Convertibles quiet after week's new issues flurry; airlines drift lower; Ford slips as GM edges higher

By Rebecca Melvin

Princeton, N.J., June 17 - Convertibles players said Friday that there was little activity in the primary market compared with earlier in the week when Invitrogen Corp., MetLife Inc. and Oil States International Inc. came to market with three new issues.

In the secondary, airlines drifted lower, while the big automakers were mixed. The stock of hard disk-drive maker Maxtor Corp. fell, but on a dollar neutral basis the convertible gained a bit.

"There was very little activity today," a New York sellside trader said, citing sublime summer weather for providing a distraction from the market.

"Everybody is watching golf," said a buyside analyst in Chicago, referring to a broadcast of the U.S. Open.

Earlier in the week, new issues including a $350 million convertibles deal from Invitrogen, a $1.8 billion mandatory convertibles issue from MetLife, and a $125 million issue of contingent convertibles from Oil States attracted attention.

The deal of Houston-based Oil States looked about 4% cheap, using a credit spread of 350 basis points over Treasuries and a volatility spread of 35%, versus the opening stock price on Thursday of $24.00, according to a New York-based convertibles analyst.

The stock's opening price, rather than the close, was used because it was an overnight deal.

Meanwhile, potential defaults still loomed. The deadline for Denver-based Navigant International Inc. to avert default was Friday. The travel management-services company asked holders of its $72 million convertible deal last week to consent to more time for filing financial reports with regulators and waive existing defaults.

Holders had until Friday to agree. But a syndicate source said information wasn't available to be made public yet regarding whether holders consented or not.

Navigant's 4.875% convertible subordinated notes due 2023 last traded at 98 on May 9, according to the syndicate source.

On Wednesday, high-profile retail name Saks Inc. received a notice of default from a hedge fund that owns more than 25% of its notes.

And on Thursday Willbros Group, Inc. received a notice of default for 2.75% senior convertible notes due 2007 from Whitebox Advisor, Inc. - although the company disputed that it was actually in default.

Hope springs eternal

Despite Friday's lull, optimism remains high in the convertibles market that the time to start accumulating positions is now.

"I think there is a one- to two-month window of opportunity to buy" convertibles, coinciding with the summer lull in volatility, said a portfolio manager at a fixed-income fund based in New York. This particular manager played all three new convertible issues brought to market this week.

"Valuations are as good as they've looked in years," he said Friday. His comments echoed a Merrill Lynch report that was apparently well received by hedge funds last week, which said that three factors contributed to this year's intense selling pressure and those factors are going away.

They included an overpriced market, a "perfect storm" of conditions including expanding spreads, rising interest rates, low and flat volatility, and fund redemptions.

Merrill said the overpricing has corrected, the perfect storm is abating and the redemptions are now a technical factor, rather than a fundamental factor. Having said this, Merrill asserted that investors risk lost opportunities if they wait for convertibles to "hit bottom."

Invitrogen moves higher

Invitrogen extended gains on the second day of trade of its 3.25% senior convertible notes. The Carlsbad, Calif.-based biotechnology company's 20-year bonds were still seen 2% to 3% cheap.

On Thursday, the maker of biomedical research tools and technologies promised investors rapid growth and product development. But earlier in the week, a U.S. Supreme Court ruling that reversed a lower court's patent ruling sparked concerns that large drug companies may now extend their research into the patented products of smaller companies like Invitrogen. The company said in a news release following the ruling that the court's opinion specifically didn't extend to patented research tools.

Invitrogen's 3.25% convertibles traded Friday at 104.375 bid, 104.875 offered, versus a stock price of $78.80, according to a syndicate source, up about 2 points from Thursday.

Airlines waiver

Airlines convertibles were mostly flat or lower Friday as the stock of Northwest Airlines Inc. continued to hemorrhage and the entire airline sector fell in the equity markets amid a spike in oil prices.

The week's stock plunge for Eagan, Minn.-based Northwest was sparked by fears of bankruptcy and the revelation through a Securities and Exchange Commission filing that Northwest's chairman, Gary L. Wilson, has sold almost 60% of his stake in the carrier, or some 2.5 million shares, since mid-May.

Northwest's 6.625% convertibles traded at 47.9 Friday, little moved compared to the issue's closing price Thursday at 47.053 bid, 47.553 offered. Northwest's shares closed down $0.36, or 6.7%, to $5.02. The stock hit its 52-week low at $4.20 on May 11.

"Airlines continued to drift lower," a Connecticut-based sellside convertibles trader said.

And a New York sellside trader referenced the week's earlier reports about Wilson's sell-off of shares.

Ford, GM jockey for market

Ford Motor's convertible bond Friday tracked the stock lower as the Dearborn, Mich.-based company had the distinction of being the only major automaker to finish down after KeyBanc Capital Markets downgraded the stock to underweight from hold. General Motors Corp. also had its rating cut, but shares still managed to close higher.

Ford's 6.5% convertible preferreds, with a par of 50, dropped 0.25 point to 43.44, while Ford shares lost nine cents, or nearly 1%, to $11.28.

At the end of the day, a report came out that Ford is offering up to $1,000 in cash to employees and retirees who bring customers to buy new cars and trucks.

The announcement was made as early numbers showed Detroit-based GM's market share jumped under a new incentive program that allows any customer to use an employee discount rate through July 5. Ford's program also extends employee discounts to all customers.

All three GM convertible bonds squeaked out a 0.01 gain, leaving the 6.25% convertible at 24.06, the GM 5.25% convertible at 18.90 and the 4.5% convertible at 24.06. Meanwhile, GM shares added six cents to settle at $35.68.

Maxtor takes price war hit

Milpitas, Calif.-based Maxtor, a maker of disk drives, saw its convertibles gain on a dollar neutral basis even as its stock sank 6.5%. A buyside analyst said the stock fell because of rumors of a price war in the hard disk drive market.

The 6.8% convertible was up about 0.75 point on a dollar neutral basis. But traders saw the convertible at 92.75 bid, 93.50, compared with 94 on Thursday.

Maxtor stock was down $0.40 to $5.72 on Friday.

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