Players rattled, frustrated in sloppy market ahead of Fed; power names, Interpublic stronger

By Ronda Fears

Nashville, March 14 - Dealers said the day was busy for a Friday on convertibles desks, but trading was sloppy and without leadership as stocks zigzagged through the session, ending flat, and credit spreads tightened but amid low volume.

In general, power names like El Paso Corp. and Calpine Corp. were strong along with new paper from The Interpublic Group of Cos. Inc. The latter was still benefiting from people exiting out of Omnicom Inc.'s converts, which were weaker on a downgrade by S&P on Friday.

Also mentioned was Corning Inc., moving up on positive equity comments.

"It was sort of a mad house today, kind of sloppy, though," said a convertible trader at one of the bulge bracket firms.

Buyside sources expressed weariness with the gyrations caused by the war and economic news, including renewed speculation of an interest rate cut by the Federal Reserve this spring, and a level of fatigue with regard to the possible war in Iraq.

The bottom line seemed to be that the ongoing war overhang is a sore spot that unrelentingly frustrates convertible players as they have to position and react to both the stock and credit markets.

"It's hard to do something smart ahead of that [war]. Yesterday proved that," said Michael Brailov, a convertible portfolio manager at Grace Brothers.

"We are just trying to manage our portfolio with the understanding that any day we could walk in and it could be going on.

"Once the cannons go off, so to speak, if you are short then you could be in trouble very quickly. But it's a tough call, a tough market.

"If the war is a quick and decisive, that would be good. If not, then it will be bad."

A quick resolution might be a catalyst for an uptick in convertible issuance, he said, which would be welcomed.

"We're starting to see more new issuance, refinancings. IPG just brought a good deal. Hopefully, we'll see some more favorable terms," Brailov said.

Interpublic's new issue continued to climb, adding another 1.5 points on Friday.

Credit concerns weighed on Omnicom's convertibles, which traders said had already sunk as some holders exited to buy Interpublic's new paper.

S&P's downgrade of Omnicom's convertibles to A- from A was a factor, but players were worried more by the rating agency's expressed concern about the risk posed by the put on the convertibles for the ad agency.

"If S&P thinks there may be trouble with Omnicom meeting the puts on the converts, then it sends up a red flag," said a dealer.

"What was interesting is S&P's speculation that they will refinance the converts, which is something our market has been anticipating as well. That could be a big plus for Omnicom, but still a lot of people just don't want to be left holding the bag if something goes awry."

Interpublic certainly has had its own share of credit scares, getting downgraded to junk by S&P itself last week.

But with the new convert taking out the overhang related to the December put on its 0% convertibles - proceeds from the latest offering will be used to tender for the existing issue - buyers are still aplenty.

"The downgrade opened up a whole new group of buyers for IPG from the high-yield end of the market," said the dealer.

Interpublic's new 4.5% convert closed at 111.875 bid, 112.125 asked, up 1.5 points on the day while the stock closed up 23c, or 2.7%, to $8.69.

A new issue by International Paper in the corporate bond market created "pretty heavy" flow in the convertibles, one trader said, as the terms were viewed positively. International Paper priced a $300 million note at a spread of 115 bps to Treasuries and a $700 million note at 162.5 bps to Treasuries.

International Paper's 0% convertible due 2021 (Baa2/BBB) gained 0.25 point to 53.5 bid, 53.875 asked and the 5.25% perpetual convertible trust preferred added 0.75 point to 49.375 bid, 49.5 asked. The common ended up $1.15, or 3.3%, to $35.64.

In general, convertible players were watching all the credit markets as spreads showed some tightening.

"We couldn't really take too much to heart," from the tighter spreads, however, a convertible fund trader said.

"There didn't seem to be a lot of volume in corporates. You can't make too much out of moves in a thin market."

In the junkier names, traders said there was strength in several power names like El Paso and Calpine, and Amazon.com Inc.

El Paso was finding some buyers, mostly for the mandatory, on encouragement from the recent closing of its new $1.5 billion bank facility and $500 million in asset sales.

The El Paso 0% convertible added 0.375 point to 34.375 bid, 36.375 asked and the 9% mandatory gained 1.75 points to 24.25 bid, 24.625 asked.

El Paso shares closed up 80c, or 18%, to $5.20.

Calpine's convertible bonds were "marked up sharply, due to the strength in utility paper," according to one dealer, noting he was not sure there was any volume to speak of in the Calpine paper.

Indeed, the Calpine 4% convertible due 2006 was quoted 9.375 points higher Friday by one of the big convertible desks, pegging the issue at 63.5 bid, 64.5 asked.

Calpine shares ended up 33c, or 12.7%, to $2.93.

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