheap. It's priced to go, but it's a bigger gamble than some of us are willing to take."

Analysts said the midpoint of the price talk puts the deal 8% to 11% cheap, noting a wider credit spread was needed after Moody's cut DDi's ratings to Caa1, including the new deal, and has a negative outlook for the credit.

The $75 million of convertibles are talked to price to yield 5.75% to 6.25% with a 20% to 25% initial conversion premium.

DDi shares closed down 47c to $9.05 and the existing 5.25% convertible note due 2008 lost 1 point to 72.25 bid, 73.25 offered.

WebMD Corp.'s new $300 million of five-year convertible subordinated notes, however, traded up 1 point from to 101 bid, 101.5 offered as the stock dropped 79c to $25.01.

Meanwhile, the secondary market was described as widely mixed and flat in general.

"Not a lot of trading was going on today," said a convertible trader at a major investment bank in New York.

"There was still some selling going on with Lucent and Calpine because of the ratings news, and Lucent was getting some pressure because of the Ciena news but Ciena's convert actually got a few bids but I don't think there were a lot of buyers for paper like that today, not in a long while."

Lucent Technologies Inc. saw selling pressure as investors began to worry that it would have to make even further cuts in spending or its workforce to remain competitive and/or viable, the trader said. The worries were compounded as Ciena Corp. announced it would cut 22% of its employees.

Lucent's new 7.75% convertible trust preferred due 2017 lost 3.25 points on the day to 89.5 bid, 90 offered and the 8% convertible trust preferred due 2031 was quoted down 2.5 points at 87 bid. Lucent shares closed ended down 19c to $4.32.

Ciena's 3.75% convertible note due 2008 was quoted down 1 point to 63 bid, 64.5 offered as the stock added 5c to $8.40.

In addition to Ciena's job cuts, the trader said it was hurt by a Merrill Lynch report saying the stock is expensive. The Merrill equity analyst said Ciena was not expected to turn a profit now until 2005 and put fair value on the stock at $5.

Calpine Corp. experienced a delayed reaction to the S&P downgrade Monday as the 4% convertible note due 2006 fell 7.125 points to 91 bid, 91.25 offered. The stock dropped $1.50 to $12.18.

Viacom shares were lower and the Liberty Media 3.25% exchangeable note due 2031, which converts into Viacom shares, also went south.

Viacom's first quarter revenue estimate was lowered by Morgan Stanley, one trader said, and that was enough to cause many players to hit the sell button. The Liberty Media/Viacom exchangeable lost 3.25 points to 101.5 bid, 102 offered as Viacom shares dropped $1.91 to $47.60.

Electronic Data Systems fell sharply on concerns about a revenue shortfall and a Sanford Bernstein downgrade to the stock, one trader said, despite several other analysts defending the story.

The EDS 0% convertible due 2021 dropped 1.75 points to 78.75 bid, 79 offered as the stock fell $4.04 to $57.96.

Convertible players sat on the sidelines regarding Tyco as its CIT unit went to the bond market to raise $2.5 billion on Tuesday, but traders noted some credit swaps activity in Tyco. CIT planned to use proceeds from the two-tranche deal for general corporate purposes, including the possible repayment both of long-term debt and a bank loan it took out to pay down commercial paper.

Tyco's 0% convertibles were basically flat, with the 2020 issue at 66.375 bid and the 2021 issue at 69.75 while the stock fell $0.34 to $32.00.

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