Market slightly higher, interest growing in credit default swaps

By Ronda Fears

Nashville, Tenn., July 17 - It was a mildly better day for convertibles, but there was notable growing interest in credit default swaps as liquidity concerns weigh on investors.

Nextel Communications and most of the wireless sector gave up some of the recent gains on nervousness about Sprint PCS earnings, which are due before the market open Thursday.

"There was a Wall Street Journal story on credit default swaps, but we've seen a marked increase in interest for several weeks. Everyone is concerned about defaults right now. Even people who are mostly focused on the stocks have to be right now," said a credit default swaps trader at one of the major investment banks.

"Spreads are all over the place, a lot like the bonds. It's hard to talk about trends, even in a specific rating category. This is name driven, more so now than ever, with certain companies having problems, you know."

In general, the derivatives trader noted that spreads were tightening for media and cable names like Omnicom and Cox. But, he said, Comcast and Interpublic Group spreads were wider.

Bear Stearns & Co. convertible analyst Matt Hempel said based on increased interest in the credit default swap market recently he looked for trends in the market with regard to specific names.

Over the past two weeks, he said, the credit default swap market for Verizon due June 2004 came down by about 90 basis points to 260 basis points, Electronic Data Systems' due November 2005 came in by about 70 bps to 220 bps, Omnicom due March 2007 came down by 40 bps to 340 bps and Cox subordinated 5-year paper came in by about 30 bps to 490 bps.

Among others with widening spreads, Hempel noted the credit default swap market for Masco due Feburary 2005 added about 20 bps to 110 bps, Interpublic Group 5-year paper gained about 25 bps to 245 bps, the Cendant 2-year put added about 40 bps to 420 bps, Comcast due January 2006 gained about 40 bps to 520 bps, General Motors 5-year paper added about 60 bps to 260 bps and El Paso due March 2006 gained some 160 bps to 550 bps.

Those were rough price estimates for the credit default swap, Hempel said, give or take about 15 bps.

In the convertible universe, trading was choppy and described as moderate to light what with the onslaught of earnings.

"It was a bit of a roller coaster ride. The day started out like we were going to be on another tear," said the head convertible trader at one of the major investment banks.

"But, then, as has been the practice of late, nearly everything we gained recently was given up, and then some in some cases. About all I could say about a trend would be that earnings are driving the market right now."

Nextel gave up some ground, as the market became nervous about Sprint PCS earnings.

Sprint PCS fell, too, sparked by an equity analyst giving rise to fears that the fourth-largest U.S. wireless phone company would report worse-than-expected second-quarter results Thursday.

The selloff was also attributed to a pullback in reaction to the wireless sector's rally over the last week or so, traders said.

"In some of these sectors, wireless, chips, biotechs, people aren't holding positions for very long," said a convertible trader at a hedge fund in New York.

"That has helped volatility, which is a good thing for us [convert arbs]. The converts aren't trading as liquidly as we'd like, though."

Nextel's 6% convertible due 2011 were quoted down 1.25 points to 60.5 bid, 62 asked. The 5.25% due 2010 were quoted off by 0.375 point to 56.875 bid, 57.875 asked. The 4.75% due 2007 were quoted off 0.375 point to 62.75 bid, 64.75 asked. The stock ended off 31c to $6.22.

Sprint PCS linked paper, five different issues, were all quoted roughly 1.5 points lower.

The Comcast/PCS 2% due October 2029 was quoted at 22.625 bid, 23.625 asked. The Comcast/PCS 2% due November 2029 was quoted at 23.125 bid, 24.125 asked.

The Cox/PCS 1% due 2020 was quoted at 38.5 bid, 39.5 asked.

The Liberty Media/PCS 3.75% due 2030 was quoted at 44.75 bid, 45.75 asked. The Liberty Media/PCS 4% due 2029 was quoted at 47.625 bid, 48.625 asked.

Sprint PCS shares lost $1.20 to $5.

Motorola Inc. was the exception Wednesday, however.

Even after posting a record second quarter net loss of $2.3 billion, or $1.02 a share, the company gained as it said it expects to bounce back to a net profit in third and fourth quarters due to aggressive cost cutting. Motorola expects earnings of about 2c a share in third quarter and 10c in fourth quarter.

Motorola's 0% convertible due 2013 was quoted up 0.125 points to 74.625 bid, 75.625 asked with the stock closing up 62c to $15.15. The Liberty Media/Motorola 3.5% due 2031 was quoted up 1.75 points to 75.625 bid, 76.625 asked.

Elsewhere, energy names continue to be a strong topic and focus of trading.

CMS Energy is taking steps to bolster its liquidity, including a 51% cut to its common stock dividend. There also continues to be buzz that the company is looking to issue a convertible, likely a mandatory, in line with those efforts.

The common dividend cut will be positive for the existing CMS 7.25% mandatory, as that will boost its theoretical value with an increased yield advantage to holding the stock.

CMS shares closed down 10c to $10.30, and the mandatory dropped in tandem, ending off 0.09 to 16.7 on the NYSE.

The 74c dividend cut equates to a $1.20 boost for the convertible, according to a report Wednesday by convertible analyst Kimberlee Brody at Wachovia Securities, Inc.

"Although CMS.M declined 1.81% on July 16 on the back of a 4.06% drop in the common stock, we believe the convertible will gain over the next several days as a result of this dividend cut," Brody said.

"Further gains are also possible as equity investors swap into the convertible to try and recapture some of their lost income."

Also under pressure was AES Corp, but Duke Energy was seeing a slight rebound.

Among some of the stronger names Wednesday were temporary employment agencies, Manpower Inc. and Labor Ready Inc.

Manpower Inc., the world's second largest temporary staff agency, reported second quarter profits fell 25%, but said it sees signs of recovery in the U.S. job market. Manpower also projected earnings of 43c to 47c in third quarter.

The Manpower 0% due 2021 gained 2.5 points to 62.5 bid, 63 asked with the stock up $3.74 to $37.94.

Labor Ready Inc., a smaller temporary employment agency, said on Tuesday net income rose in the second quarter as lower expenses helped offset a drop in revenue. But the company raised its guidance for 2002 earnings by 15%.

The Labor Ready 6.25% due 2007 was quoted 4.5 points higher at 105.5 bid, 106.5 asked as the stock closed up 38c to $6.10.

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