Convertibles snap back somewhat but witch-hunt continues

By Ronda Fears

Nashville, Tenn., Jan. 30 - Convertibles snapped back a bit Wednesday along with the broader market, but there was still a very intense beating taking place as the search continues for companies that may have accounting irregularities. Tyco recovered somewhat, but Williams and its communications spin-off, Anadarko Petroleum and Elan were the latest blow-ups in the convertible universe. Still, the primary market marched on with a new deal pricing after the close from Gabelli and a new structure introduced that is attached to Agere Systems.

Tyco shares rebounded by $1.20, ending at $34.85. The Tyco 0% due 2020 added back 0.625 point to 67.875 bid and the 0% due 2021 rose 0.25 to 70 bid.

"It was panic selling yesterday," said a market source at one of the major investment banks. "Today, it was panic buying."

While traders said the market was higher, and there was strong buying on the heels of the massive losses the day before, there still were several disasters, despite numerous analyst reports and commentary to the effect that the sell-off was a gross over-reaction. Tyco saw some of the heaviest buying, although it opened lower, after the company's chief executive and financial officer said they were buying one million shares due to the price decline.

Williams came under more intense fire and the selling continued, however. Anadarko Petroleum was added to the group as the company it will revise financial reports to correct an accounting error that will result in a $1.5 billion charge, and Elan was hit on a report questioning its accounting practices.

Williams' new 9% mandatory convertible dropped another 0.32 point to 21 bid, 21.2 offered as the stock lost 78c to $18. Williams Communications' 6.75% convertible preferred fell 1.25 to 9 with that stock off 2c, or 18%, to $1.32. Anadarko's 0% convert due 2020 lost 1 point to 63 bid, 63.5 offered with the stock down 51c to $46.89. Elan's 0% convert due 2018 plunged 3.375 points to 58.375 bid, 58.625 offered as the stock plummeted $5.95 to $29.25.

But stocks for the most part were higher, as the indexes regained a little less than half of the losses seen Tuesday. The Dow Jones Industrial Average was up 144.62, or 1.50%, to 9762.86 and the Nasdaq added back 20.45, or 1.08%, to 1913.44.

"Bargain hunters came out if force today, but it was a very selective process going on. There had to be some pretty good support lended to any particular story finding buyers, like the S&P statement about Tyco. So, there wasn't any widespread buying going on," said a convertible trader at a hedge fund in Connecticut. (Standard & Poor's said during the session that Tyco had answered questions about its accounting to its "satisfaction.")

Dealers said many traditional convertible players were satisfied with just looking at new paper, which remarkably continues to trickle in. Arbs were still busy with stocks and credit swaps, but also were lining up for the new paper.

FPL Group Inc. sold $500 million of three-year mandatory convertibles at par of 50 to yield 8.5% and with an 18% initial conversion premium - at the middle of yield guidance for 8.0% to 8.5% and at the cheap end of premium guidance of 18% to 22%. The issue was higher in the immediate aftermarket as the stock rose 29c to $52.85. GATX's 7.5% notes were flat at 107 bid but the offer edged up by 0.25 to 107.5 with the common shares off 10c to $28.80. OSI Pharmaceuticals' 4% notes slipped 0.875 point to 100 bid, 101.5 offered with the stock down 22c to $39.35.

At bat after the close was Gabelli. Gabelli launched the new deal, which had been talked about for several months, late Wednesday. The money manager is selling $110 million of mandatory convertibles in the Feline Prides structure with guidance of 6.5% to 7.0% yield and an 18% to 22% initial conversion premium. Gabelli shares lost $2.80 on Wednesday to $39.

Agere Systems on Wednesday said it plans to sell $200 million of convertibles in the shared appreciation redeemable convertible securities, or SHARCS, structure via JPMorgan and Salomon Smith Barney. The SHARCS consist of 400,000 investment units consisting of senior subordinated notes due 2007 and associated put rights. Timing of the deal was uncertain. The deal will be sold through SHARCS Trust I, a newly created trust. Agere intends to use the proceeds of the offering to repay short-term debt under its credit facility and for general corporate purposes.

Although it was not clearly explained, it appears the issue is a means whereby Agere can receive proceeds from a convertible type security without having the dilution factor of traditional convertibles. The trust will issue the SHARCS and purchase shares of Agere common stock in private transactions or in the open market. So, Agere will not have to issue any additional stock as a result of the issue.

Agere stock closed down 12c to $5.05.

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