Convertible market flat to lower as chips cool tech rally, but new paper higher

By Ronda Fears

Nashville, Tenn., Nov. 30 - Convertible traders described the market as flat to slightly lower Friday at chips stocks held the Nasdaq in negative territory while the Dow Jones Industrial Average saw a slim gain. Techs and chips retreated after seeing some nice pops earlier in the week as an outgrowth of the CSFB technology conference. But the advance ran up against a major barrier when Novellus Systems lowered its projections and several equity analysts chimed in that the recent rally in semiconductor stocks has been way out of proportion to the degree of fundamental recovery seen thus far.

"It was fairly busy today, for a Friday," said a convertible trader at a major investment bank in New York. "People were still a little distracted by the Enron event, watching and waiting for the other shoe to drop, but it was pretty much business as usual. Techs pulled back as some nay-sayers started taking profits because they don't believe the gains will hold on for long."

After Thursday's close, Novellus Systems lowered its estimates for earnings, and analysts followed with cut to their projections for earnings and the stock. The semiconductor equipment maker's zero-coupon convertible due 2031 edged off 0.375 point to 99.5 bid, 100 offered while the common stock lost $3.53 to $38.07.

"The Novellus convert is a CoCo (contingent conversion convertible) but it was sold with a hefty premium of like 52% that has expanded to somewhere around 80% now so it's pretty well insulated on the downside," said a hedge fund trader. The trader said the issue is not traded heavily because the proceeds of the deal were used to buy U.S. Treasuries to covert the par put price on July 26. "Most of the people who bought this are holding on to it."

As several equity analysts panned the gains seen in the tech sector, specifically chips, the group took a hit. The Philadelphia semiconductor index dropped 2.67% while the tech-heavy Nasdaq saw a much smaller decline, closing off 2.69, or 0.20%, to 1930.67. The Dow industrials gained 22.14, or 0.23%, to 9851.56.

"We got back to normal, somewhat today, although you continue to hear Enron, Enron, Enron on the television and streaming across the tape," said a convertible trader. "We were just doing business, normal business. A lot of chips and tech issues were getting hit by people taking profits that don't have faith in the rally."

Bear Stearns convertible analysts noted that Scholastic Corp. plans to redeem on Jan.11 all of its $110 million of 5% convertibles due Aug. 15, 2005, at par plus 20.28 in accrued interest, but suggested that as long as Scholastic's share price remains above $39.21, debenture holders should sell or convert rather than accept the redemption price. Each debenture is convertible into 26.0214 shares of Scholastic common stock, which closed off $1.05 on Friday to $43.45.

Bucking the downward trend in chips was Fairchild Semiconductor and FEI Co., which makes equipment for the chip industry, both with new issues in play. Fairchild's 5% convertible due 2008 (B), which sold a month ago at par, gained 1.375 points on the day to 110.5 bid, 111 offered while the underlying stock added 54c to $24.50. FEI's 5.5% convertible due 2008, which sold in July at par, climbed 14 points on the day to 106.375 bid, 107.375 offered as the common stock declined 86c to $29.24.

In techs, Affiliated Computer saw one of the sharpest drops, but traders noted that the company's convertibles are deep in the money. The 4% convertible due 2005 lost 4.375 points on the day to 220 bid, 221 offered and the 3.5% convert due 2006 dropped 1.75 points to 127.5 bid, 128 offered as Affiliated Computer shares closed off $1.87 to $93.38.

Although many were still watching the Enron saga unfold, traders said the event hasn't thwarted interest in new issues as the growing group of new issues continue to gain ground. Extreme Networks Inc. and Boise Cascade Corp. both priced new deals, albeit small, but both priced with aggressive terms and Boise even boosted its deal size on strong demand. Both gained ground in the immediate aftermarket, also.

Boise Cascade's new 7.5% mandatory convertible preferred, which sold at par of 50 with a 22% initial conversion premium, gained 0.55 point to 50.55 as the underlying stock added 6c to $31.93. Extreme Networks' new 3.5% convertible subordinated notes, which sold at par with a 27% initial conversion premium, added 2 points to 102 bid, 102.5 offered as the stock dropped 72c to $15.78.

Nothing else has formally been added to the forward calendar, but syndicate and buy-side source say that demand is still healthy for new converts even though issuance continues to climb beyond record heights. For November, including only deals that closed during the month, there were nearly $11 billion of new convertibles sold, bringing the year-to-date figure for the period to over $102 billion.

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