Convertibles retreat amid selling as stocks backslide

By Ronda Fears

Nashville, Tenn., Feb. 21 - Convertibles retreated as stocks failed to hang on to a positive trend. Traders said selling was pretty heavy on reports that Lipper Funds was forced to write down some $315 million due to convertible losses, which compounded selling in tech and telecom. Amgen took no regard of the market's downturn, however, and was busy late in the day pitching $2.5 billion of zero-coupon paper, which traders said was offered at issue price in the gray market.

"A blip hit the tape that the Lipper Fund was forced to write down $315 million in convertible losses, one of the biggest in recent years," said the head trader at a hedge fund in New Jersey.

"This makes everyone very uncomfortable. It doesn't sound like much, but we are hearing that that overmarked their books and are just dumping everything, at any price." Other market sources said rumors had been circulating for a couple of days that Lipper had overstated results by as much as 40%.

Lipper Co. did not return phone calls.

Moreover, dealers said the Lipper talk weighed heavily on the deteriorating trend in stocks as the Dow Jones Industrial Average failed to hold up against the Nasdaq's slide. The Dow began higher but slipped as the day went and there was a late afternoon selling spree in stocks caused the Dow to close 1% lower. The 3.3% fall in the Nasdaq was the huge disappointment, however, which traders partly attributed to vague talk of hedge fund losses and to profit taking.

"It really was sort of quiet in terms of actual trading, but as the day wore on we saw some selling really get under way," said a convertible trader at a major investment bank in New York. "The rally we saw yesterday was very suspect, and so what we say late today was some profit taking. The Lipper rumor was not really given a great deal of weight until it hit the wires, and then that spread into talk of some hedge fund losses and it gained a bit of steam. Everyone is really nervous right now, and hopefully it will settle down soon."

Traders said new deals will improve the market's mood, if the calendar flow ever really steps up. The Amgen deal created some excitement - although it was not as cheap as many would have liked to have seen - because it is an investment-grade name and the structure was familiar.

Amgen was pitching $2.5 billion proceeds of 30-year zero-coupon convertible senior notes with price talk of 1.0% to 1.25% yield-to-maturity and a 40% to 45% initial conversion premium. Merrill Lynch & Co. is sole lead manager of the overnight Rule 144A deal. The issue will be non-callable for five years with puts in years three, five, 10 and 15. There is a $300 million greenshoe.

Analysts said the deal was about 3% cheap to fair value at the midpoint of guidance, using a credit spread of 120 basis points and 33% volatility in the stock. Convertible traders said the issue was offered at issue price in the gray market. A swap trader said there was activity in Amgen credit default swaps with bids tracking lower, putting the three-year at 115 basis points and five-year at 95 basis points.

In the secondary, tech and telecoms saw some steep declines for most of the day, but began easing late. Qwest, WorldCom and Nextel took the hardest blows. Ciena also was hit hard on a warning from the company.

Nextel said in a conference call that it expects to reduce capital expenditures by $1 billion in 2004 and be free cash flow positive by then, or earlier. Traders said concern about Nextel heightened on the fact that the company reported only domestic financial results for 2001 because the amount of the charge related to its NII holdings subsidiary has not been finalized. Nextel's converts were mixed, with the 4.75% due 2007 and the 6% due 2011 slightly higher and the 5.25% due 2010 losing a bit of ground. Nextel shares closed up 12c to $4.50.

Ciena, however, fell sharply after guiding its revenues lower, saying two of its biggest customers may purchase significantly less than previously thought. The company said it sees second quarter revenue more in the $100 million area, versus the analysts' consensus of $148.5 million. Merger hopeful ONI Systems knew about the situation going into merger, Ciena said, and there is no snag anticipated for the planned union, including the ONI exchange ratio "There continues to be a high level of uncertainty surrounding service providers' near-term spending. In our ongoing conversations with our customers we continue to receive indications of further deployment delays. We recently received information that leads us to believe that two of our historically most important customers may purchase significantly less from us than they had previously indicated," Ciena said. The Ciena 3.75% convertible note due 2008 dropped 2.25 points to 61.5 bid, 62.5 offered with the stock down $1.10 to $7.60.

Similar action was seen in cable stocks and semiconductor names, traders said.

J.C. Penney suffered from more allegations in a court filing that its Eckerd drugstore chain has been altering billing records in the wake of a Feb. 1 lawsuit that accused it of overcharging customers on prescriptions. "Anything of this nature, obviously will provoke some sort of severe punishment these days," said a trader. The J.C. Penney 5% convertible due 2008 fell 7.875 points to 94.5 bid, 95 offered while the common stock dropped $2.80 to $20.79.

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