Buyers reach down credit ladder, cause spreads to contract; Spacehab zooms on space plans

By Ronda Fears

Nashville, Jan. 9 - Convertible traders said it was still busy Friday but activity cooled off from the frantic pace at midweek. The overall assessment of the first full week of 2004 was good, though, with buyers contributing to the tightening in credit spreads.

In all, the buying contributed to tightening of spreads by as much as 200 basis points or more in some cases as investors reached further down the credit scale.

"This was the first day we've seen any downdraft of any magnitude and the Dow was off just barely over 1%," said a market source at a sellside shop.

"Coming off 2003 [when stocks zoomed as much as 50%], every day I come in and ask myself if this is going to be the day we go into a rational exuberance but, then, you can't fight the tape."

With so much new money, plus money made in profits last year, floating around in the convertible market, and without much new supply so far, traders said there still were "bids...bids, bids, bids."

The week's two new deals, which together total $660 million after both were upsized, would barely dent the estimated $20 billion of new supply that it would take to begin to affect secondary price levels. Thus, both were met with raging demand, and both have done nothing but gain ground.

Ret Hat Inc.'s new 0.5% convertible, up 37%, shot up another 3.5 points to 108.625 bid, 109.125 offered while the underlying shares gained $1.30, or 6.81%, to $20.39. Coeur d'Alene Mines Corp.'s new 1.25%, up 24%, tacked on 1.5 points more to hit 108.375 bid, 109.125 offered as the stock ended up 13 cents, or 2.08%, to $6.37.

While the raging stock market is driving many convertible players to search for delta, at the same time there is a big chunk of membership looking for yield and that has been requiring a longer reach down the credit spectrum.

It's still a credit story, stupid

Thus, some of the worst credit stories have been biggest turnaround headline-makers, at least insofar as market levels go.

"The stock market has made a fantastic run, no doubt, but it's like this: 'It's still a credit story, stupid,' if you care anything about yield," said a convertible trader at a sellside shop that traffics a lot of high-yield and distressed paper.

"But it seems like no one cares if it's making sense. They just need to be fully invested so they are buying whatever they can get their hands on. Our volumes are phenomenal. It's crazy, these spreads, but we're loving the business."

Morgan Stanley equity analysts cut their view on Lucent Technologies Inc. to equal weight from overweight, based on valuation, citing the stock's 50% run since last fall. The stock took a hit and dragged the converts lower as well.

The Morgan Stanley analysts said that despite recent contract wins and the possibility of Lucent getting a large piece of new business from Verizon Communication Corp.'s stepped-up spending budget, the firm believes near-term expectations have gotten too far ahead of the fundamentals.

Lucent's 2.75% convertible due 2023 dropped about 3.75 points to 139.75, and the 2.75% convertible due 2025 lost about 4 points to 146.25, a trader said. The stock ended down 18 cents, or 4.64%, to $3.70.

Nortel Networks Corp. saw a bit of a lull in its recent run - 40% since 2004 began - due to the comments on Lucent, traders said, but it was still the darling among the credit stories for the week.

"It's just nuts. [For] Nortel, this week alone, the credit tightened by something like 200 basis points," one trader said.

Nortel's 4.25% convertible due 2008 slowed its climb Friday, edging up about 0.125 point to 102.5 bid, 103 offered while the underlying stock closed up 2 cents, or 0.33%, to $6.15.

In assessing the first full week of 2004, Jeffrey Rosenberg, head of the credit strategy team at Banc of America Securities, observed that spreads continued to tighten and the lower credit tier - single-B-minus and lower - were the top performers.

The Bank of America high-yield large cap index, its proxy for the more liquid portion of the market, gained 1.63% in the first full week of the New Year. The broad market index rose 1.33%. The lower credit tier topped both with a 2% advance.

High-grade credits also were tightening, he said, but that abated toward the end of the week.

Toys credit junked, so what

As perhaps a live illustration of the market's disregard to credit events, or at least putting little emphasis in that area, Toys "R" Us Inc. rose both Thursday and Friday in the face of getting cut to junk by Standard & Poor's on Thursday and put on downgrade review by Moody's on Friday.

Both ratings agencies cited soft performance, heightened by a disappointing 2003 holiday and continued deterioration of its competitive position as discounters continue to gain share.

Toys "R" Us reported Thursday that comparable sales for the nine weeks ended Jan. 3 were off 4.9%, and comps year to date are off 3.4%. Management also guided earnings expectations down for the fiscal year, which ends later in January, to 90 cents to 95 cents from $1.05 to $1.15.

Toys "R" Us operations are being affected by intense competition from Wal-Mart and Target as those discounters often use low prices on toys to generate traffic, offsetting the loss in gross margin in other categories.

"You could view the recent woes of FAO Schwarz and KB Toys either as an opportunity for Toys "R" Us (as management seems to believe) or as a portent regarding the folly of its strategy to cut prices in order to preserve market share," said Gimme Credit director of research Carol Levenson in a report. She noted she expects more downside.

CreditSights analyst Suzanne Chamberlain said that from a credit perspective Toys "R" Us has solid liquidity that offset its inability to deliver on its "Mission Possible" promises. But while she remains comfortable with the liquidity situation, an additional element of risk has been added with the comprehensive review of the business that is underway.

Toys "R" Us stock closed Friday up 22 cents, or 1.83%, to $12.22 after gaining 2 cents on Thursday. The 6.25% mandatory convertible due 2005 on Friday added 0.25 point to 39; it had slipped slightly on Thursday.

Spacehab skyrockets

Then, there were convertible players tromping off the beaten path - into outer space, practically.

Shares of space-related firms skyrocketed Friday on President Bush's plan to seek funding for the National Aeronautics and Space Administration to establish a permanent U.S. station on the moon and to put a man on Mars.

Shares of space module maker Spacehab Inc. zoomed almost 88% and, unknown to many convertible players, the company also has a convert in play. It's just a $63 million issue, a market source said, but it shot up some 10 points or more to the 90s on Friday, due to the news and the spike in the stock.

Spacehab has an 8% convertible subordinated note due 2007 in the market; it was pegged in the upper 90s, up from the mid-80s last week. The stock closed Friday up $1.48, or 87.98%, to $3.158.

President Bush is making a proposal on or around Jan. 14 to expand the U.S. space program. Interest in space-related stocks has been heavy for a couple of days, one trader said, since NASA's rocket explorer Spirit successfully landed on Mars.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.