Carnival's new deal repriced, still drops; earnings lift Lucent, Nextel

By Ronda Fears

Nashville, April 23 - Pleasing earnings from several high-profile convertible names lifted the market tone overall, particularly in the tech, telecom and cable areas, traders said.

Lucent Technologies Inc. gained on earnings as was Nextel Communications Inc. on its strong earnings. Nortel Networks Corp. participated to a lesser degree with the party ahead of its earnings Thursday. Also Thursday, Nortel has its annual stockholder meeting where a reverse stock split may be decided.

In the primary arena, there seemed to be an elevated amount of buzz about potential new deals but in the end Carnival Corp.'s deal was the only new paper on the table.

Carnival's deal was repriced, however, even from the OID level and still went south. The issue sold at 64.688 for a yield of 1.75%, up 93%. It was repriced at 63.879 for a yield of 2%, up 90.6%.

"I guess you'd say they sank," said a convertible hedge fund manager in New York, who had said when the deal was launched late Tuesday, "Sink or swim, Carnival jumped in."

Traders said the new Carnival convert traded lower in the gray market with the bid at 1 point under issue price and the offer at 0.5 point under just before the open, traders said. It was closed Wednesday by Merrill Lynch at 63.5 bid, 63.75 offered.

Carnival shares closed off 23c, or 0.84%, to $27.29.

Sellside analysts said the new Carnival convertible was just a tad rich, 0.44% to 0.6%, but it was interesting to find out that some sellside shops are not even trying to calculate valuations of the new deals that have funky structures like the warrant kickers or call spreads.

"It doesn't fit into our model," said a convertible analyst at one of the larger convertible desks, "so I'm just not going to try to work up a valuation sheet on these deals."

Indeed, several buyside contacts have lamented about many new deals of late not fitting into their convertible models as well.

Deutsche Bank Securities convertible analysts said in their valuation report on the Carnival deal they modeled it as a five-year cash pay convertible, since it pays a cash 1.75% coupon on the issue price for five years, with five-year warrants. They placed a value on the warrants and added that to their convertible model to arrive at a theoretical value for the issue.

Deutsche put the Carnival deal 0.6% rich, using a credit spread of 95 basis points over Libor with a 35% stock volatility input.

The Deutsche evaluation was based on the issue price, not cheaper repriced terms.

Lehman Brothers put the deal 1.7% rich based on the issue price, and 0.44% rich on the repriced terms, using a spread of 100 bps over Libor and 32% volatility. Venu Krishna, head of Lehman's U.S. convertible research noted that the issue is highly sensitive to volatility but added that it is a low volatility stock.

While many buyside players are concerned about the terms on deals lately, Adrian Miller, convertible analyst at Citigroup, said it is an anomaly that eventually will correct itself.

"All of these issues, all of them with the bizarre structures, within about a week of being issued don't trade any more, they just go away, sit somewhere. Unless their stock takes off like gangbusters, which is what they would have to do [to become attractive], they will continue to," said Miller.

"These structures, which are bizarre to say the least, are an anomaly like the 0%, high premium converts from the energy sector in mid-2001. The market at some point got its fill and it all stopped. That's what will happen."

Meanwhile, demand is still surging in the convertible market and the mention of a possible deal - such as from Xerox Corp. - spreads like wildfire.

Late day buzz Tuesday that a convert may be part of Xerox Corp.'s plans for a major debt refinancing, which the company would not discuss in its conference call Wednesday, remained a mystery.

Banker types in convertibles were for the most part cagey about the prospects of a new Xerox convertible, and one noted that a lot of potential deal buzz originates on the buyside, oftentimes purely as pipedreams.

Xerox reported earnings Wednesday, hence the conference call, and market sources said it would pay the put on its OID 0.57% convertible due 2018 in cash - a roughly $650 million obligation. Retiring that issue, one source said, could make a new convertible more probable.

The copier maker posted a first-quarter net loss, due to charges, but it reported strong operating profit due to cost cutting and better equipment sales. For second quarter, the company projects a profit in the range of 9-12c a share.

Xerox generally declined to comment in a conference call Wednesday on speculation about its refinancing activity.

When asked about refinancing the bank facility with bonds and other debt, Xerox chief financial officer Lawrence Zimmerman said: "I think those are always options. We are going to do it when we think it's the best for the shareholders of Xerox so we are constantly evaluating and thinking about it.

"There's rumors all the time about what exactly we might or might not be doing. I'm not going to comment on the rumors. We are constantly evaluating bank deals or going out to the market at all times."

Xerox shares closed up 79c, or 8.62%, to $9.95.

Debt buybacks on top of nice earnings made for a good day in Lucent and Nextel converts.

Lucent, which in the last quarter retired some $380 million of the 7.75s and $245 million of the 8s, reported a narrowed net loss that beat expectations and most onlookers say the company is solidly in recovery mode.

"Obviously, they've turned the corner," said Rao Aisola, head of convertible research at Bear Stearns. "They are firing on all cylinders."

Lucent posted a fiscal second quarter net loss of $351 million, or 14c per share, versus a net loss of $495 million, or 16c per share, a year ago. Revenues declined to $2.4 billion from $3.52 billion.

"We continue to work toward a return to profitability in late fiscal 2003," said Lucent chief financial officer Frank D'Amelio.

"We have also continued to focus on our recapitalization efforts, which have reduced our debt and convertible securities by more than $1.6 billion to date."

There is still over $1 billion outstanding on each of the two convertible preferred issues, so liquidity is not a problem, and both were bid up sharply Wednesday.

The Lucent 7.75s were up 8 to 9 points to 67.375 bid, 68.375 offered and the 8s gained 5 to 6 points to 92.5 bid, 93.5 offered. Lucent's 6.45% due 2029 junk bonds were also higher, seen up 3.5 points to 70.

Nextel had a similar day, reporting its fourth consecutive quarterly profits, plus having retired $568 million in debt and preferreds in the most recent quarter. Most of that was for its 9.75% senior notes due 2007 but convertible holders are encouraged by the continuing trend and bid up all three converts.

Also, Nextel has been one of the regularly circulated names in speculation about upcoming convertible issuance, for refinancing purposes, as it has been routinely buying back debt and recently filed a $5 billion shelf registration. (See story elsewhere in this issue.)

Nextel shares closed up $1.316, or 10.6%, to $13.666.

Nextel's 4.75% convert due 2007 gained 2.75 points to 98.75 bid, 99.25 offered. The 5.25% convert due 2010 added 1.75 points to 89.5 bid, 90 offered and the 6% due 2011 rose 3.25 points to 100.625 bid, 101.125 offered.

"Although these bonds have already realized a lot of the upside, we still believe Nextel can outperform the wireless and telecom groups," said Wachovia Securities convertible analyst Jeanine Oburchay in a report Wednesday, "and that investors should buy the 6% bonds with the understanding that the existing shelf offering can put pressure on the stock and therefore a slightly heavy hedge (following what we expect to be strength in the name today) in the near term may be warranted."

Still, market sources from both sides - buyside and sellside - expect issuance to pickup before long, mostly likely the heaviest once the bulk of earnings have been released.

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