Comtech dips on telecom slump; other new issues still on the rise; buyer seen for Adelphia converts

By Ronda Fears

Nashville, Jan. 23 - Convertible players trimmed activity Friday afternoon but were bracing for a hectic time next week amid another onslaught of earnings. Capital markets sources said there could be a busy deal slate, too, depending on what tone the earnings set.

"If it looks more positive, I think there will be some [issuers] who just want to jump in," said a top convertible origination official at one of the busier shops.

"On the other hand, if the moods are sour, they might want to wait. Timing is a big deal for some of these things."

He stopped short of saying the month could match January 2003, however. The amount of issuance is running slightly more than $3 billion so far for January but is trailing the same period a year ago by more than $2 billion.

New issues injected into the market this week were mixed on Friday.

Comtech Communications Corp. experienced a backlash as the telecom group was weaker as networking stocks continued to slide. Comtech's new 2% convertible issue slipped by 0.75 point with the underlying shares down 51 cents, or 1.51%, to $33.30.

Chip stocks also were hit hard Friday, but Komag Inc.'s new 2%, up 32% convertible, which priced aggressively, gained 3.25 points from par and 0.75 point from gray market levels beforehand.

Teva Pharmaceutical Industries Ltd.'s new convertibles were seeing lots of action with the stock and convertibles getting plugs from Lehman analysts. The 0.5% convertible was better by 0.375 point, and the 0.25% convertible gained 1 point.

Otherwise, one of the most interesting comments from a convertible trader was that "a buyer showed up" for Adelphia Communications Corp. He said the biggest buy was in the 11% perpetual preferreds, which shot up 16 points to 74, but the two bonds and two mandatories also were better by several points. The stock, though, traded down 8 cents to $1.45 in over-the-counter action.

The trader didn't have any juicy details on the Adelphia situation, however.

Eastman Kodak Co., however, gave back some ground, another trader said, after a Goldman Sachs & Co. equity analyst panned the stock valuations. The convertible was basically flat on swap but lost about 2.5 dollar points. Kodak shares dropped $1.02, or 3.3%, to $29.93.

Bonds whip players around

From a broader view, a buyside trader at a hedge fund in Connecticut said the bond market wreaked havoc on his nerves Friday.

"The bond market just whipped us guys around like crazy today," he said.

"Everything was fine until the headlines ran across the tape that the Euro zone was looking at cutting rates. If the Fed reacts to that, if yields back up much more, then our strategy could change rapidly."

Sellers in Treasuries abounded on the news, he said, and at the end of the day, "bonds gave back everything and more."

The 10-year Treasury, the trader said, ended Friday down by 29/32s, pushing the yield up to 4.064%.

Interestingly enough, Merrill Lynch & Co. analyst Marc Malloy had a report out Friday on interest rate risk. He stressed that the U.S. convertible market's overall relatively high conversion premium of 49.8% and low investment value premium of 33% makes interest rate sensitivity important and suggested adjusting duration of portfolios for insulation. (See full report on Page 1.)

Banc of America Securities chief strategist Jeffrey Rosenberg noted in a report earlier this week that anecdotal and survey evidence shows much of the active manager universe started the year short their duration bogey.

He said rising rates may yet pose a risk to corporate managers, and while that's good news for credit risk, it is bad news for interest rate risk.

"High-yield bonds now exhibit more potential for interest rate risk sensitivity as their credit spreads have compressed dramatically, reflecting the decline in defaults and default risk in the lowest credit quality issues," Rosenberg said.

Further complications for convertible guys is the impact of spread contraction vis-à-vis volatility.

"We have been looking for the volatility trade and thought that might be a place to focus this year in hopes that it would show some bounce, but that hasn't panned out yet," said a convertible fund manager in California.

Standard & Poor's fixed-income analyst David Cantor said in a report Friday that on the back of such extreme spread tightening in 2003, "declining volatility hints that aggregate spread levels may have bottomed." He agreed with the majority of credit pundits, though, that there could be additional credit spread tightening possible for the higher beta, more speculative-grade issuers.

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