AOL spreads hold up, but headlines quash exuberance in very thin market

By Ronda Fears

Nashville, Tenn., Aug. 23 - Sentiment turned negative with headlines about AOL Time Warner Inc. possibly writing down assets and broadening federal probes, but the convertible market was described as relatively unchanged amid very thin trading.

"It was dead quiet," said a convertible salesman at one of the major investment banks. "People were monitoring positions."

There was not much activity in AOL, either, in spite of the news.

"Despite the news, AOL bonds were down about a point and default protection widened about 20 basis points on a better bid," said a derivatives trader at Commerzbank Securities.

"But there was not much in the way of trading on the headlines even though it was a very liquid market today."

The trader said the extended corporate bond rally helped AOL even though the stock dived.

AOL shares closed down $1.31 to $12.76.

The AOL 0% convertible due 2019 was quoted unchanged at 50.25 bid, 50.75 asked. The Reliant/AOL 2% exchangeable due 2029 was quoted off 1.875 points to 18.25 bid, 18.75 asked. And the Tribune/AOL 2% exchangeable due 2029 was quoted lower by 3 points to 64.25 bid, 65.25 asked.

The New York Times reported Friday that the Securities and Exchange Commission is looking into AOL's complex swap transactions with Qwest Communications International and WorldCom, and The Financial Times reported the SEC is prepared to examine some of the company's profits forecasts even as 15 senior executives were selling stock.

The probe into the swaps might result in more write-downs, analysts said, on top of AOL's record $54 billion charge in the first quarter to write down the value of AOL's acquisition of Time Warner.

"There's a camp that's very bullish on this [AOL story] and some that are not," said Robert Barron, a convertible analyst at Deutsche Bank Securities Inc.

Traders said AOL (Baa2/BBB) was helped greatly by credit spreads holding up in general as stocks retreated.

During this week, BBB spreads tightened about 50-75 basis points, said a high-grade corporate bond dealer.

Banc of America Securities expects the credit rally to run further but is very cautious and recommends selling into the strength.

"We expect the credit markets rally to continue, but we are picky rather than panic buyers," said Banc of America Securities head of global markets research David Goldman and head of credit strategy research Jeffrey Rosenberg in a report Friday.

"It seems probable that the recent rally could extend over the medium term without necessarily needing strong economic support. Although we continue to enjoy the continuing investment grade rally, we remain cautious and believe investors should continue to sell into strength."

Convertible players were disappointed that no new deals were launched Friday, but remain hopeful for prospects next week.

"We kept hearing that something was going to get announced today, but then the [stock] market went south and that put a kink in the works, at least for today," said a convertible trader at a hedge fund in New York.

"It's pretty certain that something is in the works for next week, though."

Activity in the past week's two new deals from CenturyTel Inc. and Harris Corp. has already fizzled to nearly nothing changing hands, traders said, because they were so small. So, the market's appetite remains healthy.

Harris' 3.5% due 2022 was quoted off 0.25 point to 105.75 bid, 106.75 asked. The underlying stock closed down 47c to $33.65.

CenturyTel's new 4.75% due 2032 was quoted unchanged at 106.5 bid, 107.5 asked. The stock ended off 14c to $28.04. The 6.875% mandatory, which sold in April at par of 25, edged up 0.03 to 24.61.

Elsewhere, there was not much moving convertible players, traders said.

Navistar Inc. was downgraded by Standard & Poor's, the convert to B+ from BB-, and Moody's changed its outlook to negative.

The company surprised investors last week by warning it would post a fourth quarter loss because demand for medium-duty trucks, damped by the sluggish economy, had failed to bounce back in the second half. Thursday the company said it planned to cut about 10% of its workforce as it moves to reduce costs in the face of increasingly tough market conditions.

"Most of the bad news on Navistar was already priced into the bonds last week on the warning," a dealer said.

Navistar's 4.75% due 2009 dropped 0.625 point to 79.375 bid, 79.875 asked. The stock closed down 48c to $24.82.

© 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.