Ocwen issue trades over 102, eases back to close at 101; Amazon dips; Xerox climbs

By Ronda Fears

Nashville, July 23 - Ocwen Financial Inc.'s deal was received well, upsized even, and then popped as expected right out of the chute. Though there had been no gray market on it, orders were "very healthy," according to sources familiar with the deal, and it seemed to penetrate the so-called CoCo barrier with language to modify the structure if accounting rules change.

Elsewhere, trading was thin and mostly steered downward by stocks, which tended to make players nervous.

"A lot of fund managers are really nervous right now, so a lot are hanging out on the sidelines unless they have to do something," said a sellside trader. "Personally, I don't think the market, the Nasdaq specifically, has bottomed out yet. We may have to drop down another 4% to 5% in the Nasdaq before there's a big bounce."

In addition, buyside market sources said anxiety levels skyrocketed this week on remarks from Federal Reserve chairman Alan Greenspan, particularly regarding a willingness to move interest rates up faster if economic signals warrant.

"I have a feeling like we are getting a second, but less intense, unwinding of more carry trades due to the Greenspan talk," said one convertible fund manager. "The market was well bid before he spoke."

Otherwise even the most minor letdown in earnings numbers has been punished severely, at least in the underlying stocks while many convertibles have been propped up by buying or other factors.

Amazon.com Inc., for example, reported disappointing earnings and guidance, and the stock was slammed, falling 12.75%, although the convertibles, at par, were only slightly softer because of active buybacks by the online retailer since February.

There have been a few upside earnings surprises, as well. On Friday, Xerox Corp. was a big winner with its convertibles gaining 2 to nearly 4 points on the day.

Because of the earnings foibles and follies, however, volatility has spiked and that has pleased lots of players. On Friday, the Nasdaq volatility index shot up 6.55% to 23.91 and the old VIX gained 4.76% to 16.50.

Ocwen addresses CoCo debate

With a heavy book, which market sources said was weighted with outright hedge funds, Ocwen sold an upsized $150 million of 20-year contingent convertible senior unsecured notes printed with a 3.25% coupon and 35% initial conversion premium.

The Ocwen convertible shot to 101.25 bid, 102 offered right out of the gate and climbed during the morning - trading as high at 102.125 - but slipped in the afternoon as the stock sold off, closing out at 101 bid. The stock ended off 9 cents, or 1%, to $8.92.

Regarding the CoCo feature of the bonds, a source familiar with the deal said, "People were a little curious as to that language and how it was addressed. It was a matter of walking that delicate line of pleasing everyone [issuer as well as buyers], but it sold at the more aggressive end of price talk, so it looks like it went over well."

The deal, upped from $125 million and sold on swap with up to 25% of proceeds used to concurrently buy back stock, priced at the middle of yield talk for a 3.0% to 3.5% coupon and at the aggressive end of premium guidance of 30% to 35%.

There is a 125% contingent conversion trigger, but offering materials include language giving the company the option to waive the CoCo feature pending a final ruling by the Financial Accounting Standards Board on the treatment of potential dilution from CoCo converts in reporting earnings.

A task force of the FASB has tentatively recommended a change in accounting rules for CoCo convertibles that would require issuers of those securities to report diluted earnings per share even if the CoCo trigger has not been hit, plus present historical EPS figures on an as-if-diluted basis.

The FASB task force is scheduled to meet again Sept. 29 and 30 to discuss the matter.

"Basically, this gave the company some flexibility, if the accounting rules are changed, to do something with this bond rather than having to do an exchange or some other major capital markets transaction," the market source said.

As has become the norm with new issues, the Ocwen convertible also will have full dividend protection by way of a conversion ratio adjustment and a premium make-whole provision in the event of a cash takeover.

Xerox convertibles copy stock

The Xerox convertibles followed the stock higher Friday after the business machine and copier maker posted earnings that beat analysts' expectations handily and boosted its outlook. Plus, buyside traders said the numbers bode well for a credit upgrade, although he said there is some trepidation about Xerox possibly initiating a common dividend.

"Moody's put the credit on review for upgrade June 30, and this [earnings result] should help with that," the trader said. "The only hitch for us convert holders would be if, more importantly perhaps, they start making a common dividend."

Xerox shares gained 29 cents, or 3.68%, to $13.80.

The Xerox 6.25% mandatory due 2006 shot up 3.75 points to 126.26 bid, 126.75 offered from 122.5 on Thursday, a sellside trader said. On the New York Stock Exchange, the issue rose 2.74 points to 124.79.

Xerox's 7.5% convertible trust preferreds climbed 2 points, the sellside trader said, to 77.875 bid, 78.375 offered.

For 2004, Xerox raised its earnings target to 80 cents to 84 cents a share from a previous range of 67 to 72 cents, citing demand for new technology and value-added services. Also, the company posted second quarter earnings of $208 million, or 21 cents per share, a gain from $86 million, or 9 cents a share, a year earlier and beating the First Call analyst consensus of 17 cents per share.

Amazon magic no trick

On the heels of a disappointing earnings report that Amazon blamed on weak Harry Potter sales and a weak outlook, Amazon's stock was pummeled, losing $5.84 on the day, but a convertible dealer said the convertibles "just barely softened a tad" because of buybacks the company has been making this year.

Amazon's 4.75% convertible due 2009 ended Friday was easier by a quarter-point to 99.75 bid, 100 offered, the trader said. He pegged the Amazon 6.875% euro convertible due 2010 at 100.25 bid, 101.25 offered, off by about 0.125 point.

Amazon stock plummeted $5.84 on the day, or 12.75%, to $39.98.

After Thursday's close, Amazon reported earnings of $76 million, or 18 cents a share, versus a loss of $43 million, or 11 cents a share, in second quarter 2003. Sales totaled $1.39 billion, up from $1.1 billion last year, although Wall Street analysts were expecting revenues to hit $1.4 billion.

On its earnings conference call, Amazon executives blamed what could be called a revenue shortfall on a difficult comparison to 2003 results, as year-ago figures include whopping sales of Harry Potter books.

In February, Amazon called $150 million of the 4.75% convertibles at 102.375, leaving $900 million of that issue outstanding. But, in addition to the redemption, Amazon has been buying some of the 4.75s as well as the 6.875s in the open market, with board authorization to repurchase up to $500 million of that debt.

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