Nortel shocker smacks telecoms; i2 Tech lifted by private capital; Disney slides

By Ronda Fears

Nashville, April 28 - Convertibles were softer Wednesday, most notably in the technology and telecom areas as Nortel Networks Corp. ousted virtually all of its top executives amid another wave of accounting problems coming to light.

The Walt Disney Co. also slipped after Comcast Corp. announced it formally was bowing out of the bid for the media giant. On that news, though, one sellside convertible trader said the News Corp.-linked convertible found a buyer and was pushed up.

Moreover, the whole market was weighted down by the sharp drop in stocks, but several dealers commented that at least there was some respite in the run up on bond yields, although Treasuries were rather volatile Wednesday.

Convertible bankers, however, didn't blink and the trickle of new deals continued with Quanex Corp. coming back to the convertible market to raise capital for a couple of recent acquisitions. Quanex was pitching a $100 million convertible talked to yield 2.25% to 2.75% with a 35% to 40% initial conversion premium for pricing after the close Thursday.

At bat after Wednesday's close were Conseco Inc. and Transkaryotic Therapies Inc.

Conseco's $500 million mandatory was heard to be getting prepped to price a day early on Tuesday but that did not transpire, although a buyside market sources speculated that the deal runners might be regretting the decision to adhere to the original schedule since the stock market turned so ugly Wednesday. Sellside sources involved with the deal, however, said it was "well booked."

Generally, the origination professionals in convertibles are sticking with their projections for a busy calendar at least through the first half of the year, especially with the unexpected lull in issuance earlier this month.

Exodus seen in Nortel

Nortel shocked the markets again Wednesday just ahead of its scheduled earnings report Thursday by firing its three top executives - the chief executive, chief financial officer and controller - plus said its first quarter results would be delayed. It sparked a massive selloff in Nortel securities and cast a negative cloud over the credit in general.

The result was nothing short of a "bloodbath" for Nortel and many of its tech and telecom peers, one sellside trader said.

"There was a massive selloff, in the stock and the converts," he said, noting that 341 million shares of Nortel stock changed hands on Wednesday, compared with the three-month running average of 49 million shares.

"Really, we thought the worst of it was this morning. The stock started off down 24% and by this afternoon it lost over 28%."

The Nortel 4.25% convertible due 2008 steadily followed the stock lower and also saw a tremendous amount of traffic. The issue ended the session 5.5 points lower at 95 bid, 96 offered. Nortel shares plummeted $1.59, or 28.19%, to $4.05.

The accounting ordeal began last fall with a review and Nortel warned that it would be restating results back to 2000, when its stock was in the neighborhood of $100. Then, in March the company said a second restatement was needed.

"This is the final straw," said one buyside trader at a huge hedge fund in New York.

"We have been in and out of Nortel over the last six months and have done pretty well, but now it's time to just walk away."

Sellside desk analysts said the seemingly routine - these days, at least - accounting review launched last October appears to now have the markings of a "full-on scandal."

Nortel is under investigation by the U.S. Securities and Exchange Commission and the Ontario Securities Commission.

In a conference call, Nortel board of directors chairman Lynton Wilson said the decision to terminate the executive was difficult, but "the right decision."

On the news, Moody's changed the direction of its review of Nortel credit to possible downgrade from uncertain, saying that "it will take some time to re-establish confidence in both Nortel's financial reporting and its leadership."

Shockwave hits Lucent, Agere

The Nortel news also unhinged the already shaky confidence in other network names, like Lucent Technologies Inc. and its former subsidiary, Agere Systems Inc., RF Micro Devices Inc. and Ciena Corp. Agere and RF Micro Devices had disappointing news of their own, as well.

Nonetheless, there were analysts pounding the table for some of those stock stories on the resultant weakness.

Merrill Lynch equity analysts said the results of Agere and RF Micro Devices were in line with their expectations, and the selloff was unwarranted.

Agere was pitched even by a credit analyst, noting that while the March quarter was not stellar and the company's guidance for the current quarter was not overly enthusiastic, the worst is likely behind the wireless chip maker.

"Despite the disappointments, we continue to believe that the [Agere] stock is a buy because its potential reward outweighs the risks," said CreditSights analyst Zhiping Zhao in a report Wednesday.

"Absent a major wireless handset correction in the entire industry, we believe that Agere could see a significantly better September quarter."

Moreover, the analyst said Agere's business problems appear to have bottomed out amid "exceedingly low investor expectations," so the company's ability to thrive longer term is greater.

"Agere has long ago solved its liquidity issues," Zhao said. "It is net cash positive and continues to generate cash from its operations."

Agere's 6.5% convertible due 2009 was quoted at the close at 120.75 bid, 122.75 offered, down 6 to 7 points from Tuesday. The underlying stock fell 22 cents, or 8.4%, to end at $2.40.

Lucent's convertibles dropped 4 to 5 points, while RF Micro Devices converts lost 8 points or more.

Disney slides on Comcast news

Before the opening bell, Comcast announced it has formally withdrawn its proposal to merge with Disney, effective immediately. Disney slipped a little on the news, dragging most of the media sector with it. But, a sellside trader noted a buyer for the News Corp. convertible amid long-time speculation that the Rupert Murdock company would be a natural suitor for Disney.

Comcast said it was clear that Disney's management and board of director have "no interest" in a union, following at least two formal rejections since Comcast aired the courtship - its $50 bid for Disney - in mid-February.

"Being disciplined means knowing when it is time to walk away. That time is now," said Comcast chief executive Brian Roberts in a news release.

A formal end to the wrangling put Disney's credit on more solid footing, as Moody's returned the media giant's rating outlook to stable on the development, reminding that a merger with Comcast would have put Disney credit on review for downgrade.

Comcast ticked slightly higher on the news, but other media names - Time Warner, News Corp. and Viacom - felt some selling pressure as a result.

News Corp. stock closed Wednesday down $1.14, or 3%, to $36.68, but a sellside trader at one of the major investment banks said the News Corp. 0% convert caught a bid, and another said the Citigroup discount floating-rate mandatory exchangeable into News Corp., which pays the three-month Libor plus 5 basis points, was also higher.

i2 Tech spikes on new deal

i2 Technologies Inc.'s 5.25% convertible due 2006 shot up almost 10 points Wednesday on news of a $100 million capital injection for the company.

The Dallas-based supply chain software company sold $100 million of 10-year 2.5% mandatory convertible preferreds to Q Investments, a Fort Worth, Texas, investment fund, in a privately negotiated transaction, which converts at $0.926, or 105% of the volume weighted average price of i2 common stock for the two trading days of April 23 and April 26.

In addition to the Q Investment placement, which boosted its equity stake in i2 Tech to 26% on a converted basis, company founder Sanjiv Sidhu agreed to make a $20 million equity investment in the company.

The capital infusion boosts i2's cash position to about $390 million, the company said.

i2 Tech's convertible ended Wednesday at 91.5 bid, 92.5 offered, up from 82.5 bid on Tuesday. The stock shot up 16 cents, or 18.39%, to $1.03.

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