Skepticism remains widespread even as stocks rise; Orbital Sciences prices; Emulex drops

By Paul A. Harris and Peter Heap

New York, Aug. 9 - The convertibles market was left generally unexcited by another mostly positive day in stocks - the fourth consecutive gain in the Dow Jones Industrial Average and the S&P 500 index - and indeed many of the price moves were downwards as technology names had a difficult session with Emulex Corp. being the day's disaster.

Activity was described as light in convertibles and many players remain skeptical that conditions are improving.

However the day did see one new deal price, albeit a transaction rather different from the general run of convertibles. Orbital Sciences Corp. sold $135 million of units in a junk-bond structure that was marketed to convertibles players.

Aside from watching the latest developments in the various unfolding corporate scandals, most convertibles players were looking at activity in the stock market.

The Dow industrials recovered from triple-digit losses early in the session to end up 33.43 at 8745.45 while the S&P 500 closed 3.18 higher at 908.64. But the Nasdaq composite shed 10.40 to finish at 1306.12.

But even after equities managed to end mostly better after three days of triple-digit gains many remain unconvinced the tone has fundamentally changed.

"I think a lot of what's going on is just program buying," said one hedge fund manager. "I don't think it's real."

Asked whether he was ready to put money back to work, he said: "No way, no, no, no."

Focusing on activity - or the lack thereof - the convertibles market, he added: "Unless it's stock-specific related, it's been very quiet."

After Best Buy Co., Inc. took the headlines Thursday with its warning of lower earnings ahead, Friday's trouble-spot was Emulex.

The storage network company lowered its sales forecast for the first fiscal quarter of 2003, ending in September, and for fiscal 2003 as a whole.

Its 1.75% convertible notes due 2007 lost 10 points on the day to end at 69 1/8 bid, 70 1/8 offered. The securities, a $345 million issue, were priced on Jan. 23 at par. Meanwhile the underlying stock fell $8.34 to end at $15.27.

Best Buy rebounded somewhat in Friday's trading. The retailer's 0.68% convertible due 2021 finished at 64¼ bid, 65¼ offered, up from a closing bid of 63 Thursday after it had slipped three points on the session. Its stock also rose, adding $1.71 to $21.26.

During the session Eaton Vance Corp. announced an additional put - in just three months' time - on its 0% LYONs due 2031 and a one-time cash payment to holders who do not exercise the upcoming put on Aug. 13.

Its convertibles were unchanged on the day, ending at 64 7/8 bid, 65 offered. The stock added a nickel to $26.61.

In primary activity, Orbital Sciences managed to price its offering - easing its liquidity situation.

The company had previously tried to sell a straightforward $100 million convertible to refinance its maturity $100 million convertibles ahead of their maturity on Oct. 1.

But that deal failed to take off and instead the Dulles, Va. space systems company unveiled a $135 million offering of units made up of senior secured second priority notes and warrants to buy stock. Although a fairly standard structure in the high-yield market, the convertibles desk of bookrunner Jefferies & Co. continued to handle the transaction.

The offering priced to yield 12% with the warrants at a 10% premium to the Thursday's closing stock price. If exercised, the warrants will give bondholders 36% of the company's equity.

By comparison, the original convertible had been talked at a 7.5-8.0% yield with a 15-20% initial conversion premium.

Barry Beneski, of Orbital's public and investor relations department, told Prospect News that the company is quite pleased to get beyond the capital crunch it faced.

"We feel very good about addressing what was obviously a short-term source of anxiety and perceived risk on the part of our investors," Beneski said. "Investors wanted to know what Orbital's plans were to address (the maturity of the 5% converts due Oct. 1). And now we've answered that.

"What's more," Beneski added, "we feel that we addressed this issue in a very difficult market. We feel we were able to get the deal done that was available to us, that was the least dilutive of the options we were looking at.

"We're now moving forward and looking at the longer term, bigger picture issues of running the company and remaining profitable."

Declining to talk about the earlier convertibles offering, Beneski said: "I don't want to look back. Today's news is very much forward-looking, and now we are going to refocus on our core businesses."

Thursday the company announced in a press release that its Technical Services Division, based in Greenbelt, Md., has been awarded a two-year $22 million cost reimbursable contract from Lockheed Martin Corporation for engineering support services for NASA's upcoming Hubble Space Telescope servicing mission.

When asked to comment Beneski said: "What's even bigger than the contracts is what they reflect. We've been in a two-year 'Back to basics' campaign, refocusing the company back on our core space technology businesses, primarily satellites and rockets.

"We've gone through some asset divestitures of some non-core businesses. We've reduced debt. We've put a new bank line in place. That was all done within the context of winning some very strong new-order business within those core businesses. Thursday's announcement continues that trend."

Although the company denied that old convertibles were swapped for the new bonds, several convertible market sources said that the new securities would mostly appeal to people who own Orbital Sciences' old paper and liked the story.

"This new issue looks even better" than the old paper, one convertibles player commented, adding: "It looks like this can be a real viable profitable company over the next couple of years but people were hesitant to give them the money."

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