Risk-takers buy short Interpublic paper; UTStarcom opens weaker, then recovers to par

By Ronda Fears

Nashville, March 7 - Interpublic Group of Cos. Inc. provided a shot of adrenaline to an otherwise subdued convertible market Friday as its earnings report and a credit downgrade sparked considerable flow, even as the apparent nearing of an American-led war damped broader activity.

"A lot of sitting on the sidelines was due to watching the news," as the United Nations debated the issue of disarming Iraq, one dealer said.

"The headlines about Bin Laden's sons getting captured caused quite a stir, people talking, but there really wasn't much of a reaction on the trading desk to it."

So-called "risk tolerant" buyers were scooping up the shorter-dated Interpublic zeros and 1.8s, both of which gained on the day, traders said, whereas the 1.87s were essentially flat.

With the Interpublic disappointments, including the senior debt falling towards junk territory, and a WPP Group plc downgrade, Omnicom Inc. rose sharply.

UTStarcom Inc. also was a hotbed of activity as traders noted huge volume in the $350 million overnight offering, which priced at the cheap end of guidance.

The new deal weakened slightly right out of the gate but recovered to close at par.

Yield-seekers also were actively buying in names like XM Satellite as well as EchoStar Communications Corp., the latter being put on review for possible upgrade by Moody's.

"The big news of the day was IPG with the earnings and the downgrade, but it didn't cause a credit panic," said Rao Aisola, head of convertible research at Bear Stearns.

"The market anticipated this, [the downgrade] it had already been priced in.

"IPG has blown out so much in the last week that the bonds were trading at 750 bps over - essentially in the BB+ range [as] 600 over is about where BBs are in the high-yield market.

"If you think there's no more bad news, then we'd be buyers at these levels," Aisola continued, adding that the firm put the Interpublic 1.87s on its focus list Friday.

Standard & Poor's lowered The Interpublic Group of Cos. Inc.'s senior unsecured debt to BB+ from BBB- and subordinated debt to BB from BB+, and the ratings remain on negative watch.

The market is not widely anticipating another downgrade soon, however, which is why, as one trader put it, "there are willing buyers on the short end."

S&P said the downgrade was based on recent weak profitability and higher debt to EBITDA, as well as the expectation that recovery in the advertising industry will be slower than previously thought.

Late Thursday, Interpublic reported that fourth quarter earnings plunged in the neighborhood of 80%, and said it would make additional charges of $165.7 million. Also, the company warned full 2003 earnings would likely fall below current Wall Street estimates amid continuing weakness in advertising.

If IPG's senior rating falls any more, though, the zeros can be converted immediately. S&P noted the conversion feature trigger if the rating declines below BB+.

Interpublic's 0% convertibles due 2021, which are putable in December, were quoted up 0.75 point on the day to 79.5 bid, 80 asked and that issue was described by traders as the most active.

The IPG 1.8% due 2004 was quoted up 2.125 points on the day to 90 bid, 90.5 asked.

IPG's 1.87% due 2006 was quoted down 0.125 point on the day to 74.5 bid, 75 asked.

IPG shares closed Friday off 14c to $8.45.

On another advertising name, Moody's put WPP Group plc, including the Young and Rubicam Inc. 3% convertible due 2005 at Baa1, on review for possible downgrade, due to concerns about weakened debt protection measures.

There is not a great deal of liquidity in the Young and Rubicam converts, but the ratings actions sent many investors wanting exposure to the sector looking to fellow ad agency Omnicom, which has also had troubles.

In addition to feeling pain from the economic downturn, several ad agencies like IPG and Omnicom have suffered investigations into their accounting practices, chiefly stemming from acquisitions.

Due to IPG's disappointing results "there is renewed focus on whether 'Street' estimates for Omnicom can be attained," said Merrill Lynch equity analyst Lauren Rich Fine.

But Omnicom gained sharply, as the stock ended up $2.17 to $51.19.

UTStarcom's overnighter was weaker initially, at about 99.5 bid, but traders said it rebounded before noon to par, where it closed.

The 0.875% issue, with a 30% initial conversion premium, ended at 100 bid, 100.125 asked. The stock closed down $1.28 to $17.02 - typical following an overnight transaction.

There was some tweaking on the valuation of the deal that took a lot of the initially perceived cheapness out of it, however, which could have accounted for some of the early weakness, traders said.

Sellside analysts had put the deal around 2.5% to 3% cheap right after it emerged late Thursday.

An analyst at one of the lead banks on the deal modeled the UTStarcom deal, at the midpoint of guidance, 2.45% cheap, using a credit spread of 728 basis points over the comparable Treasury and 50% stock volatility.

On the final terms, versus the stock opening at $16.62, that analyst tightened the spread to 575 bps, modeling it 0.5% cheap.

Otherwise, market sources said the secondary market was relatively quiet Friday.

Some positioning was noted in energy names, again as convertible players search for yield and upside potential in beaten down credits.

On a positive note, ratings action added to the upbeat spin on EchoStar as Moody's put the 4.875% convertibles due 2007 and 5.75% convertibles due 2008, both now at Caa1, on review for possible upgrade.

Moody's said the potential upgrade reflects a belief that EchoStar's credit profile may have improved enough to warrant less speculative ratings.

The rating agency also noted specifically that the previous developing outlook is no longer appropriate following regulatory blockage of the proposed merger with Hughes, adding that EchoStar's liquidity remained strong even after paying the breakup fee.

"It's only a matter of time before EchoStar is upgraded, and the stock gets stretched," Aisola said.

"At that point, I would anticipate some premium expansion trades."

Looking to next week, the calendar is empty but convertible players anticipate the activity of this past week could be mirrored as war looms.

"If the perception holds that the gauntlet will be thrown down on March 17, then we'll see another week of steady new deals," said a convertible salesman.

"With the [stock] market where it is, you can also count on most of the deals coming quickly, too."

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