Market treads water while stocks, credit spreads flounder

By Ronda Fears

Nashville, Dec. 13 - Convertibles were treading water Friday as stocks retreated sharply and credit spreads floundered. Gilead Sciences Inc.'s overnighter shot up out the gate but other new issues were still flagging.

It was a widely mixed bag, with thin volume.

Some profit taking was noted in tech and telecom names like Agere Systems Inc. and Corning Inc., although Nortel Networks Corp. gained smartly on a new financing plan.

Energy names were in flux but the general tone was negative, traders said. AES Corp. got a nice lift from completing its new bank lines and debt exchange.

SPX Corp. was the big loser of the day on a sharp drop in the stock due to a downgrade by a Banc of America Securities equity analyst, who cited deteriorating fundamentals.

"The market just feels tired. We were busy today, but it's tough to stay busy," said Jonathan Cunningham, director of U.S. convertible securities at Jefferies & Co.

"It's like everyone is struggling to get to the finish line, the end of the year. Hedge funds had a good month last month. For outrights, the die is cast. Everyone's just trying to hang on."

A dealer said that credit spreads seem to be stable despite a soft week for corporates and there is slight concern about volatility coming in, but nothing has stimulated a great deal of activity.

"Gilead was probably the only tiny bit of excitement," the trader said.

"Next week will be even worse, especially if there's a transit strike."

Gilead Sciences sold $300 million of five-year convertibles at par to yield 2.0% with a 25.74% initial conversion premium in the overnight Rule 144A market - at the aggressive end of guidance amid strong demand.

The new convert shot up 4.75 points from par out of the gate.

Traders said there was some switching out of the existing Gilead convert into the new one. The 5% convert due 2007 was quoted off 0.5 point to 158.125 bid, 159.125 asked.

Gilead shares closed down $1.70 to $35.68, a typical response to an overnight convertible transaction.

Merrill Lynch & Co. equity analysts suggested buying Gilead on the weakness from the convertible.

"We expect the stock to be weak in the face of the convertible note offering as hedged positions are set up. However, we would use any weakness to aggressively buy one of the best fundamental stories in biotech," Merrill analysts said in a report.

Gilead was a bright point of the week, wrapping up a string of not-so-delightful new deals.

Navistar's new 2.5% convertible due 2007 (B2/B) was quoted Friday down 1.875 points to 95.25 bid, 96 asked as the stock closed down 66c to $23.50.

Computer Associates International Inc.'s new 1.625% convertible due 2009 (Baa2/BBB+) was quoted down 2.375 points to 97.125 bid, 97.375 asked with the stock ending down 73c to $13.18.

Baxter International Inc.'s new 7% mandatory edged up 0.25 point to 51.1 while the stock closed unchanged at $29.05. The 1.25% due 2021 (A3/A) was quoted flat at 99.5 bid, 99.75 asked.

Even one of the recent darlings, Advanced Micro Devices Inc., lost ground. The new 4.5% convertible due 2007 (B3/CCC) was quoted down 5.25 points to 124.125 bid, 124.625 asked while the stock lost 43c to close at $7.32.

Some of the weakness in AMD, traders said, was a bit of profit taking on the heels of some nice gains in tech names this week. Telecom and telecom equipment makers saw the same thing.

Agere's 6.5% convertible due 2009 (B3/B) lost 1 point to 71.5 bid, 72 asked while the stock closed off 1c to $1.29.

Corning's 3.5% convertible due 2008 (Ba2/BB+) also lost 1 point to 73.5 bid, 74 asked. The 7% mandatory dropped 7.5 points to 209.875bid, 210.125 asked. Corning shares ended down 15c to $3.76.

Several energy names lost ground, traders said, but AES and El Paso Corp. were higher as high-yield buyers stepped in.

The AES 4.5% convertible due 2005 was quoted up 0.125 point to 36.125 bid. The AES 9.375% junk bonds due 2010 climbed 7.5 points to 57.5 bid.

"There are probably more high-yield accounts buying the AES converts than convertible accounts," said a convertible dealer.

AES shares closed up 4c to $3.25.

AES was benefiting from finally completing a refinancing package that will push out its maturities beyond 2004, giving it a little breathing room and putting to rest fears of an imminent bankruptcy filing.

Nortel also got a big boost from a new financing plan designed to free up some of its assets as collateral.

Nortel said Friday it terminated a $1.18 billion line of credit and is now seeking new financing from banks and Canada's export development agency.

"These assets were collateral against something like $1.1 billion in letters of credit. That's a big wad of value that can be plugged back in," said a convertible trader.

Nortel's 4.25% convertible due 2008 (B3/B) was quoted up 3.125 points to 54.5 bid, 55.5 asked. The stock closed up 8c to $1.89.

SPX was the big disappointment, sinking hard in reaction to the Banc of America Securities note.

The SPX 0% convertible due February 2021 (Ba3/BB-) was quoted down 1.5 points to 61.375 bid, 61.625 asked and the 0% convertible due May 2021 down 0.625 point to 60.75 bid, 61.25 asked.

SPX shares fell $4.47 to $37.18.

Next week the market looks to at least one deal, although buyside sources anticipate perhaps at least one other will come to market.

The Phoenix Cos. Inc. is set to price $130 million of three-year mandatory convertibles, which are subordinated, was launched with price talk of a 7.25% to 7.75% dividend and 18% to 22% initial conversion premium after Monday's close.

Phoenix shares ended down 70c to $6.80.

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