Convertible players watch issues gain with stocks; selling subsides; RF Micro gains on better guidance

By Ronda Fears

Nashville, Sept. 8 - Traders said it was probably busier than usual for Monday, but for the most part convertible players were silently watching the market rise in tandem with stocks. At least, traders said, the selling spree looks to be winding down, as the prospects for new issues looks less and less promising.

Telecoms and telecom equipment makers like RF Micro Devices Inc. gained on rosier earnings guidance, and there was continued activity in names like Nortel Networks Corp., Lucent Technologies Inc. and Nextel Communications Inc.

Biotech stocks were soaring again, but traders said there was not as much action in the converts. That said, however, a distressed trader said there was "a nibble" in the Elan Corp. plc distressed convert that moved it up 0.5 point.

Traders remarked that mandatories are still gaining interest from buyers, as has been the case for about a week.

"I wouldn't say that the bids are just rolling in exactly," said the head convertible trader at a bulge bracket firm.

"There definitely weren't any sellers, though. Overall, the convert market is still better bid, but it was a Monday, so trading was nothing spectacular. A lot of the hedge guys were busy short-covering in the stock market.

"If the calendar stays like this [very light], we'll see trading really pick up. And converts will be looking more appealing if stocks continuing on this tear. I think, though, if we see a build-up of forces in Iraq, the markets will probably give back a lot of the recent gains."

Some of the uncertainty about military actions, along with "more than a little skepticism about the rose-colored glasses being issued in the telecom sector" gave lots of convert players pause, said a buyside trader with an outright fund in New York.

"We think there's some kinks that could really unwind this rally, like a step-up in military activity in the Middle East, or a big blow-up in the biotech group," he said.

"For right now, we're just sitting tight. It's nice to watch what you have move up but we're not in a rush to do anything just this minute."

President Bush in a special address to the nation Sunday said he is asking for $87 billion in U.S. military spending, aimed at the war on terrorism that is centralized in Iraq and Afghanistan.

Meanwhile, nothing else surfaced to add to the calendar's slim pickings for this week, but price talk emerged on the NII Holdings Inc. deal.

NII's $100 million of 30-year convertibles are talked to yield 3.5% to 4.0% with an initial conversion premium between 27.5% and 32.5%. It's slated for Wednesday's business.

Primus Telecommunications Group Inc. also is selling a $75 million this week.

Market onlookers expect there could be another deal or two pop up this week, but in general the outlook for issuance in the remainder of 2003 has turned rather bearish.

That, however, would likely bode well for secondary levels and trading volumes, as traders have been saying.

Finally, returns among hedge funds are beginning to show the results of interest rate hedging, it appears.

Merrill Lynch's hedge index was up 0.52% for the past week after showing weakness for several consecutive weeks. Volatility was neutral to the index for the past week, but took a whopping 3% dive on Monday.

High yield spreads improved by about 10 basis points to 467 bps, Merrill analysts said, despite a drop in 10-year yields from 4.45% to 4.35%. Merrill's high yield strategy still sees spreads as overly tight, as the spread to Treasuries at 477 bps at Aug. 31 is markedly lower than currently justified by the prevailing credit, liquidity and monetary environment.

Merrill's high yield spread model justifies a 604 bps high yield bond market as of Aug. 31, making for a 128 bps gap between actual and estimated high yield spreads (55 bps is the fair value threshold).

The top five performers for hedge funds last week, according to Merrill, were Gap's 5.75% convertible due 2009, DST Systems' 4.125% due 2023, General Motors 6.25% due 2033, Nortel's 7% mandatory and Ford Motor's 6.5% trust preferred.

The week's bottom five performers for hedge funds, according to Merrill, were Crown Castle's 6.25% trust preferred, Solectron's 7.25% mandatory, WMS Industries's 2.75% due 2010, Western Wireless' 4.625% due 2023 and the Merrill Lynch 0% due 2031.

Traders said telecoms remained active, fueled Monday by RF Micro Devices' lift to its quarterly forecast. The company now expects to post a slight net profit in second quarter, instead of the loss of 4-5c a share it forecast in July, and a 10% increase in sales rising rather than the prior guidance for flat revenues.

RF Micro Devices' 1.5% due 2010 was marked up sharply, by 17.5 points according to one sellside trader, to 151.5 bid, 152 offered. The stock rose $1.45, or 16.09%, to $10.46.

Rivals to the wireless chipmaker - Anadigics Inc., Skyworks Solutions Inc. and TriQuint Semiconductor Inc. - also finished higher.

Telecoms and other telecom equipment makers also gained.

Motorola Inc.'s 7% mandatory rose 1 point to 35.89 on the New York Stock Exchange, but a broker quoted it at 37.1875 bid, 38.6875 offered. Motorola shares closed up 53c, or 4.93%, to $11.28.

The Liberty Media 3.5% exchangeable due 2031, which converts into Motorola shares, gained 3.75 points to 75.75 bid, 76.25 offered.

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