Profit taking noted among high yield players; some attention turns to European convertibles

By Ronda Fears

Nashville, May 9 - It was a very slow Friday, convertible traders said, but a few made observations of some profit taking among high-yield accounts. There also was some attention turning to European convertibles, and not just the new ASML Holding NV issue.

"Today's a dead day. I couldn't get much done in trades since a lot of people are away today," noted one outright fund manager.

"A lot of people are on vacation, taking a breather from this market."

While stocks rebounded - particularly tech names on stronger outlooks from Nvidia Corp. and Intel Corp. - and bonds rose slightly, some profit taking by traditional bond investors was noted as the scorching rally of the past six months is broadly seen cooling.

The bond rally, in which credit spreads tightened by as much as 50% just in the investment-grade market since October, was bound to take a break, said David Goldman, head of global markets research at Banc of America Securities.

"Some of the higher beta names in both the high-grade and high-yield markets are seeing some profit taking as investors step back and lock in gains as they turn their attention back to fundamentals," Goldman said in a report Friday.

"One expects the occasional eructation after a six-month feeding frenzy which saw investment-grade spreads fall by half, and that is what has occurred in the past 48 hours. Nevertheless, record inflows are rolling into the markets and investor appetite for new issues is undiminished. The risk market remains halcyon, and we remain unconcerned."

Goldman's comments mirrored those of convertible markets late in the week, but one dealer on Friday said most of the selling to capture profits was limited to high yield players.

In another noteworthy event, although a trend is probably too strong, Merrill Lynch & Co. had a couple of brief notes out Friday pitching euro convertibles, on the heels of what was described by salesmen as strong interest in the new ASML euro issue.

Merrill convertible analyst Robert Dia said, though, that the notes on Koninklijke Ahold NV and Colt Telecom Group plc were not designed to focus on the European market, but more the product of finding opportunities in the broader, global view.

That said, Dia noted that feedback seemed to suggest that the ideas jarred some U.S. investors as they had not expanded their radar screens to purposely look at euro issues, although they were impressed with the values noted by Merrill.

As for Ahold, while there is some hair on the name due to investigations into its financial practices, Dia said the 2003 and 2005 convertible bonds represent attractive equity alternatives with yields of 12-13%.

"The company is undergoing a massive restructuring plan to de-lever its balance sheet. [Thursday] the company stated in its conference call that it would examine all possibilities to reduce debt," Dia said in the brief investment note.

"One of the main obstacles the company will face over the next 18 months is debt maturities, while the company does have cash on its balance and access to a new secured facility," assets sales will likely need to occur to cover the later months of the debt maturities.

The Ahold 3% due 2003 saw better buyers, traders said Friday, and the issue ended up 0.25 point to 95.75 bid, 96.5 offered. The 4% due 2005 closed off 0.5 point to 85.75 bid, 87.25 offered.

Ahold shares closed up 42c, or 6.67%, to $6.72 in the U.S., and up €0.50, or 9.35%, to €5.85 in Amsterdam.

Dia also recommended investors buy Colt Telecom's 2% senior convertible bonds due 2005, noting the cash burn has slowed at the company.

"The bond has an approximate yield-to-maturity of 20% and is the first bond to mature in the capital structure with no bank debt in front of it," he said.

"Cash burn has been significantly reduced in the quarter, excluding its plan to repurchase some of its outstanding bonds. The company currently has about £1.6 billion in debt against about £1 billion in cash."

Furthermore, he noted Colt has reduced capital expenditures to conserve cash and the company believes it will be free cash flow positive by 2005.

The Colt 2% due 2005 gained 0.25 point to 82.5 bid, 84.5 offered.

Colt shares closed up 0.239c, or 4.23%, to $3.179 in the U.S. and were unchanged at 48p in London.

ASML remained one of the hotter new issues of late, as well.

The ASML 3.5% euro convertible due 2010 added 1.5 points on the day to 103 bid, 104 asked. The stock ended up 28c, or 3.12%, to $9.25 in the U.S. and up €0.11, or 1.4%, to €7.98 in Amsterdam.

Starwood Hotels & Resorts Worldwide Inc.'s new 3.25% overnighter, which was repriced by the underwriters at 98.75, got a tepid reaction, according to several buyside sources, who noted it opened below the re-offer price.

"It's ironic that HOT is not," said Barry Nelson, portfolio manager at Advent Capital Management, referring to the new Starwood convert.

Venu Krishna, head of U.S. convertible research at Lehman Brothers, said that even at the re-offer price of 98.75 the issue modeled out 0.44% rich, using a credit spread of 350 basis points over Libor and a 35% stock volatility.

The high 3.09% common dividend reduces income pickup to 85 bps on the issue, Krishna said, and the implied volatility of 36.3% also suggests limited room to realize volatility.

JPMorgan, one of the lead bankers on the deal, closed the new Starwood convert out at 98.25 bid, 98.5 offered. The underlying stock ended off 23c, or 0.83%, to $26.95.

Elsewhere in the secondary market, sources mentioned The Interpublic Group of Cos. Inc., Vitesse Semiconductor Inc. and Nvidia.

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