Convertibles flat, quiet as market thin ahead of FOMC

By Ronda Fears

Nashville, Tenn., March 18 - Convertibles were flat Monday ahead of the FOMC meeting and with static stocks, but the market also was described as thin. New deals provided fodder for the gray market, but there was some weakness as guidance was tightened for both the Navistar and Airborne deals.

"It was extremely quiet today in the secondary with everybody waiting to see what the Fed is going to do," said a convertible trader at a major investment bank in New York.

"The bets seem to be leaning toward to real rate movement and if that should prove wrong, then the market could be in a world of hurt. But if it does turn out to be just a shift in bias, then we're also going to see some action as people begin to prepare for higher rates and make some portfolio shifts."

Meanwhile, the market had a bit of diversion with the two small deals slated for this week, and buzz about what other deals may be coming, if any.

"We've heard several names bandied about as candidates for deals this week. A couple are telecom names, and that's no surprise," said a convertible trader at a hedge fund in New Jersey.

"We also heard something was coming from a capital goods name, but that could be a lot of things."

Navistar's deal was advanced to price a day early, with tighter price talk as the trend has been lately. Analysts said the new talk took 200 basis points of cheapness out of the deal.

Navistar Financial Corp.'s $200 million seven-year exchangeable note that converts into Navistar International Corp. stock was revised to put the yield at 4.75% to 5.0% with a 27.5% to 30% initial conversion premium, and the pricing was advanced to after Monday's close.

The issue slipped in the gray market from 2.25 points over par to 1.5 on the new price talk, but firmed up to 2 over par at the close, traders said. The issue is expected to be rated Ba2/BB-.

Original price talk put the yield between 5.0% and 5.5% and premium between 22.5% and 27.5%.

Navistar shares closed off 8c to $42.87.

Guidance on Airborne Inc.'s new convertible deal, which was upsized to $125 million from $100 million, was also tightened. The coupon is fixed at 5.75%, versus original price talk that put the yield between 6.0% and 6.5%. The initial conversion premium is now expected at 20% to 24%, versus original guidance of 18% to 22%.

Traders said the issue had not traded much in the gray market, although there were active bids at 2 points over par. Analysts said the new talk took about 250 basis points out of the cheapness. Moody's rates the new deal at Ba3, and S&P at BBB-.

New issues from last week were mixed along with the broader market, although dealers emphasized that the market was very thin. Hence, price quotes were erratic.

Lucent's new 7.75% convertible due 2017 was quoted off 0.5 point to 99.25 bid, 99.75 offered by one dealer, but another quoted it at 97.75 bid, 98.25 offered. Lucent shares slipped 11c to $4.78.

The Computer Associates 5% convertible due 2007 was quoted up another 2 points to 108 bid, 109 offered by one dealer, but another quoted it at 109.75 bid, 110 offered. The stock gained $1.18 to $19.68.

Ohio Casualty's new 5% convertible due 2022 was up 0.5 point to 107 bid, 108 offered. as the stock rose 35c to $$19.01.

Otherwise in the secondary market, traders said computer hardware and storage names were dampened by a Prudential call. Brocade and Emulex were both sharply lower and among the biggest decliners in the convertible universe.

Emulex's 1.75% convertible due 2007 lost 2 points to 81.5 bid, 82.25 offered as the shares dropped $1.34 to $26.54. Brocade's 2% convertible due 2007 fell 4.5 points to 85.5 bid, 86 offered with the stock down $2.44 to $23.10.

Electro Scientific Industries Inc. was among the bigger gainers, traders said, but some or all of that may be erased after the company posted weaker than expected earnings after the closing bell.

Electro Scientific reported that excluding non-recurring items, a tax credit and consulting expenses, the proforma net loss was $2.2 million or 8c per diluted share, compared with analysts forecast for a loss of 1c per diluted. The Electro Scientific 4.25% convertible due 2006 closed up 2.5 points to 120.5 bid, 121.375 offered and the stock added $1.25 on the day to $38.25.

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