Extreme pessimism in markets keeps players idled, shaken up

By Ronda Fears

Nashville, Tenn., July 23 - Amid extreme pessimism, the convertible market was virtually idled as shaken-up investors remained in the shadows. Market turmoil also was said to be putting a kink in Orbital Sciences' new deal, but that could not be confirmed.

"For as far as I could see, there was nothing on my radar screen in the green or getting any bids. There are no buyers to be found," said a convertible trader at a hedge fund in New York.

A dealer described the day as "gruesome," with cable, banks, media, energy, telecoms and telecom equipment makers getting "bludgeoned as shaken up investors just check out of the market."

Some of the biggest disasters of the day included Clear Channel Communications, Charter Communications, Tyco International, Agere Systems, Lucent, Avaya, Reliant Energy, Mirant, Calpine, El Paso, AES and Williams.

While there were few gainers, Masco was higher as it announced it was successful at forestalling the $775 million put on its 0% convertible due 2031 with an additional put next year as a sweetener.

"These are the most trying times. In general, the secondary market has been extremely difficult. The primary market has been shut down," said Venu Krishna, head of convertible research at Lehman Brothers.

"For the next couple of years we may not see much improvement. It takes time to come back from a bear market."

While there has not been a new deal this month outside of Mirant's overnighter on July 1, Orbital Sciences was pressed against the wall, needing to refinance its $100 million of 5% convertible subordinated notes due October 2002. The new $100 million of four-year convertible senior notes are talked to yield 7.5% to 8.0% with a 15% to 20% initial conversion premium.

The deal was set to price after the market close Tuesday via Jefferies & Co., after the space technology and satellite maker released earnings.

Orbital posted second quarter net income of $5.4 million, or 12c per diluted share, versus net income of $66.6 million, or $1.75 per diluted share, a year before. Revenue grew 25% to $135.4 million in from $108.5 million. Operating income was $7.2 million as compared to an operating loss of $8.5 million.

Several market sources talked of hearing trouble with the deal, as Orbital shares fell below $5, but that could not be confirmed.

Orbital shares closed down 85c to $4.43.

Market conditions are tough right now but sources believe the deal will get placed. No revision to price talk was mentioned, however.

Meanwhile, the market is very quiet. Many players are glad to be taking summer vacations.

There has not been widespread buzz about a massive exodus from the convertible market, but it was announced earlier this month that the Calamos Convertible Technology Fund would be liquidated at the end of the month.

In any event, liquidity has become constrained, particularly for names that are perceived in good status as they've become very rich. Others, like the busted converts, are getting some trading activity on high yield desks. And a few have moved to distressed trading desks.

"Liquidity has dried up in a lot of situations. People are unwilling to take risks," Krishna said.

"No one knows how long this is going to persist. There are too many uncertainties. That said, there has been more interest in mandatories where there's not as much exposure to credit problems, you hedge most of the stock risk and get a nice yield. You're better off giving up 15% of the upside at a time like this."

Thus mandatory convertibles indeed have been rising on the popularity scale.

Several are still struggling, nonetheless.

Williams was hit hard again Tuesday as S&P cut Williams to junk, a day after Fitch did the same, amid growing concern about its negotiations for new bank financing to replace its existing unsecured $2.2 billion revolver and a $700 million three-year bank line that matures in July 2005.

According to a report Tuesday by convertible analyst Kimberlee Brody at Wachovia Securities, however, the news that Williams was cutting its common stock dividend by 95% to 4c and she expects a delayed positive impact for the Williams 9% mandatory as it will boost the mandatory's theoretical value, reflecting the increased yield advantage.

The 76c dividend cut equates to a $1.90 boost for the convertible, Brody said.

"We believe the convertible may gain over the next several days as a result of this dividend cut," Brody said in the report.

"Further gains are also possible as equity investors swap into the convertible to try and recapture some of their lost income."

On Tuesday, the Williams mandatory closed down 2.28 to 5.67. The stock lost 82c to $1.19.

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