Convertibles tick up along with stocks, trading spotty still but volumes gain

By Ronda Fears

Nashville, Tenn., Aug. 7 - Convertibles continued to follow stocks higher and volume remained fairly modest but trading was described as spotty.

"There wasn't really any firm trends going on today, but trading volume was pretty decent," said the head convertible trader at a major investment bank. "We still lack conviction."

Volatility spiked up, traders said, and that spurred hedge funds into trading. Outrights were seen as heavy sellers.

"It seems a little busier today than the last few days," said Stuart Novick, convertible analyst at Salomon Smith Barney.

He noted market buzz on Orbital Sciences Corp., with "people thinking a deal might get done for them."

Indeed, Orbital Science was prepping a new deal, but not a convertible. However, the junk deal was said to be pricing off the Jefferies & Co. convertible desk, sometime Thursday.

The original $100 million four-year convert deal - talked at 7.5% to 8.0% yield, up 15% to 20% - has been reworked into $135 million of four-year units consisting of a junk bond talked at 12% yield and stock warrant talked at a 10% conversion premium.

The terms were considered very cheap for convertible buyers, but not outrageously cheap for junk bond buyers.

"It smacks of desperation now," said a convertible trader at a hedge fund in New Jersey.

A convertible market source said Orbital Sciences could have probably exchanged the old 5% convertible - which will be repaid at its maturity in October with proceeds from the new deal - with better terms but "tried to get creative with structures and paranoid about getting the screws put to it by the holders."

As it is now, the source pointed out: "Their worst fears have come true, but by their own making."

Orbital Sciences shares ended Wednesday up 20c to $3.45.

Still, buyers for the new deal may come mostly from the convertible market, sources said.

There were some buyers seen for Interpublic Group after a few sessions of getting beaten down and Omnicom was also holding firm.

A few oil drilling names were also finding buyers, such as Nabors, Transocean and GlobalSantaFe.

Brinker International was getting sold off due to slow sales even though the company beat estimates for fiscal fourth quarter.

Slow sales expectations for retailers also hurt those issues, and Gap was seen trading lower.

"The outlook for back-to-school sales are not so good," Novick said.

Biotech and drug names were widely mixed, what with some positive earnings countered by the indictment of ImClone's former chief executive.

ICN Pharmaceuticals was higher after earnings but Invitrogen and ImClone were sharply lower.

In general, traders said, the market's perception of the outlook for business is bleak, due to nervousness at the consumer level about the economy and talk of a double-dip recession.

"Everyone is treading softly right now," one trader said.

"We're not seeing anyone making any bold shifts to their portfolios. There was Warren Buffett's move into telecom and power names, but we've not seen anybody really jumping on that bandwagon."

Fund managers were still tweaking positions and some were still busy with end-of-month bookkeeping matters.

"I've been bogged down with a lot of administrative stuff this week," said a hedge fund manager in New York. "It's been tough."

Froley Revy said earlier this week that its convertible bond index was down 7.05% for July with prices down 7.39% for the month. Year-to-date the firm's convert index is down 10.6% with prices down 12.75%.

HedgeFund.net, an industry website, shows convertible arbitrage returns were up 0.26% for July with year-to-date returns up 4.11%. The latest available CSFB/Tremont convertible arbitrage index shows June returns were off 0.433% with year-to-date through June 30 returns down 1.0%.

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