Market tiptoes into earnings season with anxiety, weighed down by uncertainty of war length

By Ronda Fears

Nashville, March 31 - Trading volume in convertibles was mostly described as light Monday but mixed in terms of direction, as earnings season got under way and players still fretted over gauging how long the war in Iraq will last.

Meanwhile, Allied Waste Industries Inc. launched its $300 million mandatory deal with guidance, although many market participants are expecting it will be tightened before pricing on Thursday.

Price talk on the Allied Waste mandatory puts the yield between 6.25% and 6.75% and initial conversion premium at 18% to 22%, but, again, many anticipate the deal will be re-priced with tighter terms before it prices after the close Thursday.

"Allied Waste looks attractive at the midpoint, relative to the overall new issue market and new mandatories," said Krishna of Lehman Brothers.

"We think it is around 4.3% cheap versus year-to-date new issue mandatory cheapness of 2.1% and overall year-to-date new issue cheapness of 1.07%."

Sellside analysts put the deal from 4.3% to 6.3% cheap at the midpoint of guidance.

The market is expecting a couple of other deals this week, mainly as overnighters, but no solid leads on what companies might be bringing deals to market have emerged.

Most of the market appears "a little foggy," without any conviction, as one trader put it.

"People are just trading the market right now. The market definitely lacks a theme," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities.

"This is a market you have to trade on. If you get caught with a view, you could get hurt."

Although it was the end of first quarter, very little trading was due to the so-called "window dressing" that often happens at the end of a quarter.

In fact, trading was described as slow to thin at the major desks and only moderately busy at some of the smaller boutiques that tend to handle paper at the lower end of the credit charts.

The war is still a big overhang, or at least the length of the conflict.

"Obviously, no one expects the U.S. to lose," Howard said, but the questions revolve around whether the military action will go on for three or four weeks, or six months.

Trading on volatility and some cheapening has been noted, along with more activity in names with callable/putable convertibles.

"Recent cheapening of investment-grade converts is making some look reasonable on a vol basis," said Venu Krishna, head of U.S. convertible research at Lehman Brothers, naming 3M Co., General Mills Inc., BJ Services Co., Countrywide Financial Corp. and First American Corp.

Anadarko Petroleum Corp. and D.R. Horton Inc. both made cash offers Monday to buy their 0% converts - Anadarko by exercising call provisions while D.R. Horton announced its upcoming scheduled put - and while calls/puts have been explored in depth by several analysts recently, traders are still getting caught off-guard as both Anadarko and D.R. Horton dropped sharply on the news.

Anadarko called its 0% due March 2020, offering to pay 55.646 per debenture, reflecting the issue price plus accrued interest, which is equivalent to $47.85 per share under the conversion provisions. April 15 is the redemption date.

The company plans to fund the cash outlay of about $383 million with existing credit facilities that currently offer lower effective interest rates.

If all the outstanding debentures are redeemed for cash, it will reduce by 8 million shares the number of shares outstanding used to calculate diluted earnings per share, the company said. Conversely, if all of the debentures were converted to common stock, based on year-end 2002 balances, debt-to-total-capital would have been reduced from 44% to 41%.

Anadarko CEO Robert J. Allison reaffirmed Anadarko's commitment to reduce debt by about $300 million by the end of 2003.

The independent oil company also boosted its 2003 earnings estimate to $1.35 per diluted share from a previous forecast of $1.15 per share and its cash flow estimate to $3 per share from $2.60 per share. Anadarko forecasts 5% production growth for 2003 and 12% for 2004.

"With the strong oil and gas prices, we're looking for first quarter cash flow and earnings that are more than 15% above the guidance levels we issued just two months ago," Allison said at an energy conference in Houston.

"Our goal is double-digit production growth, which we can achieve - and also post strong financial returns. We will continue to improve our returns and cash margins, and we will continue to work on costs."

Anadarko's convertible was quoted down 2.875 points at 57.5 bid 57.875 asked with the stock closing off 50c, or 1%, to $45.50.

D.R. Horton also said it will pay cash for any of its 0% due 2021, which is putable May 11, at the put price of 55.973. Total potential cash outlay is about $213.3 million, the company said, noting that at Dec. 31 it had some $868 million of liquidity.

The D.R. Horton convertible dropped 1.125 points to 57.5 bid, 57.875 offered, as the stock ended off 14c, or 0.72%, to $19.20.

Traders described the overall market as mixed, but there were a few high-profile "blowups."

Regeneron Pharmaceuticals Inc., AOL Time Warner Inc., ImClone Systems Inc. and USA Interactive all slid on news.

There was a huge sell-off in Regeneron Pharmaceuticals Inc. as it reported disappointing trial results on its obesity drug, Axokine.

The Regeneron 5.5% convertible due 2008 fell 24 points to 70.5 bid, 71.5 asked. The stock plummeted $9.79, or 56.5%, to $7.52%

"Although the results of this Phase III study were statistically significant, the overall magnitude of the weight loss was small," said Dr. Leonard S. Schleifer, CEO of Regeneron.

A major disappointment was that about 70% of patients in the trials developed antibodies, or a tolerance to the drug, that blocked the efficacy of the therapy.

During a conference call with analysts, the company the potential market for the drug is still large, but said it would have to evaluate a commercial strategy and talk with experts from the Food and Drug Administration before deciding whether to pursue more trials.

"Given the epidemic proportions of obesity, the group of potential responders is very large," said Dr. Louis Aronne, clinical associate professor at Weill-Cornell University Medical College and director of the comprehensive weight control program at New York Presbyterian Hospital, in a Regeneron press release.

"Obesity is a complex metabolic disease similar to type 2 diabetes, and like diabetes will probably require combination therapies to achieve optimal efficacy and the dramatic weight losses that people have been hoping for. Its unique and well-defined mechanism of action makes Axokine a potentially attractive candidate as part of an obesity regimen."

ImClone Systems lost ground on restatements related to troubles stemming from its former chairman Sam Waksal.

ImClone said it will restate financial results going back to 2001, or farther back, in order to account for potential taxes on stock options and warrants issued to Waksal, who was the central figure in federal insider trading and tax evasion cases evolving from a sell-off in the company's stock just before the Food and Drug Administration rejected an application for review of Erbitux in December 2001.

The company also said it would delay reporting fourth-quarter and 2002 financial results until April 15.

It is estimated that the total amount to be reflected on its balance sheet relating to the nonpayment of taxes could be up to $60 million, with an anticipated charge of at least $23.3 million against earnings, the company said.

ImClone stressed that it has the financial means to maintain operations at least through March 2004.

All the gains last week in ImClone from positive headlines on approval for its cancer drug Erbitux, which was the source of Waksal's trouble, were erased, traders said.

The ImClone 5.5% convertible due 2005 dropped 4.5 points to 88.5 bid, 89.5 asked. The stock closed down $1.82, or 10%, to $16.54.

Waksal reached a partial settlement with the Securities and Exchange Commission last week about allegations he informed others that the FDA was going to reject Erbitux before the news was disclosed to the public. He agreed to pay $800,000 and is permanently barred from serving as an officer or director of a public company. Earlier this month, he pleaded guilty to tax evasion charges.

AOL Time Warner dropped on new pressure related to the SEC's investigation of its accounting practices.

All AOL-linked converts were weaker, but traders noted the most activity in the newest issue of the bunch, Liberty Media Corp.'s 0.75% exchangeable was the most active. That issue dropped 1.375 points to 96.875 bid, 97.375 asked, as AOL shares closed down 49c, or 4.3%, to $10.86.

In its annual report filed at the SEC late Friday, AOL said the agency has informed the company that regulators believed it had improperly booked some $400 million in advertising revenue recognized from two deals struck in 2001 with Bertelsmann AG.

The SEC continues a probe into accounting issues at the America Online unit.

Weakness in USA Interactive also stemmed from an SEC filing that revealed a snafu in its acquisition of Expedia Inc.

USA Interactive said it has been named in three class-action suits filed on behalf of Expedia Inc. shareholders seeking to block or to rescind the merger agreement.

The Deutsche Bank/USA Interactive convertibles both were lower. The As lost 4.75 points to 149.25 bid, 149.75 asked and the Bs fell 3.5 points to 138.375 bid, 138.875 asked.

USA Interactive shares closed down $1.64, or 5.75%, to $26.79.

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