Goodyear bounces up 2.75 points; Agere weakness lures buying; Ocwen deal at bat

By Ronda Fears

Nashville, July 22 - It was a quiet session in convertible Thursday but marked with some buying on recent weaknesses, particularly in the busted quadrant of the convertible market, while many issues continue to hold steady ground in the face of a leery attitude among money managers.

Goodyear Tire & Rubber Co. got a bounce from its guidance for second quarter, although earnings aren't due out for a couple of weeks, but observers speculated the company's decision to nix the sale of its chemical unit would ultimately be a drag on its performance.

Agere Systems Inc. was among busted issues finding interest on recent weakness.

Moreover, though it was a slow summer session; one buyside trader commented: "I watched the Yankee game today, the market was dead."

On the new deal front, Ocwen Financial Inc. was at bat with its $125 million of 20-year contingent convertible notes, talked to yield 3.0% to 3.5% with a 30% to 35% initial conversion premium, but otherwise the primary market remained quiet as well. There still was no gray market seen for the deal, but Ocwen's orders were running at very healthy levels, according to buyside market sources.

"It's unbelievable that we've had three straight weeks with almost zip for new issuance," said a sellside market source. "Maybe a better word instead of unbelievable would be disappointing because, frankly, there's a decent amount of reasons - the CoCo situation, weaker-than expected forward guidance, lack of earnings leadership, et cetera - that could be holding up issuance."

In the interim, the convertible market as a whole is standing up well to pressures from the broader markets, but players were beginning to find pouches of opportunity.

"Continuing blowups are starting to create some busted opportunities," said a convertible fund manager in New York. "And higher vol [volatility] is giving a boost to convert arbs. The market is becoming more exciting."

New railroad paper afloat?

As for the summer drought of new issues, the fund manager said: "I can't wait for American companies to step-up the capex."

There has been rampant speculation about the source of new paper waiting in the wings, ranging from homebuilders like Centex Corp. or a jumbo from the likes of Blockbuster Inc., to no avail.

Then, the fund manager posed the possibility of something from a railroad name, such as Union Pacific Corp., whose stock sank Thursday on higher but disappointing earnings.

"When will Union Pacific and other railroads float some convertibles to raise the capital to reduce all that congestion?" he posed.

"When will companies upgrade software and hardware in order to have better control of inventories in the face of transportation problems? 'Just-in-time' works only if deliveries arrive on time, which doesn't always happen in a booming economy where Nimby [not in my back yard] and other constraints limit expansion of transportation infrastructure.

"Try building or expanding a railroad, a highway, an airport or a runway. Neighbors don't want it near their homes so there is a chronic problem of transportation infrastructure lagging demand."

Union Pacific on Thursday reported a surge in business, as well as soaring profits, but investors and analysts were disappointed with the results as management spoke of being short-handed and vowed to get its performance back on track.

The Omaha-based railroad recorded record revenue, up 5% from a year ago to over $3 billion, but said shipping volumes from a rebounding U.S. economy have been overwhelming with freight trains clogging key lines. The 142-year-old railroad said it plans to hire and train another 5,000 trainmen and lease 750 more locomotives by yearend.

Rail names CSX, GATX steady

In the face of Union Pacific's headlines, existing railroad paper in the convertible market from CSX Corp. and GATX Corp. was steady as those stocks showed some slippage. Those two companies report earnings next week.

Traffic in CSX's zero-coupon convertibles in fact has been higher than usual this week, a trader said, and ended "unchanged to off a tad" on Thursday at 83.5 bid, 84 offered while the underlying stock dropped 85 cents, or 2.73%, to $30.33.

"Earlier in the week, around Tuesday, they [CSX convertibles] were bid up about a quarter-point," the trader said. "That was with the stock at $31.70 and now it's at $30.33, so the bonds have held up very well."

The Jacksonville, Fla.-based railroad company is scheduled to report earnings next Wednesday.

Chicago-based GATX, which leases tank cars, freight cars and locomotives in addition to financing that lease activity, also was steady in the convertible market with the stock lower. The company reports earnings next Thursday.

GATX's 5% convertible bonds were "basically unchanged," the trader said, at 125.625 bid, 126.125 offered on a 60% hedge. The 7% due 2007 was at 114.5 bid, 115.5 offered on a 35% hedge. The underlying stock closed Thursday off 8 cents, or 0.32%, to $25.15.

Agere picked up on weakness

Among recent blowups, a sellside trader mentioned Agere Systems Inc., which on Wednesday warned the markets about performance expectations and posted less stellar results than expected.

For fiscal third quarter, ending June 30, Agere posted net income of $2 million, breakeven on a per share basis, as revenues rose 9% to $495 million. The bottom line compared to a loss of $78 million, or 5 cents a share, a year ago.

For fiscal fourth quarter, ending Sept. 30, the company expects revenue to decline to $420 million to $445 million, blaming slower sales of chipsets plus lower wireless infrastructure licensing revenue, and the company projects a loss of 2 cents, or again breakeven on a per share basis.

Following a massive sell-off in the stock Wednesday, which cheapened the converts, the sellside trader said a few buyers - "mostly current holders adding to their position" - stepped up for the Agere paper on Thursday. The 6.5% bonds added about 1 point to 95.875, he said, while the stock gained a nickel, or 4.35%, to $1.20.

Some analysts were sticking by Agere's side, too.

In a report Thursday, CreditSights analysts Zhiping "Ping" Zhao and David M. Reich maintained their overweight position on Agere but expressed some dissatisfaction.

"We still believe in Agere's long-term position and its under-valuation. We were wrong in that the business had not yet reached the bottom. A storage revenue shortfall during the September quarter could be due to inventory and a push back of orders," the analysts said in the report.

"It is difficult to imagine how much lower the stock can go following today's sell-off. Any significant uptick in the near term would require one of the following conditions: upward revisions of estimates/guidance; a management shakeup; or being bought out by another company."

Goodyear bounces on outlook

Goodyear Tire & Rubber Co.'s guidance for second quarter was enough to give its new convertible a bounce, in tandem with the stock, but one buyside trader said the company's decision to keep its chemical unit would be a long-term negative that would be a "drag on the story."

"Spin it anyway you want, but the no sale of the chemical unit will be viewed as a negative long term in the banking circles and among the rating services," the trader said.

Still, the Goodyear 4% convertible gained 2.75 points to 109.75bid, 109.625 offered as the stock rose 41 cents, or 4.31%, to $9.92. Goodyear's junk bonds, however, were heard down about a half-point on the day and lower by about 1.5 points in the past two days.

Goodyear said after the closing bell Wednesday that it expects second quarter sales of about $4.5 billion, up from $3.8 billion a year ago, which would beat the First Call analyst consensus for $4.1 billion.

Also, Goodyear said consideration of selling its chemical division was not being pursued, saying the unit is more valuable to the company that proceeds from such a sale, "given its improved earnings...cash flows and cost advantages."

But management said the company will refinance its $680 million senior revolving credit line, due April 30, and a new $500 million revolver secured by the same collateral, due in 2007.

"While we are pleased with our year-to-date operating results, challenges remain, including high levels of debt and unfunded pension obligations, which we are addressing with specific strategies," said Goodyear chief executive Robert Keegan in a statement.

Goodyear will report its second-quarter results Aug. 5.

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