Convertibles tread water; Lucent, XM Satellite fall, ViroPharma halted

By Ronda Fears

Nashville, Tenn., March 19 - Convertibles were slightly lower Tuesday, again in a thin trading pattern, as the Federal Reserve left rates unchanged while shifting to a neutral stance on the economy. New paper was mixed, with sharp gains for Navistar and Computer Associates countered by a huge drop for Lucent.

Elsewhere in the secondary, XM Satellite Radio Holdings Inc. had the wind against trying to refute a news story that said the company's latest annual report cited the company's auditor as saying there was substantial doubt about its ability to continue as a going concern. XM Satellite said the phrase was standard because for companies which do not have 12 months of funding and has been included in every one of its annual reports since it went public in 1999. Nonetheless the convertibles dropped along with the stock, because as one trader put it: "It's an uphill battle trying to fight a fire with one hose because it's been lit in a million places."

ViroPharma Inc. was unchanged with its shares halted Tuesday as a Food and Drug Administration advisory panel considered, and unanimously voted to deny, the company's experimental common cold drug, Picovir. But when the action picks up, traders anticipate a considerable decline, although ViroPharma has vowed to pursue approval.

"It's been really quiet all this week. We're hoping there will be some action in the second half of the week now that the Fed meeting is over," said a convertible trader at a major investment bank in New York.

"Today, we were treading water for the most part, although the market as a whole is probably down a bit. Telecoms and telecom equipment got hit really hard, especially Lucent and Corning."

The Fed's decision not to change interest rates was expected, as was the shift from an easing bias to a neutral directive.

It is considered as the first step toward an eventual boost to interest rates, however, so market watchers expect money managers to begin assessing their holdings in anticipation of that. Wall Street pundits don't widely expect a rate hike until May.

Lucent nosedived suddenly, traders said, as investors became concerns about falling revenues.

"There wasn't really any news out on Lucent, except what looked like a partnered research project with Corning, so there wasn't any immanent reason for the decline," said a trader at a hedge fund in New York.

"It was a killer, though. The new Lucent convert fell more than the old one, so there is a lot of pain out there right now."

Lucent and Corning announced they will collaborate in an effort to improve the performance of optical long-haul systems with optical fiber properties that to enable service providers to continue to lower overall transport and operational costs.

Corning repeated its view that first quarter will likely be the bottom for its business, but said it still does not know when demand will begin improving.

Apparently, Corning ducking a forecast for business to improve, coupled with Lucent's surprise cut in its quarterly revenue forecast, after three weeks before saying it expected to meet financial targets, was enough to spark a sell-off.

Lucent shares hit the lowest level since the company was spun off by AT&T Corp. in 1996, falling 48c to $4.30. The Lucent convertible preferreds followed suit, with the new 7.75% due 2017 losing 8.75 points to 89 bid, 89.25 offered and the 8% due 2031 down 7 points to 87.25 bid.

Corning's 3.5% convertible note due 2008 lost 2.5 points to 100 bid, 100.125 offered with the stock down 28c to $7.75.

Most of the telecom and telecom equipment makers were lower, traders said, but not to that degree.

XM Satellite fell sharply despite its reply to a Dow Jones story citing the auditor's warning about its ability to continue as a going concern in the company's annual report.

The company's statement not hitting the tape until afternoon failed to mitigate the damage of the report, which came across the wires during the morning, traders said.

The XM Satellite 7.75% convertible due 2006 fell 14.75 points to 117 bid as the stock lost $2 to $13.

XM Satellite did not dispute the content of the news, except on the basis that it wasn't new. In fact, XM Satellite said in a statement that the auditor comment is standard for companies that do not have 12 months of funding and has appeared in every 10K filing by the company since it went public in 1999 as well as all offering documents issued for the company's public financings.

"The story and particularly its headline prompted other stories, leaving the impression that there was a new and troubling financial development at XM, causing a drop in the stock. XM wishes to reaffirm the company's confidence in its ability to raise sufficient capital to fund its operations on an ongoing basis," the XM Satellite statement said.

In 2001, XM Satellite said it has successfully launched its service nationwide, raised $382 million in financing and acquired some 28,000 subscribers. To date, the company has raised about $1.5 billion of equity and debt net proceeds from investors and partners. The company also reaffirmed confidence it will hit its first quarter subscriber target of 70,000 customers.

ViroPharma did stave off what will probably be an eventual decline, however, by halting its stock as a Food and Drug Administration advisory panel considered, and unanimously voted to deny, the company's experimental common cold drug, Picovir. Although the FDA is not bound to follow the panel's recommendation, it usually does.

Reports pitted ViroPharma's assertions that Picovir fights common cold viruses and cuts illness short by about a day against FDA staff concerns that the drug was not safe enough to treat a non-life threatening condition.

ViroPharma vowed to pursue approval, however.

The slide in ViroPharma began last week, with the stock falling to the lowest levels in a year, on the FDA staff concerns and after an analyst said he expects regulators to reject the drug.

ViroPharma shares stood at $13.41 and the 6% convertible due 2007 was at 46.375 bid.

New paper provided most of the activity of the day, traders said.

The Navistar Finance deal came in at the aggressive end of revised price talk with a 4.75% coupon and 30% initial conversion premium. The paper was up 3.25 points from par and up 1.25 points from the gray market bid, losing at 103.25 bid, 103.5 offered. Navistar International shares closed off 8c to $42.87.

The Computer Associates 5% convertible due 2007 soared another 7 points to 115 bid, 115.75 offered with the stock up $1.84 to $21.52.

Ohio Casualty's new 5% convertible due 2022 was up 0.75 point to 107.75 bid, 108.25 offered with the stock up 12c to $19.13.

Next at bat is Airborne Inc.'s $125 million convertible with tightened guidance putting the coupon fixed at 5.75% and the initial conversion premium between 20% and 24%.

Market watchers said there could be some additional primary market activity in light of the Fed's decision, but nothing firm has surfaced. Traveler Property & Casualty Corp.'s spin-off from Citigroup is scheduled for after the market close Thursday with an $850 million mandatory coming to market alongside the IPO.

Though nothing is definite, it did appear from a Qwest Communications conference call Tuesday and the company's amended bank facility that efforts are moving forward for another convertible from the name.

© 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.