Toys R Us drops another 2 points; Computer Networks tightening on recent buying; tech issues widen

By Ronda Fears

Nashville, Aug. 12 - While technology stocks and the broader market continued to decline, convertible traders said the credits were in gyration with some widening in areas that was piquing some interest, finally.

"The market has too much underlying strength for what's happening," a sellside convertible trader said. "Fear is running high; the market shocks are exaggerated."

Thus, he said, there were some situations where the credit finally cracked and began to widen, and there was some buying interest on that cheapening.

"We'd been seeing the stock give way and then nothing would happen on the credit side, so there wasn't anything to move the convert, except to sell it, no cheapening in the credit to bring in any buyers," the trader said.

"Finally, we are seeing some spreads blow out and that is why we've got some buying going on."

Computer Network Technology Corp., Kulicke & Soffa Industries Inc., ATMI Inc. and Juniper Networks Inc. were mentioned in the tech sector. Several of those were finding buyers on cheapening.

Toys R Us Inc., however, continued to see holders dump its mandatory issue as debtholders are not expected to fare well in a break-up scenario.

High-grade issues were not exempt from cheapening, either. Schlumberger Ltd. was mentioned in that context, which one trader attributed to its exposure to OAO Yukos Ltd., although he added that analysts have stated the exposure is "very limited." The Schlumberger 1.5s dropped 0.875 point to 104.25 bid, 104.5 offered, and the 2.125s dropped 0.75 point to 102.25 bid, 102.5 offered as the stock fell $1.05, or 1.72%, to $59.95.

Toys R Us mandatory dumped

Holders continued to dump Toys R Us convertibles, in heavy volume, as the position of debtholders in a break-up situation was considered weak.

A day after the company unveiled the play, albeit with sketchy details, the Toys R Us 6.25% mandatory convertible due 2005 fell another 2 plus points. A dealer quoted it at 43 bid, 43.25 offered. The issue closed on the New York Stock Exchange down 2.11 to 43.14 with 134,200 units changing hands versus the three-month running average of 38.476.

Toys R Us shares plunged again, too. The stock dropped another 99 cents, or 6.13%, to $15.16.

Credit analysts seem to agree that the situation doesn't bode well for Toys R Us debtholders, although convertible holders with an equity stake could balance their risk somewhat.

"You could always wait to see the actual spinoff figures, but barring the unlikely acquisition by a stronger credit we don't envision things getting much better for bondholders," said GimmeCredit head of research Carol Levenson in a report Thursday.

CreditSights bond analyst Suzanne Chamberlain said in a report Thursday that under a Babies R Us spinoff scenario, shareholders would get a stake in the most profitable and fastest growing business.

"However the future remains murky for the company's bondholders given weak covenant protection, the uncertain future of the toy business and potential for a capital restructuring," Chamberlain said. "What we do know, however, is that the risk/reward does not favor unsecured bondholders as we once again review the company's bond covenants."

At the end of the day, a dealer said, convertible holders bailed out.

"No one is feeling extraordinarily risk tolerant right now, not with all the blowups out there," the trader said.

Computer Network tightening

Spreads on Minneapolis-based storage networking firm Computer Network Technology Corp. convertibles have tightening in the neighborhood of 500 basis points in the past week as buyers swooped in on a dive the paper took after the company's warnings, a market source said Thursday.

"People are looking for yield plays, and as you know, the busted convertible universe has been shrinking for some time but now we're seeing it come back," said the sellside market source.

"A lot of the CMNT buyers were crossovers from high yield."

When Computer Network issued its warning a week ago, the credit blew out, and when the dust settled, the convertibles were trading around 1,100 basis points over Treasuries, he said. Now, he said, they have tightened to around 800 basis points.

The yield is still running about 15%, he pointed out.

On Thursday, the Computer Network 3% convertible due 2007 traded off about 0.25 point, ending with the bid at 76.375, and the bonds were offered at 78.375.

Computer Network shares closed Thursday down 14 cents, or 4.81%, to $2.77, pressured by recent warnings about the storage business from Hewlett-Packard and Cisco Systems plus apprehension ahead of Dell Computer's earnings after the closing bell.

Last week, Computer Network warned that second quarter results will come in below analysts' forecasts. The company expects revenue in the $75 million to $80 million range and a per-share loss of 42 cents to 46 cents. The First Call consensus estimate was for a profit of 2 cents a share on sales of $103 million.

The company is scheduled to report earnings Aug. 17.

CMNT may be refi candidate

Acknowledging a tough environment for the computer networking sector, some market sources believe that Computer Network will survive, at least long enough for the convertible to pay off or get refinanced.

"Computer Network has been one of the best of a bad lot," said a holder of the Computer Network convertibles. "With the likes of EMC, McData, Emulex, and Brocade [stocks] down an average of greater than 87%, Computer Network's 77% decline is relatively decent."

With revenues in the area of $80 million, the sellside market source said the company should be able to break even on a cashflow basis and the only debt is the $125 million convertible.

"They should be able to chug along for the next couple of years" making debt service obligations and covering operations, he said.

The convertibles, he pointed out, mature in about 2.5 years.

The sellside source said Computer Network also may tap the convertible market to refinance the 3% convertible. The market is not as friendly to issuers as six months ago, he noted, but the company may want to refinance it rather than use all its cash and bank facilities to pay it off.

CA, software pack softening

Amid anxiety in technology stocks in general, and particularly computer names on the Hewlett-Packard and Dell headlines, software issues were particularly softer, traders said, even though several convertible names were presenting at the CIBC World Markets enterprise software conference in New York.

Computer Associates International Inc. and Veritas Software Corp. were two active names in that space, with Computer Associates dropping 1 to 2.5 points and Veritas trading sideways but with lots of sellers, a sellside trader said. And both presented at the CIBC conference, he said.

"Of course, the companies have a positive spin on things," from comments made at the CIBC conference, he said. "But if the big picture isn't looking good for the Ciscos and Hewlett-Packards and Dells of the world, then you can bet it's not good for a Veritas Software or Computer Associates. Computer Associates has had a cloud over it anyway."

Computer Associates has been persistently dragged down by a long-running criminal probe of its accounting methods, plus numerous top executive changes, over the last couple of years that also have sparked a series of investor lawsuits.

The Computer Associates 1.625% convertible due 2009 dropped 2.5 points Thursday to 131.5 bid, 132 offered, and the old 5% convertible due 2007 lost 1 point to 110.5 bid, 111 offered. The stock fell 59 cents, or 2.54%, to $22.61.

Veritas Software's 0.25% convertible due 2013 was at 94 bid, 95 offered, unchanged to a tad lower, with the stock dropping 51 cents, or 2.87%, to $17.29.

Tech spreads may lure buyers

Credits spreads on a good number of the technology issues - particularly several chip names - finally gave way Thursday and there was some widening seen that some traders suggested may also lure some bidders into the market on the cheapening.

Kulicke & Soffa Industries Inc., ATMI Inc. and Juniper Networks Inc. were specifically mentioned.

"We're seeing some widening of credit spreads in tech, in sympathy with Cisco. I guess this is obvious," said a convertible fund manager on the West Coast. "Unless the issue is pretty small, flow is still okay, though."

A sellside trader said there indeed was some buying support for Kulicke & Soffa from more fixed-income oriented investors.

"They [Kulicke & Soffa] warned earlier this week, but really took a beating yesterday [Wednesday]. The 1s dropped 8 or 9 points and the 0.5s something like 5 or 6," the trader, at a boutique that caters to more high-yield clients, said. "Today, the 1s were about even with yesterday and the 0.5s actually ticked up about three-quarters of a point."

He closed the Kulicke & Soffa 1% converts due 2010 at 71.8125 bid, 72.3125 offered and the 0.5% convertibles due 2008 at 71 bid, 71.5 offered. A bulge bracket trader pegged the 1s at 70 bid, 71 offered and the 0.5s at 69.25 bid, 70 offered, however.

Kulicke & Soffa shares dropped 11 cents, or 2.09%, to $5.15. After Tuesday's close, Kulicke & Soffa said its results for the September quarter would come in $30 to $40 million below its previously forecasted range of $175 to $195 million.

Juniper's 1% convertible due 2008 dropped 2 points on Thursday to 123.5 bid, 124 offered while the stock lost 49 cents, or 2.37%, to $20.20.

ATMI's 5.5% convertible due 2006 lost 1.25 points to 99.5 bid, 100.5 offered as the stock slipped 36 cents, or 1.96%, to $17.97.

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