Firm tone on rising confidence; Allergan prices $450 million, Lucent, EDS active

By Sara Rosenberg

New York, Oct. 31 - The convertible market was characterized as firm on Thursday as investor confidence continues to grow and people are beginning to view the current market environment as a buying opportunity. Trading was fairly active with names such as Lucent Technologies Inc., Electronic Data Systems Corp., Ohio Casualty Corp., PerkinElmer Inc. and Omnicare Inc. being listed as some of the day's movers.

Meanwhile, in an unexpected deal, Allergan Inc. priced $450 million in proceeds of 0% convertible senior notes due 2022 after the close Thursday. They priced to yield 1.25% with a 25.45% initial conversion premium via Banc of America Securities and Salomon Smith Barney.

"The tone of the market is actually firm. It's looking very solid," said Rao Aisola, head of convertible research at Bear Stearns & Co. "Names have been holding up, even names like Lucent. [But], nothing spectacular is going on today."

"As people start to feel a little more confident about the market, they're willing to be more aggressive and take a chance on names like Lucent," said Stuart Novick, convertibles analyst at Salomon Smith Barney.

On Thursday, "USA Today reported that the SEC is investigating possible improper accounting at Lucent. More specifically, the SEC is looking at whether Lucent used aggressive accounting in 1999 and 2000 to inflate sales numbers. The publication reported that a notice will be sent to the company within days," according to Wachovia Securities, inc. analysts, Jeanine Oburchay and Brian Park. However, this seemed to have little effect on the company's convertibles and stocks as both were up on the day.

Lucent's 8% convertible closed at 399.680 bid, 404.680 offer and its 7¾% convertible closed at 361.694 bid, 361.694 offer, compared to Tuesday's offer around 350, Aisola said. The stock closed at $1.23, up 3c or 2.5%.

Electronic Data Systems 0% convertible firmed about a point on Thursday after dropping Wednesday in response to the company's earnings release. The 0% convertible closed at 72.609 bid, 73.109 offer. On Wednesday, the issue was quoted around 72 versus about a $13.50 stock price. The stock closed at $15.06 Thursday, up $1.31 or 9.53%.

On Wednesday, the company reported third quarter earnings of 18 cents per share and net income of $86 million, compared to earnings per share and net income of 44c and $212 million in the year-ago quarter. These results compare to the revised guidance EDS issued Sept. 18 for earnings per share of 12c-15c and revenues of $5.3-$5.5 billion.

"Third quarter 2002 results reflect reduced discretionary spending on existing contracts, fewer new sales and increased investments in sales pursuits," the company said in a news release.

"Even though bookings are down they're still doing a decent amount of business," Salomon's Novick said in explanation of Thursday's firming. "The balance sheet hasn't seen much erosion."

In order to improve profitability, the company is: reducing its global workforce by 3%-4% over the next several quarters, beginning with 800 to 1,000 positions by year-end; reducing other corporate overhead expenses by $75 million in 2003; divesting several non-core, non-strategic assets, with the anticipation of raising cash proceeds of more than $500 million over the next 6-8 months; and, shifting a minimum of 1,500 applications development and client contact center positions to high-quality, low-cost solutions centers around the world in 2003.

Ohio Casualty took a hit on Wednesday after its earnings news, "but today the issue seems to have found a level," Novick said.

The company reported a net loss of $69.9 million, or $1.14 per share, for the third quarter, compared to a net income of $44.2 million, or 73c per share in the comparable period last year. After-tax operating income for the quarter was an operating loss of $66.3 million, or $1.08 per share, compared with an operating loss of $1.9 million, or 3c per share, for the third quarter of 2001.

The 5% convertible putable in 2007 closed at 93.193 bid, 93.693 offer. On Tuesday, pre-earnings announcement, the convertible traded as high as 107, Novick added. The stock closed at $13.19, down 21c or 1.57%.

PerkinElmer's 0% convertible ended at 52.125 bid, 53.125 offer. The stock closed at $6.96, up 46c or 7.08%.

Omnicare's 5% convertible finished the day at 92.227 bid, 93.227 offer. The stock closed at $21.73, down 28c or 1.27%.

"[Overall], trading is fairly active from the good things to the bad things, but nothing jumps out," Novick said. He explained that companies that have released earnings reports in the last couple of days, particularly companies that have come in line with expectations or have given investors the feeling that the downturn is basically over have been pretty actively traded.

"They've given a lot of investors the sense that things look to have bottomed out," Novick explained. "[Investors are beginning to feel that] maybe the worst is over and this is a buying opportunity."

In other news, price talk emerged on The Phoenix Cos. Inc./Hilb, Rogal & Hamilton's $125 million of three-year mandatory convertibles sale. The yield is talked in the 7% to 7.5% range and the initial conversion premium is talked in the 18% to 22% range, according to market sources.

The registered deal, which is expected to price on Nov. 7, is coming via lead managers Banc of America Securities, Merrill Lynch & Co. and Morgan Stanley.

The issue price is expected to be the same as where the common stock is trading.

There is no greenshoe on the deal.

Moody's Investors Service rates the deal Baa2 and Standard and Poor's rates it BBB+.

There will also be a secondary stock offering of 1.7 million Hilb, Rogal & Hamilton shares with 1.135 million by the company and 567,000 shares by Phoenix.

Proceeds of stock offering will be used to repay debt, for acquisitions and other general corporate purposes, including working capital and capital expenditures.

"With a complete lack of new issuance, any new deals are welcome," an analyst said. "It probably won't be very cheap, but nobody's complaining."

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