Convertibles slide as credit concerns continue to weigh

By Ronda Fears

Nashville, Tenn., Feb. 6 - Convertibles continued to feel the pressure of credit concerns, traders said, and succumbed to the bearish tone along with stocks although a bullish effort was again made early in the session. Tyco abated its recent hammering with a conference call, but Calpine saw worries get resurrected after acknowledging an SEC inquiry. Traders said the tone remained cautious, but a few buyers eased in.

"We actually saw some buyers today, in defense, some technology, and that was nice. At the very least, it's a relief to see a stop to money getting pulled from the market. Still, everyone's pretty edgy right now, and we're at the point of wondering what it's going to take to calm people down," said a convertible trader at a major investment bank.

"The day started off on a more positive note, but sentiment turned sour again real quick. What's really going on is a lack of confidence and that is eroding everything. Besides the concerns about valuations, there is a lot of concern about debtloads and creditworthiness, the viability of some of these companies to pay back their debt or, for a good portion of the convertible market, pay the puts coming up."

Tyco of course had some influence on the positive tone, as the company got a bounce from its conference call. Elan, the drugmaker that has suffered severely from accounting questions, also firmed a bit but traders said the drug sector was down sharply.

Offsetting the turnarounds at Tyco and Elan was the resurgence of concern at Calpine. The company confirmed that it has received an informal request for information from the enforcement division of the SEC regarding a Jan 4 news report that claimed the company may have made selective disclosures to analysts. Calpine reiterated that is has made no inappropriate disclosure and stressed that it is working with the SEC to clarify this matter. In a separate but unrelated matter, the company said it has received a comment letter from the non-enforcement division of corporation finance of the SEC seeking clarification and offering guidance on certain disclosures. These comments do not require the company to alter any aspect of its financial results.

"There's a strong conviction that Calpine will have to return to the debt markets this year to get by, maybe not in order to pay the put coming up, but sometime this year," said a convertible trader at a hedge fund in New Jersey. "They set the stage for that with their new shelf, which sort of set a lot of people off because they had stressed they were going to not need any more financing and were going to cut their capex program."

Calpine's new 4% convert due 2006 fell 9.25 points on the day to 71.5 bid, 72 offered as the stock dropped $1.95 to $6.80. The convertible preferreds have also been getting hit hard, traders said, although the Calpine 0% convert due 2021, which has a put coming up in April, has been holding firm just shy of the par put price.

As analysts rush to upgrade telecom and media stocks due to the recent weakness, convertible traders said there was some lift to the sectors. But, again, credit concerns weigh on the groups because of the Global Crossing and McLeodUSA bankruptcies. "There was some bargain hunting going on in telecom and media," said the convertible trader at a major investment bank. A day after posting results that beat forecasts, Nextel got a boost. The Nextel 4.75% converts were up 3.5 to 58.25 bid, the 5.25s added 1.125 to 51.75 bid and the 6s regained 2.75 to 56.875 with the stock up 97c to $6.02.

Investors were looking to put money back to work after some heavy selling in recent sessions, traders said. Defense got a lot of attention, in light of the anticipated boost to the U.S. defense budget, and there were some tech names on the rise. L-3 Communications shares soared $3.42 on no news, which boosted the 4% convert due 2011 up 2.5 points to 113.75 bid, 114.25 offered and the 5.25% convert due 2009 up by 3.5 to 143.25 bid, 144 offered. Northrop Grumman's 7.25% convertible preferred rose 1 to 119.5 bid with the stock up $1.24 to $109.32.

Retail was also getting some pressure due to comp store sales lagging, traders said, but there were a few gainers like at Rite Aid, which had gotten an upgrade on the stock from Robertson Stephens. However, one trader noted that Wednesday's surge at Rite Aid will probably be erased quickly on Thursday because Moody's downgraded the credit after the close. Rite Aid was downgraded by Moody's, which also assigned a Caa3 rating to the drugstore chain's new convertibles. Moody's expressed concerns with respect to the long-term sustainability of the company's current capital structure, given its opinion that operating cash flow will not reliably cover cash interest payments going forward. Moody's said it believes that operating cash flow may not grow enough to support all of the company's liabilities over the intermediate term, in spite of a balance sheet debt reduction of $2 billion during 2001.

Rite Aid's new 4.75% convert due 2006 on Wednesday added 5.75 points on the day to 66.75 bid, 68.25 offered and the stock was up 47c to $2.85.

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