Nortel heads $1.6 billion of mandatories; Tyco, El Paso, Williams lead plunge amid distrust

By Ronda Fears

Nashville, Tenn., June 3 - The convertibles market plummeted on heightened distrust and disgust as news at troubled high-profile Tyco, El Paso and Williams rattled investors. Meanwhile, new deal activity heated up with four mandatories totaling $1.6 million slated for this week, including a $750 million deal from Nortel.

"With everything that was happening today that wasn't good, it was nice to have some new deals to at least shift your attention to," said a hedge fund manager in New York.

"These new deals are not as cheap as we've been seeing, though, and they are in some troubled areas - power, telecom, financials."

Nortel hinted late last week that it was contemplating a convertible and equity deal, but the name is circulated in the market every month or so as a potential new-issue name since it needs a liquidity injection.

"I didn't really take Nortel serious. But, hey, if Lucent can do a deal and Agere's doing a deal, why not Nortel," said the manager.

"From the conference call, I got that they [Nortel] need something like $2 billion. I'm not sold on it yet. If there is something good to say about it, though, maybe it's that they don't have the problems that Adelphia, El Paso or Tyco have, or at least we don't know about it."

Nortel is pitching $750 million of mandatory convertibles with 7.0% to 7.5% yield and an 18% to 22% initial conversion premium.

"There will be plenty of buyers show up for this," said a convertible trader at a hedge fund in New Jersey.

"I think it could probably be set up right. It's a long shot, but I think it's worth it."

Nortel's 4.25% convertible due 2008 (Ba3/BB-), a $1.8 billion issue that sold at par in August with a 32% premium, was quoted down 0.625 point to 54.25 bid, 54.5 offered. Nortel shares closed off 13c to $2.08.

One trader noted that the Nortel convert's premium has expanded to 150% and the yield-to-maturity is at about 16%, and has attracted a lot of high-yield investors.

"You could see some high-yield funds and some retail-type investors get involved with this, conceivably," the trader said.

Also this week, the market is looking at mandatory convertibles from FPL Group, American Electric Power and Provident Financial.

But troubling news cast a pall over the market as a whole. Convertibles tracked stocks lower as the Nasdaq fell 3.29% and the Dow Jones Industrial Average lost 2.17%.

News at Tyco, El Paso and Williams overshadowed trouble at Adelphia, whose stock was delisted Monday, and with the new deals launched, made for a hectic start to a busy week.

"You hardly heard Adelphia mentioned today. That song's played out now," said a convertible trader at a major investment bank in New York.

"It was wild, very hectic."

A convertible trader at a hedge fund in Chicago said investors are "disgusted with these corporate yahoos taking our money and pissing it away."

"You have to wonder where it's going to end," the trader said.

"I mean, I'm all for personal responsibility. But it's getting to the point that you can't trust anything anybody tells you."

Tyco was the latest bombshell, taking the market off-guard with the sudden resignation of Dennis Kozlowski, the chief executive of the embattled conglomerate, amid news he is under investigation for personal tax evasion.

"It's another straw. This is a guilty until proven innocent market," said Jeff Siedel, head of U.S. convertible research at Credit Suisse First Boston.

"This is really a personal thing but I think the market equates that to a lack of trust in management. It boils down to execution on CIT. If that's done, no matter what else, they have boosted liquidity."

Tyco's 0% convertibles, which have been steady for quite some time as the market awaits the CIT initial public offering, fell dramatically on Monday's news. The 2020 issue lost 2 points to 63.25 bid, 64 offered and the 2021 issue dropped 1.75 points to 69.25 bid, 70 offered.

Tyco shares plunged $5.90 to $16.05.

The battered energy group, with Enron at the genesis of its troubles, reeled again Monday with the apparent suicide of El Paso's treasurer - reminiscent of the suicide of Enron vice chairman J. Clifford Baxter after the company collapsed in an accounting scandal.

El Paso's treasurer, Charles Dana Rice, however, reportedly suffered from severe health problems, and that attributed to his state rather than the company's problems.

"The market hears these things and just freaks," said CSFB's Siedel.

"If you were set up on El Paso, you are making money. The hedge probably had to be adjusted, but the bonds are holding up very well."

El Paso's 0% convertible due 2021 was quoted off about 0.5 point to 40.5 bid, 40.625 offered. The 4.75% convertible preferreds, however, dropped 4.3 points to 35.5. El Paso shares plunged $3.70 to $21.95.

Williams Cos. fell sharply, as the pipeline and energy trading company's troubles deepened with a report that it tried to corner the natural gas market in California. A New York Times article over the weekend cited a former Williams employee saying the company distorted internal pricing metrics and had planned to corner the California natural gas market.

William Hobbs, president of Williams' energy marketing and trading operations, said in a conference call the allegations were "ridiculous," noting that Williams ranked 13th in trading volumes for the first quarter, which infers the company is not concerned about rankings.

Nonetheless, Williams was hit due to the "general air of mistrust," one dealer said.

The Williams 9% mandatory dropped 2.5 points to 15.5 as the stock plummeted $3.25 to $10.95.

The new TXU 8.125% mandatory closed off 0.09 point to 49.93 with the shares down 17c to $51.16.

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