Market stirred by war fears, Conseco's demise; defense issues fly as techs tumble

By Ronda Fears

Nashville, Dec. 18 - War fears and Conseco Inc.'s bankruptcy, along with several other events, drew convertible players out of the shadows and into the fray Wednesday. In general, defense and oil names were soaring while techs fell on several profit warnings.

"It was a crazy day," said a convertible dealer. "We were definitely busy."

Convertibles were widely mixed as stocks headed south and the credit markets rallied.

While tech issues were considerably soft, defense names and homebuilders firmed up.

Life insurers and financials were also weak, the latter largely due to Conseco's demise.

"Defense stocks are flying and we're trying to keep up," said John Seibel, head trader at Silverado Capital Management.

Headlines putting the U.S. closer to declaring Iraq in violation of a U.N. disarmament resolution heightened war fears and boosted oil prices. Coupled with the Pentagon request for a $14 billion, or 3.85%, hike in defense spending to $378 billion, defense names soared.

Northrop Grumman Corp. was the big winner among convertibles.

The stock closed up $3.10 to $94.36. The mandatory added 1.67 to 104.55.

Raytheon Co. also gained with the stock up 85c to $29.45 and the mandatory rising 1.15 to 52.3.

Lennar Corp. also firmed after the homebuilder said it expects fiscal fourth quarter EPS to exceed the current analyst estimate of $2.81 by more than 10%. The company also raised its fiscal 2003 goal to $8.50 per diluted share.

Fitch Ratings said Lennar's extensive liquidity position should allow it to weather a meaningful cyclical downturn and absorb acquisitions. Under a severe housing contraction, the rating agency said Lennar is expected to generate sufficient cash for obligations and manage its capital structure within the investment grade rating.

Still, traders said concerns about the housing bubble caused some convertible holders to sell into the strength.

Lennar's 0% convertibles were quoted slightly higher with the 2018 issue at 71.25 and 2021 issue at 45.75. Lennar shares ended up 16c to $52.51.

Conseco's filing, although not unexpected, pressured several financial names in the convertible universe, like GATX Corp.

That event along with a report by Moody's that the outlook for U.S. life insurers remains negative put pressure on the converts of MetLife Inc., Prudential Financial Corp., Anthem Inc. and AmerUs Group Co.

A wider loss than expected from Micron Technology Inc., among other events, pushed down tech names.

Chips were especially weak on the Micron news, with heavy selling seen in Advanced Energy Industries Inc. and Advanced Micro Devices Inc.

Fitch also had a report out on information technology spending, with an overall cautious tone.

"The bottom line, really, is that we're all still pretty cautious about the coming year," said a convertible trader at a hedge fund in New York.

"The profit warnings keep coming. We've not seen a great deal of positive news on the tech front."

Fitch analyst Brendan Buckley said any growth improvement in IT spending is likely to be gradual as end-users continue to face economic and competitive pressures themselves.

On a positive note, investors again cheered EchoStar Communications Corp.

EchoStar announced Wednesday that it will buy back all the convertible preferreds sold to Vivendi Universal SA last year. EchoStar sold the issue to Vivendi last year for $1.5 billion to help fund the bid for Hughes in return for a 10% stake in the post merger company.

EchoStar is buying the issue back for $1.066 billion.

Even with that capital outlay and the $600 million breakup fee EchoStar is paying Hughes, Standard & Poor's said EchoStar ratings, including the convertibles at B-, remain on positive watch.

Convertible analysts have been optimistic about EchoStar's credit profile since the Hughes merger fell through, and more so since EchoStar also is not pursuing the previously planned purchase of PanAmSat from Hughes.

EchoStar's convertibles were up 1 to 3 points, traders said. The 4.875% due 2007 was quoted at 89.375 bid and the 5.75% due 2008 at 91 bid. EchoStar shares ended up 99c to $22.79.

Motorola Inc. also announced a debt buyback, saying it will take a $98 million fourth-quarter charge as it strives to slash its debt load by 10% and cut interest payments by agreeing to buy back $825 million of debt from Goldman Sachs & Co. on Feb. 3. The company also said it bought back $84 million of other long-term debt during this quarter.

As convertible players watch for buybacks from Sanmina-SCI Corp., traders said there was little activity in the three issues.

Sanmina-SCI Corp.'s junk deal was indeed upsized, as rumored Tuesday, when all was told.

The $450 million deal was boosted not to the $600 million talked about Tuesday, but to $750 million.

The eight-year senior secured notes (Ba2/BB-) priced at par to yield 10.375%, smack in the middle of price talk.

Proceeds are earmarked to repay debt under the existing credit facility, to repay the outstanding balance on the receivables securitization facility, to refinance or restructure other debt and to fund expansion and for working capital.

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