Beazer bid up 0.25 points in gray market; Epix trades as high as 101.75; Nortel slides

By Ronda Fears

Nashville, June 2 - Nortel Networks Corp.'s new executives didn't have a lot of news to impart to the markets and the lack thereof sparked a turnaround in the Nortel convertibles, and Lucent Technologies Inc. was dragged lower as well.

Nortel's convertibles slid 0.5 to 1 point while Lucent's lost more than 3 points. Most of the technology sector was weak, traders noted, ahead of Intel Corp.'s mid-quarter update scheduled for Thursday after the closing bell.

"Converts were generally softer," said a buyside convertible trader at a hedge fund in New York. They were "probably just tracking the bond market."

Convertible traders on the sellside said there were not a lot of stand-out movements and reported an overall lackluster session as end-of-month book marking continues and the hedge fund community waits to find out how much, if any, money is going to be taken off the table.

As OPEC made a renewed bid on Wednesday to do its part to rein in oil prices, dealers noted that the airline paper was marked up along with underlying stocks but it really had more to do with short-covering. Reports were coming in from the major airlines as well, showing a rise in traffic but lower load factors, one trader said.

"There were no buyers for this stuff [airline convertibles]. It's all going south," he said.

Meanwhile, on the new-issues front nothing fresh emerged, but deals from Epix Medical Inc. and Beazer Homes USA Inc. were both active and higher.

Epix cheapness leaves room

Final terms on the tiny overnighter from Epix Medical were cheap and even with the first-day runup there is still some room for profits, said a buyside convertible trader.

"This is the first real convertible we've seen in a long, long while, so people were all over it," he said. "It's really remarkable that a company with a market cap of $500 million to $600 million could get a deal like this done. That really was the only stumbling block for it."

The Cambridge, Mass.-based developer of contrast agents for MRIs sold the $75 million of 20-year convertible notes with a 3.0% coupon and 17.5% initial conversion premium - at the cheap end of guidance for a 2.5% to 3.0% coupon and 17.5% to 22.5% initial conversion premium.

Deutsche Bank Securities analysts put the Epix Medical convertible 6.25% cheap at the final terms, using a credit spread of 600 basis points over Libor and a 40% stock volatility.

Beazer bid at 100.25 in gray

Beazer was at bat after the closing bell with $150 million of 20-year convertible notes talked to yield 4.375% to 4.875% with a 53% to 58% initial conversion premium, and in the gray market the issue was bid at 0.25 points over par with an offer at 0.625 points over, according to a buyside trader.

Deutsche analysts put the Beazer convertible 2.53% rich to 0.88% cheap at the middle of price talk, using a credit spread of 225 basis points over Libor and a 30% stock volatility.

Nortel backslides after call

Nortel's update by the new executive team that replaces those fired last month was mostly an echo of news already known. As a result, the convertibles backtracked gains ahead of the call, plus dragged a lot of peers lower, too.

"We're fully aware that today's press release does not contain a lot of new information," said the new Nortel chief executive William Owens on the conference call, which was mandated by Canadian securities regulators.

Owens said Nortel was moving "aggressively" and "committed to getting the facts and getting them right."

But with investors disappointed by the lack of new information, the Nortel 4.25% convertible gave back 0.5 point Wednesday to 91.75 bid, 92 offered, while the stock lost a quarter, or 6.13%, to close at $3.83.

Nortel now expects to post a loss instead of a previously reported profit in the first half of 2003. But sales for each of the past three years and cash balances are unaffected, executives said.

The company is now reviewing results for the third and fourth quarters of 2003. New chief financial officer William Kerr said the restatements will not be ready before the second quarter ends June 30 but could not state when the restatements would be complete.

Lucent was lower in sympathy, with its 2.75% convertibles down by more than 3 points, traders said.

Hedge funds in serious pain

Many traders still were busy Wednesday marking their end-of-month prices, and several on the buyside remarked that, again, there is considerable anxiety that less robust returns among the hedge funds might prompt investors to pull some cash off the table.

Merrill Lynch's convertible hedge index for May was down 1.25% net of a 2% annual management and a 20% performance fee, taking the year-to-date net return to zero before hedging out interest rates.

"I think that this is low," said a convertible trader at a hedge fund in New Jersey. "All I heard was that most names were in 3 to 4%."

Acknowledging that it is difficult to gauge convertible hedge fund returns in real-time, he said it felt more like the group was off by about 2%.

Shorting two-year Treasuries to hedge against rising yields would put convertible hedge returns in positive territory, as Merrill analysts note, but another buyside convertible trader noted that "it's been a very volatile bond market, so what looks good on paper, or in theory, doesn't always work out that way."

Most of the loss in May came from widening spreads, Merrill convertible analysts said, with rising yields, lower volatility and time decay making further negative contributions.

Market cheaper but still rich

Meanwhile, buyside market sources said the cheapening in convertibles seen recently may not be enough to keep investors from putting their money to work elsewhere.

"Convertibles have cheapened, a little, but it's still not a buyer's market," said a hedge fund manager in New Jersey. "There still too much downside risk, too much room for more weakness."

Citigroup Global Markets Inc.'s convertible index in May showed a slim gain of 0.1% with the underlying stocks advancing 1.8%, and Merrill Lynch's convertible index edged up 0.3% versus a 2.1% gain in the underlying stocks.

"So long as convertibles were beating the stock indexes there was more hope" that money wouldn't be pulled from the asset class, a convertible hedge fund manager in New York said.

"But when the tide turned and they [investors] see that stocks are beating us, then there could be some redemptions. To what extent that affects the broader convertible market is yet to be seen. If it means prices get more reasonable, it will be good."

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