Convertible market pulls back modestly as stocks lose on Enron bankruptcy

By Ronda Fears

Nashville, Tenn., Dec. 3 - Convertible traders said the market was modestly lower as stocks retreated on a barrage of bad news, lead by the unsurprising bankruptcy of Enron Corp. over the weekend. Firms impacted by the $31.2 billion bankruptcy, the largest in U.S. corporate history, continue to emerge with the likes of J.C. Penney & Co Inc. joining a long and growing list of companies with exposure to the energy firm. Mergers and acquisitions also drove some issues, but in a mixed fashion.

"Converts are holding up pretty well although the Enron bankruptcy was a pretty hard psychological blow, an event that really gets the attention of a lot of folks that are now thinking maybe the economy is worse off than they feared," said a convertible trader at a major investment bank in New York.

"The new issue market could cool off this month because of all this, but the jury is still out on the matter. There are lots of deals lined up in the shadows that could still make a move to tap the convertible market. We'll just have to wait and see about that."

As Enron and 13 units filed bankruptcy in New York, claiming $49.8 billion in assets against $31.2 billion in debt, stocks fell with the Nasdaq losing 25.68, or 1.33%, to 1904.90 and the Dow industrials falling 87.60, or 0.89%, to 9763.96.

Enron shares rallied 14c to close at 40c and there were some convertible holders looking to unload the paper as hopes of recovery in the bankruptcy proceeding were dashed. Fitch expects recovery rates on senior unsecured claims in the 20% to 40% range, with subordinated and preferred stock recovery rates significantly less. Enron's zero-coupon convertible due 2021 was issued at the senior unsecured level and edged down 0.5 point on the day Monday to 13, but traders said offers to sell that rose to 15 did not get any takers. The Enron exchangeable that converts into Enron Oil & Gas stock is very much like a subordinate or preferred stock issue, added 0.42 to 4.12 as Enron Oil & Gas shares rose $1.04 to $36.02.

"There were some hopefuls out there today thinking they could unload some of this (Enron) paper at 15, but no one would take it for that," said a convertible trader at a hedge fund based in New York. "This is such a complicated mess, some people think there will be no recovery at all for the convertible holders. The list of creditors is supposed to be like a tome all by itself. It's a nightmare."

In addition to firms like El Paso Corp., Mirant Corp., Duke Energy and several others that do business with Enron's energy trading group, there are the brokers and investment vehicles like Stilwell Financial's Janus Funds that have exposure to Enron's mountain of debt or own its stock. On Monday, J.C. Penney Co. Inc. said it was monitoring its long-term energy management agreement with Enron after the bankruptcy filing. The J.C. Penney 5% convertible due 2008 (Ba3/BB+) lost 1.625 points on the day to 106.5 bid, 107 offered as the underlying shares declined 64c to $24.70.

The market wasn't entirely consumed with the Enron saga, however.

Separate merger news regarding drug concerns Aviron Corp. and Cephalon Inc. pushed the converts in different directions.

MedImmune Inc. agreed to buy Aviron in a $1.5 billion stock swap aimed at adding FluMist, Aviron's promising treatment for influenza, to its portfolio of infectious disease drugs. The deal is not accretive until 2004, but FluMist could be approved by the Food and Drug Administration around mid-02. Aviron's 5.25% convertible due 2008 gained 4.875 points on the day with the news, to 91.625 bid, 92.625 offered as Aviron shares climbed $4.37 to $41.42. MedImmune shares, however, lost $5.27 to $38.83.

The reaction to Cephalon Inc.'s $450 million cash purchase of the French pharmaceutical company Group Lafon was just the opposite. Cephalon said it has cash and a credit commitment from a major investment bank that will enable it to complete the transaction. The company anticipates taking a one-time charge in the quarter ending Dec. 31 for the cost of the acquisition but estimated the deal would add $80 million in additional revenue for Cephalon next year, $20 million in EBITDA and 3c in earnings per share. As a result, Cephalon raised its guidance for financial performance in 2002, putting revenues at $400 million to $410 million and EBITDA of around $100 million with diluted earnings of about $1.03 per share.

Cephalon's 5.25% convertible due 2006 dropped 2.5 points on the day to 115.5 bid 116.5 offered as the stock dropped $2.71 to $70.03.

New paper was flat to lower, traders said, as liquidity in some of the smaller deals began to dry up, as is usually the case within the first week of trading. Extreme Networks Inc.'s 3.5% convertible due 2006 dropped 2.75 points on the day to 99.125 bid, 99.625 offered as the stock lost 87c to $14.96. Boise Cascade Corp.'s 7.5% mandatory convertible preferred, which sold at par of 50 last week, was flat at 50.66 as the stock closed unchagend at $32.04.

"No one has been indicating that new issues will dry up this month, so we don't have any reason to think that the skies will clear a bit in a few days and everything will look a little rosier and we will see some new deals pop up," said a trader at a major investment bank based in New York."

There is nothing on the forward calendar, except for Prudential Financial Inc.'s $500 million of mandatory convertibles that are scheduled to price next week.

End

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