US Convertibles: Some buyers seen late in session, curbing slide

By Ronda Fears

Nashville, Tenn., Sept. 21 - Convertible traders said there was not a reciprocal sell-off in convertibles as the stock markets dove again Friday amidst a huge selling spree. There were even a few buyers dipping into the market late in the afternoon, which traders said helped prop up bond floors and convertible prices. But, most of the convertible market was marked sharply lower as stocks plunged ahead of the weekend.

"We did not have a big sell-off like was seen in stocks today," said a convertible dealer in New York. "In the afternoon, we've even seen more buyers step up. There is, however, some flight to quality still going on in a big way."

Stocks staged a widespread sell-off, however, pushing the Dow industrials to lows not seen in years. Economic and war-like movements by the U.S. military troops combined to make investors very skittish about their holdings over the weekend. The Dow Jones Industrial Average fell 134.58, or 1.61%, to 8241.63, and the Nasdaq composite lost 46.81, or 3.18%, to 1424.12.

As stock investors flocked to the bond market for cover, long-term treasuries rose while short paper remained fairly flat. Yields on the 10-year note dipped to 4.65% from 4.73% and the 30-year bond declined to 5.58% from 5.61%.

"Most of us are still just sitting tight," said a convertible fund manager in New York. "We're trying hard to be patient right now."

Dealers said the pressure was widespread and virtually every industry group was marked lower Friday, again, in one of the toughest weeks for the market in decades.

Leisure-oriented names have been weak because of the economic pressures under way even during the summer, but the onset of U.S. military actions akin to war have exacerbated the poor outlook for the industry. There were several cautious comments about the group by analysts, and cruise lines, hotels and amusement parks saw a giant drop during the session.

Royal Caribbean was downgraded by Salomon Smith Barney equity analysts Caribbean to hold from buy given last week's events and uncertainty about a recovery in leisure travel. Carnival's cautious tone on its third quarter results confirmed the nervousness, traders said. One analyst said that while Royal Caribbean has more operating leverage, it also has more risk than other large players.

The Royal Caribbean zero-coupon convertible due February 2021 (Baa3/BB+) dropped 0.25 point to 27.375 bid, 28.375 offered and the zero-coupon convertible due May 2021 lost 0.5 point to 29.5 bid, 30.5 offered with the underlying common stock at $$8.65. Royal Caribbean shares closed off 43c to $8.62.

Carnival's 2% convertible due 2021 (A2/A) gained 0.75 point to 89 bid, 90.5 offered with the common at $18.90. The stock ended up $1.14 to $19.19.

ONI Systems held a conference call to discuss its profit warning early Friday. The company reduced third-quarter revenue guidance to $40 million to $50 million from $75 million to $80 million with a loss of 17c to 21c. The company said the deteriorating global economic environment has impacted capital deployments of metro optical equipment, which traders said sent the fiber optic group spiraling lower.

CIENA Corp., a direct competitor of ONI Systems, and Lucent, as well as other fiber optic names, fell in sympathy with the outlook. The CIENA 3.75% convertible due 2008 (Ba3/B+) dropped 1 point to 62 bid, 63 offered with the common at $10.79. CIENA shares closed down $1.51 to $10.54. Lucent's 8% convertible preferreds due 2031 (Ba3/B-), which were issued at par of 1000, fell 59.625 points to 981.125 bid, 982.125 offered with the common closing down 48c to $5.27.

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