Convertible market gains with stocks on rate cut, new deals

By Ronda Fears

Nashville, Tenn., Nov. 6 - Convertibles rose in tandem with stocks that rallied on another Federal Reserve interest rate cut, and a couple of new deals on the calendar. Tech and telecom issues were very hot, traders said. But there also was excitement about the defense area as Northrop Grumman Corp. unveiled plans for a $1.2 billion convertible and stock deal next week. Sierra Pacific Resources also launched a new deal after reporting a return to profits.

"The rate cut was expected but it really was a shot in the arm for the market," said a convertible trader at a major investment bank in New York.

The Federal Open Market Committee decided Tuesday to lower its target for the federal funds rate by 50 basis points to 2% and the Board of Governors approved a 50 basis point reduction in the discount rate to 1.5%.

"Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity," said a Federal Reserve statement. "For the foreseeable future, then, the Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness."

Stocks rallied on the news, with the Dow Jones Industrial Average closing up 144.69, or 1.53%, to 9585.72 and the Nasdaq ending higher by 38.22, or 2.13%, to 1831.87.

Sierra Pacific Resources plans to sell $300 million of four-year convertible premium income equity securities (PIES) with pricing guidance of an 8.75% to 9.25% yield and an 18% to 22% initial conversion premium. Lehman Brothers is bookrunner of the registered deal, which is scheduled to price early next week. A road show runs Wednesday through Monday.

Also Tuesday, Sierra Pacific reported third quarter earnings of $80.4 million, or 89c per share, compared with a net loss of $19.5 million, or 25c per share, for third quarter 2000. Revenues rose to $1.97 billion from $868.2 million. The third quarter results represent an important initial sign of recovery from the severe financial pressures faced by the company over the last year due to high fuel and purchased power costs, the company said. Earnings recovery was aided by new Nevada state law that ensures the company's two utility operations, Nevada Power and Sierra Pacific Power, can recover power and fuel costs.

Sierra Pacific common shares closed off 49c to $13.90.

Northrup Grumman Corp. announced Tuesday that it would sell $1.2 billion of stock and mandatory convertibles with proceeds earmarked to reduce debt and general corporate purposes. The deals will be launched next week. Price talk is expected to emerge this week, most likely on Wednesday, market sources said. Northrop Grumman shares closed down $1.27 to $98.35.

After the closing bell, the market was anticipating the ATMI Inc. and Chesapeake Energy Corp. deals to price.

ATMI is pitching $100 million of five-year convertible subordinated notes with price talk of 5.25% to 5.75% yield and a 21% to 25% initial conversion premium. The Rule 144A deal comes to market via lead manager Goldman Sachs. ATMI shares closed off 75c to $17.75.

Cheasapeake is selling $125 million of convertible preferred stock in the Rule 144A market via book-runners Credit Suisse First Boston and Bear Stearns. Pricing guidance puts the yield at 6.25% to 6.75% and initial conversion premium at 21% to 26%. Cheasapeake shares closed off 18c to $6.11.

Dealers said there was still enthusiasm for new paper. King Pharmaceuticals Inc.'s new 2.75% convertibles due 2021 (Ba1) added 2.25 points on the day to 106.375 bid, 106.875 offered as the common added 95c to $38.11.

"It seemed like there was some shifting within the health sector, moving money out of one name into another," said a convertible trader at a hedge fund in Connecticut. "There also was some movement out of the safety groups into higher risk areas. So, we saw names like Baxter, Elan decline on selling, and Peregrine, Hewlett-Packard gain."

Hewlett-Packard gained as market observers applauded the Hewlett family's rejection of the Compaq Computer merger, traders said, although the company said it is pursuing consummation of the merger. The Hewlett family and related trusts hold 100 million shares of stock in the company, just 5% of the outstanding shares.

"I believe that Hewlett-Packard can create greater value for stockholders as a stand-alone company than as a company combined with Compaq," said Walter Hewlett in a statement. "I firmly believe that partnering with Compaq will not give Hewlett-Packard what it needs most to create additional stockholder value - expansion of its printer and imaging business as well as the higher-end segments of its services and server businesses. The combination would dramatically increase Hewlett-Packard's exposure to the unattractive PC business and dilute current stockholders' interest in Hewlett-Packard's profitable printer business. Given the lack of stockholder benefits, I believe the extensive integration risks associated with this transaction are not worth taking."

Hewlett-Packard executives said in a company statement, "While we regret very much the Hewlett family's decision, we are not surprised. The HP Board of Directors and HP and Compaq remain fully committed to the merger and expect shareholder approval."

Traders said the Hewlett family is likely to sway stockholders by virtue of their relation to the company, although some analysts have not been very keen on the merger terms, either. Hewlett-Packard's zero-coupon convertible notes due 2017 added 2.5 points on the day to 48.375 bid, 48.875 offered as the common stock gained $2.86 to $19.75.

Not all was rosy in the tech and telecom sectors, however. Although most of the pack were headed north, American Tower fell sharply as the company posted a wider net loss and announced it will be curtailing growth as it foresees a fourth-quarter loss to be worse than expected. The American Tower 5% converts due 2010 lost 9 points on the day to 56 bid, 58 offered, the 2% discount converts due 2009 lost 6.625 points to 60 bid, 61.625 offered and the 6.25% converts due 2009 fell 10 points to 68.5 bid, 70.5 offered. American Tower shares fell $3.28 to $7.56.

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