Convertibles gain as buyers emerge on extended stock rally

By Ronda Fears

Nashville, Tenn., Feb. 11 - With stocks extending a rally from late last week, traders said convertibles gained as buyers emerged to look for bargains among the rubble. Most of the picks were in tech and telecom, but there also was rekindled interest in energy. After the closing bell, traders cringed, however, with news hitting the tape from Nortel Networks Corp. about the resignation of its chief financial officer amid alleged wrongdoing. The primary market remained quiet, but onlookers expect that if stocks continue heading north it won't take long for new deals to surface.

"The Nortel news was not good, and it may be a setback tomorrow. The company took great pains to say it was an incident isolated to the one person, but that one person was the CFO. It really compounds the general attitude of mistrust out there," said a convertible trader at a hedge fund in New Jersey.

Nortel Networks said after the close that its chief financial officer, Terry Hungle, had resigned after allegedly buying and selling company stock in his retirement plan in violation of company policy, and that securities regulators in the U.S. and Ontario had been voluntarily notified about the transactions. Nortel shares had risen along with the wireless phone sector, closing up 55c to $6.84. The Nortel 4.25% convertible note due 2008 was up 4.5 points to 93.25 bid, 93.75 offered.

Before the Nortel news, the tone had been rather positive with stocks extending last week's rally. Buyers were milling about, traders said, looking for bargains and careful to steer clear of any hot spots. Credit concerns, accounting issues and merger and acquisition activity were among the top red flag signals.

"The selections are pretty narrow. Everyone is still pretty cautious here in the convertible universe," said the head convertible trader at a major investment bank in New York. "But there was a good deal of buyers today for some energy, Evergreen Resources and Kerr-McGee. Nortel was higher. Brocade and some of the other network names were seeing some action. Telecoms were pretty upbeat, although there was some trepidation about Qwest and its Global Crossing involvement."

Brocade Communications Systems, Inc.'s 2% convertible due 2007 rose 2.5 points to 103 bid, 103.75 offered with the stock up $1.54 to $34.17. Ciena Corp. and Corning Inc. were also higher. Avaya Inc. was behind its peers after announcing it has hired Salomon Smith Barney to explore alternatives for its Connectivity Solutions unit, including possibly selling the unit. Avaya's 0% convertible due 2021 edged up 0.625 point to 39.25 bid, 39.5 offered and the stock added 19c to $6.55.

Qwest Communications International Inc., which is pondering a convertible offering in the neighborhood of $1.25 billion, was getting selling pressure after the receiving a subpoena for documents concerning now-bankrupt Global Crossing from the SEC. The company said it intends to cooperate fully. Qwest shares dropped 24c to $9.36.

Semiconductors were also marked up, traders said, but most of the buying was in ancillary equipment makers like Teradyne Inc., which makes test equipment and software for semiconductors. Teradyne's 3.75% convertible note due 2006 rose 5 points to 138 bid, 138.25 with the stock up $1.67 to $30.64. Software names were also higher. Symantec Corp., which makes the Norton antivirus software for computers, continued to recover from a sharp drop last week on questions about how it booked its recent convertible issue. The 3% convert due 2006 added 1 point to 125.5 bid, 126 offered as the common stock gained 30c to $34.82.

Veeco Instruments Inc. was the exception, on downgrades in the wake of revising its first quarter outlook last week after posting a fourth quarter loss. The company makes equipment for the semiconductor industry. The Veeco 4.125% convertible notes due 2008 lost 2 points to 95 bid, 95.5 offered while the stock dropped 59c to $26.84.

Outside of tech and telecom, traders said there were solid gains in retail, energy and cable.

In oil and gas, Kerr-McGee's 5.25% convertible note due 2010 was up 1.25 point to 112 bid as the stock rose $1.09 to $33.51. The Evergreen Resources 4.75% convert due 2021 added 2.75 points to 104 bid with the stock up $1.25 to $39.35.

J.C. Penney's 5% convertible due 2008 added 7 points to 102 bid, 102.5 offered while the stock rose $2.48 to $23.51 after the company reported that the last week of sales indicated that it was running ahead of expectations for February.

If the market surge continues into next week, convertible issuance is likely to pick up because there is a big backlog of deals waiting to come to market, sources said. Right now, the only firm prospects come from Qwest and Travelers Property Casualty Corp., Citigroup Inc.'s insurance unit, which is planning a $1 billion initial public offering consisting of a mandatory convertible upper DECS along with the common stock.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.