Overnighter steps into market fraught with nervous skeptics

By Ronda Fears

Nashville, Tenn., July 25 - The skeptics won out. Stocks retreated and convertibles followed suit, but traders said there were some bottom-fishers in the market, although they were outnumbered by distressed sellers.

"There just isn't any faith right now in the markets, in the numbers," said a convertible trader at a hedge fund in New York.

"I know it's amazing, considering the drop we've seen this year with the S&P 500 off something like 41%, but the market is probably still a little over-valued. We think we have to go back to before the dotcom era in order to get some rationalization, some reality."

Yet, in what is considered a very brave move considering the market turmoil, St. Paul Cos. was peddling an overnighter, however. Market conditions stalled the Orbital Sciences' new deal, but as one dealer put it, there's not as much hair on St. Paul.

Aside from a heavy earnings calendar and the latest big disaster, AOL Time Warner, the spike in volatility and blow out of credit spreads has heightened the nervousness. But, it also has sparked some trading activity.

"I think this has been the most volatile week of the year," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities Inc.

"We will see if this marks the bottom. But I think a lot of people are unwilling to believe the worst is over."

There was some activity in the AOL converts and Tyco International, both heading south.

AOL's trouble renewed selling pressure in the media and cable group, traders said.

Omnicom and Charter Communications were both lower, but traders said there were some bids late in the day for those two names on the weakness.

Techs were hurting badly for the most part, but Lucent Technologies and Xerox were finding buyers.

Xerox was among the strongest gainers with solid buying. The 7.5% convertible trust preferred due 2021, which was sold last year with three years of dividends collateralized, added 4 points on the day to 43.75 bid, 44.25 asked. Xerox shares closed up 85c to $6.20.

Tyco also saw a good deal of activity.

In a late-day conference call, the company emphatically denied rumors of bankruptcy that were buzzing through the markets, and then addressed several pressing issues about its liquidity.

Right after the call, Tyco announced it had selected a replacement for former CEO Dennis Kozlowski, who left the top post in June in advance of a federal indictment for tax evasion.

Tyco tapped Motorola to name Edward Breen, former chief operating officer of Motorola Inc., as its new CEO.

Tyco's converts were trading erratic to the stock, but mostly holding up very well.

"The [Tyco] common stock and bonds are trading for different reasons. The company made it clear that it was not going to be buying back stock, but use any surplus cash to trim its debtload," Deutsche's Howard said.

"But bonds are not trading as bonds right now. Bonds are trading as yield-enhanced stock."

The Tyco 0% converts were lower, with the 2020 issue down 2 points to 56 bid, 57 asked and the 2021 issue down 1.25 points to 67.5 bid, 68.5 asked. The underlying stock closed down $1.75 to $8.25.

Mandatory converts continue to be tossed about by the volatility spikes, but the St. Paul mandatory was seen getting done despite the tough market conditions.

"We're talking about a BBB+ credit, so some of the pressure is off," said a convertible trader at a hedge fund in New Jersey.

"Still, with credit spreads being so blown out, it's tougher even someone like St. Paul right now. But if anyone could get a deal done now, it would probably be Merrill and Salomon, the top two powerhouses in underwriting convertibles."

Other buyside sources were not so enthusiastic about the deal, saying it was priced too aggressive for market conditions. Analysts were pretty far apart on the valuations, too, putting it anywhere from 0.75% rich to 3.8% cheap, which is a bit below the average cheapness of new issues.

St. Paul shares closed down $1.16 to $24.20.

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