Lower session pulls in some frantic sellers; power producers hit

By Ronda Fears

Nashville, Tenn., Sept. 26 - Convertible traders hesitated to say there was anything like a huge bail-out, but noted that there was some frantic selling taking place Wednesday as stocks retreated again into negative territory. The heaviest selling was in independent power producers, following a earnings warning from AES Corp. The market was also "psychologically jolted," as one trader put it, by the reality of a heavy debt issuer like Exodus Communications Inc. filing bankruptcy, although the speculation has been abuzz for several weeks.

"The AES news was kind of a surprise, I mean to the extent that they are warning," said a convertible trader at one of the major investment banks based in New York. "It started a pretty hefty sell-off among the entire independent power names, like Calpine and NRG, and I even heard Duke Energy."

AES convertibles sank as the underlying stock was bludgeoned on the heels of its profit warning after the market close Tuesday, and much of the independent power producer group went south as well. AES cuts its earnings expectations by about 25%, to a range of $1.25 to $1.45, due to continued weakening of the Brazilian real currency relative to the U.S. dollar and the decline in U.K. electricity prices. The First Call analyst estimate put the earnings between $1.60 and $1.90.

The AES 4.5% convertibles fell 22.75 points on the day to 85 bid, the 6% converts dropped 9.5 point to 30 bid and the 6.5% converts lost 19.375 points to 27.125 bid while the underlying common stock lost nearly 50% to close down $12 at $12.25.

"This was a total over-reaction, if you ask me," said a convertible fund trader in New York.

Calpine Corp. and NRG Energy Inc. got punished in a "guilt by association" sort of way, but nothing to the extent of the mark-downs for AES.

The Calpine 5% convertible bond was down 1.875 points to 42.5 bid. The convertible preferreds lost as well, with the 5.5% issue off 3.5 points to 51.5 and the 5.75% issue down 8.625 points to 77.75. Calpine common shares lost $2.35 to $21.40. NRG's 6.5% convertible bonds were down 1 point to 16.5 bid as the underlying stock dropped $1.33 to $13.72.

As stocks relapsed back into negative territory, treasuries gained and traders said corporate bonds widened against treasuries. The Dow Jones industrial average dropped 92.58, or 1.07%, to 8567.39, and the Nasdaq composite lost 37.60, or 2.50%, to 1464.04.

When the talk became reality for Exodus Communications Inc. as it filed bankruptcy on Wednesday, traders said the magnitude of the internet industry's woes came crashing home.

"Things are probably going to get worse before they get better," said a convertible hedge fund trader in Connecticut. "That's what we're betting on, and we're comfortable with that. But we've been preparing for this all year."

The Exodus 5% convertible notes due 2006 (C/CC), a $250 million issue that sold at par in February 1999, were quoted at 9. The 4.75% convertible notes due 2008 (C/CC), a $500 million issue that sold at par in December 1999, were quoted at 2.75. And the 5.25% convertible notes due 2008 (C/CC), a $575 million issue that sold at par this February, were quoted at 2.75. Exodus common shares were halted at the 17c level they closed at on Tuesday.

While telecom issues were a little soft due to the downturn in the underlying stocks, traders said supplier and equipment makers for the industry got the brunt of the losses on Wednesday.

Billing and other telecom software maker Amdocs Ltd. was hurt by several stock downgrades with speculation of demand for the company's products to weaken, but traders said there was no specific news on the name. The Amdocs 2% convertible bond lost 2.25 points on the day to 82.25 bid, 83 offered and the convertible preferred issue lost 2.5 points to 25.75. Amdocs common shares fell $2.70 to $27.99. End

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