Convertibles lower on more selling after long weekend

By Ronda Fears

Nashville, Tenn., Feb. 19 - Convertibles were lower again in sympathy with stocks, as sellers continued to control the market's direction for virtually every sector, traders said, but volume was still described as light to moderate. AES Corp. was dealt another blow after it announced plans to sell assets, which critics said would also constrain growth. Ciena Corp. got a slight lift on its friendly merger with ONI Systems Inc., but telecom and telecom equipment issues were sharply lower. Even amid the turmoil, Ameren Corp. marched out a new deal for next week's slate.

"The market is pretty sloppy right now. We were off quite a bit today. I didn't see any buying, although there have been people giving some indication that they are looking around for something, somewhere to put their money to work," said the head convertible trader at a major investment bank in New York.

A convertible trader at a hedge fund in Connecticut said the 3% drop in the Nasdaq could be a signal that the bottom is at hand, but few people are willing to step out in faith that an uptick is near.

"We're buyers right now, but it has to be a very compelling story," the trader said. "We may have reached the point of capitulation, but we're not ready to make that bet. Unless there is a clear sign in the markets, it probably won't get any better, and probably it will be a slower process than what we've seen."

As the Dow Jones Industrial Average dropped 1.6% and the Nasdaq fell 3% on Tuesday, traders said selling was the order of the day. Many also noted that mandatory convertibles have been taking a beating from the stock market rout.

Nonetheless, St. Louis-based regional utility Ameren trotted out $300 million of 3.25-year mandatory convertibles with guidance of 9.25% to 9.75% yield and a 18% and 22% initial conversion premium. Analysts said the midpoint of the price talk puts the deal about 8% cheap to fair value, assuming a credit spread of 185 basis points over Treasuries and 18% volatility in the stock.

"This is a tough sector right now, but it's a pretty good story, so it probably will do okay," said a trader at a convertible fund in New York, referring to the Ameren deal. "It's probably not one that will get a lot of hedge fund participation, but it's difficult to say. No one's really looking at it hard at this point, with it a week away."

Independent power producer AES was hit hard again, even after the company announced the plan it expects will keep it from having to access the capital markets in 2002, including asset sales projected to fetch $1 billion to $1.5 billion and cutting its budget for the year by $490 million. AES also said it will reduce its exposure to Latin America in 2002. Credit analysts had downgraded the company or put it on negative watch because of its exposure to Venezuela.

"We are taking aggressive action to restructure and deleverage AES. Given today's market climate we are going to rely on the cash flows of our solid operating businesses," said Dennis W. Bakke, chief executive of AES, in a company statement.

The AES 4.5% convertible notes due 2005 (Ba2/B+) fell another 6 points on the day to 43 bid while the stock lost $2.25 to $4.75.

Fellow IPP convertible issuer, Calpine Corp., also declined. Calpine's new 4% convertible due 2006 lost 1 point to 76 bid, 76.5 offered with the stock off 4c to $7.60.

Nvidia Corp. also continued trailing south.

"The market right now is brutal, entirely unforgiving and is not taking back anything, even if it was a knee-jerk reaction it's going to stick until something drastic happens," said a convertible trader at a hedge fund in New York.

The healthcare sector, drugs and biotechs were lower on whole, and even dragged King Pharmaceuticals down as well, although the company reported earnings that beat expectations and reaffirmed its guidance for 2002. The company said it remains comfortable with its previous guidance for 2002 projected earnings of $1.24 to $1.32 per share on revenues between $1.1 billion and $1.2 billion. But the King Pharma 2.75% convertible due 2021 (Ba1/BB) dropped 3.25 points on the day to 91.875 bid, 92.625 offered as the stock sank $2.20 to $30.35.

Techs and telecom also remain the focus of a lot of selling, traders said. But Ciena Corp. went against the grain after it and ONI Systems announced a friendly union whereby Ciena will buy ONI in a $900 million stock deal. The Ciena 3.75% convertible due 2008 (Ba3/B+) added 1 point to 63.75 bid although most other fiber optic names were lower. Corning's 3.5% convertible due 2008 (Baa1/BBB) lost 2 points to 95 bid, 95.25 offered and the Extreme Networks 3.5% convertible due 2006 fell 4.75 points to 76.25 bid, 77 offered.

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