Buyers emerge with new paper, improved tone in broader market

By Ronda Fears

Nashville, Tenn., Sept. 6 - Buyers emerged in the convertible market Friday as stocks improved and a new deal priced, which gained nicely out of the gate. Players anticipate an uptick in issuance soon, with buzz still circulating about a new deal on Monday.

"On margin, there was more buying today than in the past few days. There was a fair amount of flow in some names," said Venu Krishna, head of convertible research at Lehman Brothers.

"Liquidity has been an issue in the convertible market in recent weeks. It was difficult to execute orders. It's still a little bit of an issue, but it was more of a function of credits blowing up. In the last two or three weeks, though, there's been a massive rally in the credit markets."

Bonds retreated, or at least stalled, Friday with yields and prices ending rather flat, traders said, but that was pretty much ignored by convertible players.

"The credit markets stalling had more of a positive effect on converts, because it meant money was getting pulled from Treasuries and put back into stocks. So, buying in stocks drove prices higher, and that trickles down to the convert eventually," a dealer said.

Convertible players in general are a bit skittish about reacting to movements in stocks or bonds, as the gyrations have become so erratic due to the bombardment of conflicting signs about economic and corporate profit recovery.

"There is clearly no direction in the market," due to the seesaw nature of the broader markets, Krishna said.

"Overall it's fair to say that uncertainty has outstripped any positive catalyst."

Unusual phenomena in converts also have kept players off-center.

For instance, the positive factors of the bounce back in volatility was erased by the blow-up in credits.

"A lot of arb funds had gotten used to cheap volatility and cheap credits. Now it's a mixed game," Krishna said.

"Systemic risk has been reduced in the convertible market. The arbs now have very low leverage and they are sitting on a lot of cash."

Some positive trends are emerging, however, that provide some encouragement.

Froley Revy reported Friday that its convertible bond index gained 1.2% in August with an 0.84% boost in prices. Year-to-date through Aug. 30, the index is down 9.53% with prices 12% lower.

All the uncertainty, coupled with constrained liquidity in the secondary market, makes new issues imperative.

Public Service Enterprise Group's new deal priced at the middle of guidance and gained sharply out of the gate after being quoted with a bid of issue price, 50, before the market open.

PSEG's new 10.25% mandatory was quoted closing up 1.375 points to 51.375 bid, 51.6875 asked. The shares closed up 71c to $34.25.

Other utility and power names were mixed.

PPL Corp. and Mirant Corp. were both mixed on news that PPL plans to acquire the remaining 49% stake in U.K.-based Western Power Distribution from Mirant for $235 million in cash. PPL will fund the acquisition by increasing a stock offering already announced to $500 million from $200 million, scrapping consideration of a possible convertible issue in the process.

S&P revised PPL's outlook to negative, citing a weakened credit profile from declining wholesale electricity prices and setbacks in international operations rather than any direct impact from the acquisition.

Moody's confirmed PPL's ratings on the news.

PPL's 7.75% mandatory gained 0.13 point to 68, but the shares ended off 42c to $33.49.

Mirant's 6.25% convertible preferred ended off 0.16 to 21.75 and the 5.75% due 2007 lost 2 points to 63.875 bid, 64.875 asked. Mirant stock closed down 18c to $3.25.

Calpine Corp. was lower, along with Duke Energy and NRG Energy.

But AES Corp. was higher, as were Ameren and Teco Energy.

"There is a lot of interest in these [power] mandatories," said a dealer. "The yields are very attractive, but you have to be set up just right to make them work. And you have to be very risk-tolerant, because there's little to no downside protection."

In the health sector, which also has been hit with concerns about creditworthiness recently in the wake of trouble of HealthSouth Corp., traders noted some buying interest.

"A lot of the healthcare names suffered from guilt by association, which is typical when a bad headline scrolls across the screen," said a trader at a convertible fund in Boston.

"We are buyers in that space right now. We're conscious of the balance sheet but there are some really good names in that group, solid credits, strong cash positions."

HealthSouth's converts have held up very well against the drastic wounding the stock has taken recently, mainly because they mature in about six months. The 3.25% due April 2003 were quoted unchanged at 92.5 bid, 93.5 asked as HealthSouth shares ended off 8c to $5.30.

Also of important note in the health group is a development in the $2 billion put coming up on Medtronic Inc.'s 1.75% due 2021.

The issue dropped as it became more likely that the company will pay the par put in cash rather than offer a sweetener to keep it outstanding.

Medtronic reported Friday that it made a private placement of $500 million of floating rate notes due June 6, 2003 and has procured a short-term $500 million credit facility with a group of banks - with proceeds, together with available cash, to pay the put.

Standard & Poor's affirmed Medtronic Inc.'s ratings, including the convertible at AA-, and the stable outlook on the news, noting robust cash flow, strong operating margins and a conservative capital structure.

Deutsche Bank Securities Inc. analysts said in mid-July that if Medtronic shares were not over $42.50 the issue would likely be put back to the company. And the analysts noted that the contingent reset interest feature on it would cause the bond to be worth even more than par on the Sept 17 put date if the stock was below $30.91.

Thus, a trader said, the Medtronic convert on Friday slipped 0.25 point to 100.625 bid, 101.125 asked while Medtronic shares closed up 64c to $39.79.

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