Convertibles flat with hints of a retreat to quality

By Ronda Fears

Nashville, Tenn., Jan. 10 - Convertible traders said there were hints of a retreat to quality Thursday, but trading was moderate as stocks failed to make much headway in any direction, and the market was described overall as flat. Traders said even new issues were having a tough time in the aftermarket as Teco Energy joined Best Buy to bring overnighters to market. More than $2 billion of new paper was put into circulation this week, but market sources said the richer terms of late have cooled demand somewhat.

"There is a slight shift, a hint that people are beginning to look for shelter again as some of the tech gains are being winnowed away," said a convertible trader at a major investment bank in New York. "We are still seeing buying in the tech area, but we're seeing stronger buying in consumer cyclicals, places where there is more of a perception of quality and value. There is quite a bit of apprehension that valuations have run up too much already."

Jitters among stock investors ahead of Friday's speech from Federal Reserve Chairman Alan Greenspan on the economy and a flurry of news ranging from retail sales to a rumor that IBM would issue a fourth-quarter warning, kept stocks flat. The Nasdaq eked out a gain of 2.35, or 0.11%, to 2047.24 while the Dow industrials closed off 26.23, or 0.26%, to 10067.86.

Even new paper was not a strong diversion for convertible players.

"Demand is still pretty strong," said a trader at a convertible fund in Boston. "It has been a tough go for hedge funds in the past couple of months, but they still are doing real well and there's still money to be put to work. We could begin to see some money pulled out of the market by the hedgies, but mostly right now we're seeing sort of a dull response to the terms. There was a lot of new paper sold in December that is still pretty active, so the new deals we're seeing now are really competing for buyers with all that paper."

Teco Energy Inc. brought an overnight mandatory convertible, alongside Best Buy and both were richer than the market has been used to for the past few weeks when issuers rushed in to get deals done before year-end. Teco sold $400 million of three-year mandatory convertibles at par of 25 to yield 9.5% with a 14.5% initial conversion premium. Best Buy Co. Inc. sold $350 million of 20-year convertible senior subordinated notes at par to yield 2.25% with a 37.7% initial conversion premium - at the rich end of pricing guidance.

Buyside market sources said the Teco deal priced right at fair value and the Best Buy deal was only about 1% cheap, which curtailed interest somewhat. While Best Buy's new deal was up 1.75 to 2 points in the gray market before pricing, it closed Thursday up just 0.75 from par. Best Buy shares pulled back because of the deal, losing $1.39 to $73.77.

Deals from earlier in the week were also retreating.

Axcelis Technology Inc.'s new 4.25% convertible due 2007 dropped 1.5 points to 101 bid, 102 offered with the underlying stock off 29c to $14.60. Radian Group Inc.'s 2.25% convertible senior notes due 2022 slipped 0.125 point as the stock declined 76c to $43.86.

In a slight indication of a search for shelter, traders said investors were buying names like Johnson & Johnson, whose zero-coupon convert due 2020 gained 1.625 points on the day to 82 bid, 82.5 offered as the stock rose $1.37 to $58.28. But there was also some buying in growth areas like networking, with Brocade Communications Systems Inc.'s 2% convertible due 2007 up 1.875 to 113.625 bid, 114.125 offered as the stock rose $1.02 to $40.40.

Calpine Corp. was applauded as it received a $1 billion working capital credit facility from a group of banks. The new 4% convert due 2006 rose 2 points to 114.5 bid, 114.875 offered as the stock added 31c to $16.05.

But bad news was more prevalent, traders said, which kept many players on the sidelines.

Lam Research announced a workforce reduction of 400 employees, or 12%, and said it would record a charge for the job cuts in the current quarter. Separately, the company said it had settled a patent dispute with Varian Semiconductor and Lam will pay $20 million plus issue a warrant for the purchase of up to 2 million Lam shares exercisable through December 2005 at $21.30. Lam said it would record a charge of $42 million in the current quarter as a result of settlement.

The Lam Research 5% convert due 2002 fell 4.25 points to 109.75 bid, 110.375 offered and the 4% due 2006 was down 0.25 point to 94 bid, 94.5 offered with the stock dropping 16c to $26.03.

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