Convertible market slows in flat session; CV Therapeutics soars

By Ronda Fears

Nashville, Tenn., Nov. 14 - Convertibles were described overall as flat in a moderate session. Activity slowed on both the primary and secondary fronts as the market prepared to wind down for next week's holiday-shortened business. Rite Aid Corp. advanced its deal, however, and upsized it with a sweeter yield. Duke Energy Corp. also surprised players with a $750 million deal before the opening bell. In trading, CV Therapeutics scored a home run in a 14-point gain for its converts on positive news.

"We saw a lot of the tech names get stronger, some activity in Network Associates and other software names. We also saw some activity in industrials like Anadarko, Tyco and SPX," said a convertible trader at one of the major investment banks based in New York. "Obviously, bonds were weaker today on better-than-expected retail numbers. People were selling bonds and buying stocks," the trader continued, which turned some eyes to convertibles.

Volume for convertibles was considerable slower than Tuesday, however, with the overall market mixed. Stocks stumbled through much of the session, traders said, but closed higher. The Dow Jones Industrial Average rose 72.66, or 0.75%, to 9823.61 and the Nasdaq added 11.08, or 0.59%, to 1903.19.

CV Therapeutics was the spotlight gainer of the day after it reported that its new heart treatment was showing success in clinical trials. The 4.75% convertible due 2007 climbed 14 points on the day to 97.25 bid, 97.75 offered as the underlying stock rose $9.96 to $48.35. Merrill Lynch & Co. convertible analysts Anne Cox and Anne Elliott had noted in a report Tuesday that there was product news coming Wednesday that could move the stock up and suggested hedge and outright investors buy the convertible as an attractive way to participate in the story.

"This was a big score for us," said a convertible fund manager in New York. "We've liked CV for a long time, and they've been showing a lot of promise. We expect to do well with it."

Better-than-anticipated retail sales from the U.S. Commerce Department, showing total October sales gained 7.1% after a 2.2% decline in September, with a record 26.4% surge in vehicle sales that benefited from 0% interest campaigns by automakers. Traditional and online retailers gained from the positives sign, traders said.

Rite Aid's new deal gained as the pricing advanced with sweetened price talk, but it slowed from gray market levels seen Tuesday. The deal was nearly doubled, also, from $125 million to $200 million, with book orders running "way, way over-subscribed." In the immediate aftermarket, the new 4.75% Rite Aid convertible, which priced with a 24.3% initial conversion premium, added 1.5 points from par to 101.5 bid, 102 offered as the underlying common stock slipped 7c to $5.16.

Duke Energy slipped another new deal into the market before the bell with no pre-market pricing guidance. The 8% mandatory convertible, which priced at par of 25 with an 18.5% initial conversion premium, lost a bit of ground in the aftermarket, however, closing off almost 0.5 point to 24.5625 bid, 24.6875 offered. Duke Energy common shares fell $2.31 to $37.81 due to the new issue. Duke Energy's 8.25% mandatory convertible fell similarly, ending down 2.41 to 25.49.

"It looked like they wanted to get a jump on the other two mandatories coming this week. But it caught a lot of people by surprise," said a market observer. After Wednesday's closing bell, Northrop Grumman and PartnerRe were at bat, each with mandatory convertible preferreds. Both coming deals are expected to do well, with Northrop providing access to the defense industry and PartnerRe adding another name to the growing insurance group in convertibles.

Industrial names were mostly higher Wednesday, with names like Tyco and SPX Corp. advancing. SPX's zero-coupon convertible due February 2021 added 1.375 points on the day to 65.25 bid, 65.5 bid and the zero-coupon issue due May 2021 rose 1.375 points to 62.5 bid, 63 offered with the underlying stock up $4.69 to $113.87.

The exception was in the oil and gas sector, however, which was getting slammed as investors betted that there will not be significant oil production cuts to lift prices. OPEC met Wednesday and agreed to a 6% cut in its output, but only if other non-OPEC oil producers make similar cuts. Anadarko Petroleum's zero-coupon convertible due 2020 fell 3 points on the day to 71.5 and the zero-coupon due 2021 lost 0.5 point to 99 as the underlying stock dropped $3.72 to $55.16. Light sweet crude oil futures fell $1.93 to $19.75 a barrel on the New York Mercantile Exchange.

"The basic consensus is that this was OPEC's way of getting around having to make any cutbacks," said one convertible trader. "OPEC is notorious for breaking agreements, and now they want the rest of the world to promise to curtail production before they will. Well, no one's betting that's going to happen. So, we saw oil prices get hammered and the oil and gas group along with it."

Hewlett-Packard Co. gained on its earnings news, which the company took as an opportunity to also reiterate that it is proceeding with and expects a successful merger with Compaq Computer Corp. despite having met with opposition from both the founding Hewlett and Packard families. Looking forward, the company said market conditions continue to be difficult and the company is not counting on an economic recovery in 2002. For fiscal first quarter 2002, Hewlett-Packard expects revenues to be down slightly from fourth quarter due to normal seasonal effects. Gross margins are expected to be flat, reflecting an intensely competitive environment. The company expects to hold expenses flat with the fourth quarter on a pro forma basis. The company posted fiscal 2001 earnings of $408 million, or 21c per share diluted, down from $3.7 billion, or $1.80 per share, in fiscal 2000. Revenues for the year were down 7% to $45.2 billion from $48.9 billion.

"While executing well, we continue to focus on our long-term objectives. We are convinced that the Compaq transaction is a unique opportunity to move HP into the future and benefit our shareowners, customers and employees," said Hewlett-Packard chief executive Carly Fiorina. "We expect this transaction to create substantial earnings accretion soon after the merger closes. With Compaq's customer base and complementary products and services, we will materially strengthen key HP businesses."

The Hewlett-Packard zero-coupon convertible due 2017 gained 1.5 points on the day to 49.75 bid, 50.25 offered as the common stock rose $1.85 to $22.08.

Elsewhere in secondary activity, some investors were still searching for bargains as the market continues to track upward, particularly in some of the beleaguered areas like travel and leisure. "We've been getting into Royal Caribbean," said a broker-dealer in Chicago. "They're going to make a nice move up, pending some disaster. So, I'm getting in now." Several traders said they were anticipating a positive reaction to Providian Financial's news at the closing bell that it would cut 6% of its workforce as the troubled credit card company aimed to save about $18 million in annual expenses.

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