LabCorp, TXU slammed hard on huge sell-off after latest warnings

By Ronda Fears

Nashville, Tenn., Oct. 4 - Profit warnings sent Laboratory Corp. of America Holdings and TXU Corp. into the tanks as investors rushed to sell out and traders said the convertibles market overall was lower with sellers dominating.

In fact, only a handful of converts were seen higher on buying. Among those were Province Healthcare Co. and Community Health Systems Inc. A few buyers also were seen for Omnicom Group Inc.

"There were rumors that the dock strike was resolved and the market rallied about 100 points. Earlier, it rallied off the employment data, but couldn't sustain it," said Jonathan Cunningham, head of convertible research at Jefferies & Co.

"The sentiment is definitely that people are just bearish. Some people see that as a positive because the thinking is that the more people that are saying that, maybe we are closer to the real bottom."

Stronger-than-expected employment data lowered the Street's expectations for further Federal Reserve rate cuts, and that pushed spreads wider, traders said.

Profit warnings from banks aggravated the widening credit spread scenario, traders said.

Trading in convertibles was rather brisk for a Friday, but the focus was on selling. Credit default swaps in several convertible names were also said to be active.

"Default protection on some of these big international banks blew out to something like 400 basis points," said a derivatives trader. "That's just insane."

Of course it makes for a lot of scrambling in converts, with the trading frenzy magnified by distressing headlines of profit warnings.

"We're busy, but we're busy in the blowups, where people are forced to take action," Cunningham said.

The reactions to the warnings seemed to be overblown in many traders' opinion but others said it's a signal that the market is still way overvalued.

"We're talking landslide proportions," one dealer said, referring to the LabCorp and TXU declines.

On LabCorp's warning late Thursday that third quarter earnings would be about 4c a share shy of the consensus forecast of 49c, there was a massive sell-off in both the stock and converts.

LabCorp's 0% due 2021 (BBB) plunged 5.75 points to 64.625 bid, 65.25 asked.

The stock fell $11.50 to $21.68.

"It seems pretty dramatic, but this [LabCorp] was a bit rich for this market," said a trader.

"Some of the air had to be let out eventually."

Standard & Poor's said LabCorp's warning did not change its view on the credit (senior BBB+/stable), saying that credit protection measures remain solid and consistent with the investment-grade rating.

Power names also remained in the spotlight with TXU's warning, which prompted Fitch Ratings to cut its European unit to junk and Moody's to lower TXU's outlook to negative.

Again, the market reaction was sharp.

TXU's mandatory converts dropped as much as 4.85 points on the news and the stock lost $5.86 to $27.04.

TXU on Friday slashed its profit outlook through next year by more than 25%, blaming low power prices and fierce competition in the U.K.

In addition to drastically cutting 2003 earnings expectations through 2003, TXU said it will stop all development activity in Europe, restructure the business to cut costs and renegotiate power contracts. Asset sales could be a part of the plan, too.

Fitch cut TXU Europe Ltd. to junk and noted a number of credit rating triggers. But, Fitch also noted that the unit has investment-grade ratings with the two other rating agencies, although one has the credit on negative watch and the other is carrying a negative outlook on it.

Retailer names also still seemed to be an area where there was some two-way activity going on.

"You get to a point where you start to make some bets, like in retail," one fund manager said.

You can't take the group as a whole, he said, because there are credit concerns put make some situations out of reach. But, for the most part, he said, the retail bets are being made right now, in anticipation of the holiday shopping season that is so vital to most retailers.

"You can't even say today that you're safe in retail if you go with food, groceries," the manager said.

"You have to understand the credits and sometimes that seems like an impossible task. And, to some extent, you just reach a point where you have to put money somewhere and given the season, retail seems like a nice bet."

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