Market quietly closes ahead of holiday-shortened weeks

By Ronda Fears

Nashville, Dec. 20 - For all intents and purposes, it was the final week of the year in convertibles and rather uneventful.

"For the next couple of weeks everybody will have about one-third of their staff on the desk," said Stuart Novick, convertible analyst at Salomon Smith Barney.

Traders said there was not much activity on Friday, in typical fashion, and very little is expected for the remainder of 2002.

"It was Friday, the holidays start next week, the markets seemed slightly positive or at least a bit more stable," said a dealer. "A lot of people just left early."

Holiday parties was a topic at several shops, buyside and sellside alike.

"It's all over, 2002. I thought it was over a week ago," said a convertible trader at a hedge fund in New York.

"Very little happened today and there will be even less the last two weeks of the year."

As has been the case for the past four to six weeks, there is still a bit of portfolio tweaking taking place, but no major positions getting staked out.

Morgan Stanley convertible analysts recommended several portfolio changes Friday and a few of those issues saw some activity.

Added to the Morgan Stanley recommended portfolio were, among others, Hartford Financial Services' 6% mandatory, Mercury Interactive's 4.75% convertible due 2007, Quest Diagnostics' 1.75% convertible due 2021 and Tribune's 0% convertible due 2017.

Deleted from the Morgan Stanley recommended portfolio were, among others, Barnes & Noble's 5.25% convertible due 2009, Gap's 5.75% convertible due 2009, Genzyme's 3% convertible due 2021 and Jones Apparel's 0% convertible due 2021.

Hartford's mandatory gained 1.32 points to 50.32 on the NYSE, while the underlying stock closed up 85c to $46.50.

Quest Diagnostics Inc. announced Friday that it has extended its exchange offer for Unilab Corp. common stock by 10 business days to Jan. 6 because the two are continuing discussions, which include settlement with the Federal Trade Commission regarding the merger.

Quest and Unilab are also in discussions with a third party regarding the sale of assets in Northern California to address the FTC's concerns. Quest said it hopes to complete the merger by Jan. 31.

As of midnight Thursday, the company said more than 29 million shares of Unilab stock, or 88% of outstanding shares, had been tendered.

But there was no change in the Quest converts, which were quoted at 104.5 bid, 105.25 asked.

Quest shares closed down 55c to $57.30.

Electronics contract manufacturer Solectron Corp. reported after Thursday's close a wider quarterly net loss, while better than the analyst consensus, but said revenues stabilized despite continuing weak demand.

Still, Wachovia Securities convertible analysts Henry Voskoboynik and Dmitry Melnick noted the credit profile is slowly improving.

Seasonality in PC and storage drives accounted for the earnings surprise, the analysts said, but also noted that Solectron's gross margin expanded 40 basis points sequentially to 7.5%, a notable improvement.

"Balance-sheet metrics continued to improve," the analysts said in a research note Friday.

"The company believes it can achieve annualized cash flow from operations of $850 million in the next nine months, and we believe that goal is attainable."

Solectron guided for revenue of $2.8 billion to $3.0 billion next quarter, versus the current consensus estimate of $3.0 billion. The company forecast operating EPS of breakeven to a loss of 2c, compared with the current consensus estimate of breakeven.

At the end of November, the analysts noted, Solectron had cash and equivalents of $2.0 billion, long-term debt of $3.5 billion ($2.74 billion of it the convertibles) and off-balance-sheet liabilities of $547 million.

The company repurchased $219 million of its 0% converts due November 2020 and $87 million of short-term bank debt.

Standard & Poor's noted Solectron's debt reduction, while maintaining a strong cash position but said the credit measures are very weak for the BB senior rating with total debt to EBITDA for the 12 months ended Nov. 29 of more than 6x.

This is only partially offset by expected long-term debt reduction of as much as 20% by mid 2003, S&P said.

Solectron's 0% convertible due May 2020 is putable at 62.86 in May 2003. At 61.27, the Wachovia analysts noted a yield-to-put of 6.81%, premium of 1,370% and implied credit spread of 568 basis points.

Solectron's 0% convertible due November 2002 is putable at 58.75 in May 2004. At 49.55, the analysts noted a yield to put of 12.4%, premium of 1,144% and implied spread of 1,081 basis points.

At 11.19, the analysts noted the mandatory has a premium of 30% and implied spread of 1,808 bps.

Solectron's mandatory closed Friday off 0.03 point to 10.87 on the NYSE while the stock ended down 12c to $3.16.

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