Convertibles flat, thin outside of new deal activity; most of nearly $3 billion of new securities higher

By Ronda Fears

Nashville, Tenn., March 14 - Convertibles were described as flat and the market rather thin outside of new deal activity. There was plenty of that, though, what with nearly $3 billion of new paper put into circulation. New paper was mostly higher in the immediate aftermarket, except Lucent, which traders said slipped a bit as the stock was sold off due to the dilution from the new convert.

"It was really very slow outside of the new issues. Lucent slipped a bit, we assume because there was still a lot of heavy selling in the stock. Probably a lot of the straight stock holders were selling because the convert might dilute their stake," said a convertible trader at a major investment bank in New York.

"Stocks were just kind of floundering around and it made for a very sloppy market."

Caution continued to be the watchword, dealers said, as the market waited and searched for some optimism to provide a bounce. Otherwise, there was some shuffling in hedge ratios and a little activity in interest-rate swaps, dealers said.

"One way you can tell that real trading was pretty light is when there are a lot of rumors circulating, and we saw that today," said a convertible trader at a hedge fund in New York.

"The one about Lockheed Martin making a run for Raytheon was out there. Also, a new one put a hitch in the Ciena merger with ONI Systems, that somehow that deal may blow up before it gets done. Most of this stuff we were hearing today was just talk, nothing we acted on."

In any event, Ciena Corp.'s 3.75% convertible notes due 2008 were flat, quoted at 63.5 bid. The underlying stock closed off 33c to $8.82.

Although new deals have been coming by issuers with liquidity concerns and amid downgrades seemingly without a hitch, traders the secondary market has been reacting strongly to credit concerns.

GATX Corp. fell on its downgrade by Moody's to Baa2. Traders said, however, that the converts were being sold off because of a comment by Moody's that the finance and leasing company would turn more to secured debt market for funding and that would subordinate convertibles in the capital structure.

"Credit analysis is the weakest link in our market, particularly with us hedge funds. Nearly everybody is looking for good credit analysts," said a convertible trader at a hedge fund in Connecticut.

"Since the Enron fiasco everyone is scrambling for credit work and so they tend to pay more attention to anything from a credit analyst, although the rating agencies have kind of taken it on the chin with regard to a the whole accounting problem."

The GATX 7.5% convertible notes due 2007 dropped 2.5 points to 114 bid, 114.25 offered. The common shares lost $1.12 to $30.90.

Also lower was Lucent's new convert, which was upsized on strong demand and priced at the midpoint of yield talk but more aggressive than premium guidance. The 7.75% issue closed down 0.625 point from par to 99.375 bid, 99.5 offered. The stock was off 9c to $4.83. Lucent's existing 8% convertible preferred due 2031 was down 0.5 point to 93.125 bid, 93.375 offered.

Other new deals were higher, although Computer Associates slipped from pre-open levels but ended 4 points higher than the par issue price. The 5% convert closed at 104 bid, 104.5 offered with the stock down 19c to $18.11, but traders said before the opening bell it was up 5 points in the gray market.

"There was a lot of discrepancy about the credit spread for Computer Associates. It was anywhere from 1.2% cheap to something like 12.5% cheap. The spreads ranged from 500 basis points to 950," said the trader in Connecticut.

"Anyway, it was cheap and the fact that it was a vanilla convertible with none of the funky bells and whistles, contingent conversion or floating rates, really made it very attractive to a lot of people. That, and it being investment grade."

Ohio Casualty's new deal also gained similarly, with the 5% notes adding 4 points to 104 bid, 104.125 offered. The stock gained 21c to $18.04.

Dominion's deal rose but interest was comparatively more tepid, as analysts put the deal pricing only about 3% cheap. The new 8.75% mandatory convertible added 0.25 point from par to 50.25 bid, 50.75 offered with the stock up 73c to $61.33.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.