Convertibles lower, digesting new paper; Lucent retreats on downgrade

By Ronda Fears

Nashville, Tenn., March 22 - Convertibles were holding steady Friday as stocks retreated, and traders said volume remained lower than normal as the market digested the week's new deals that brought the tally for the month to $8 billion.

"Volatility came in sharply today, so there's some pain out there, at least for a lot of convert arbs," said a convertible trader at a hedge fund in New Jersey. The CBOE market volatility index, which has been on the decline for several weeks, was down 1.8% on Friday.

Dealers said trading was erratic throughout the session, with much of the activity centered around new paper.

Travelers Property & Casualty Corp. was the latest addition, with a home-run $25 par convertible. The 4.5% issue, with a 25% initial conversion premium, gained about 0.5 point in the aftermarket and was very active, dealers said.

"Travelers seemed to be a home run. The stock did pretty good out of the gate, not as well as we though it would do, but we still see it getting to the mid-20s," said a convertible trader at a hedge fund in Boston.

"It looked like the pricing was dead-on at fair value. It's a defensive play, so there was interest from all sides of the market."

Also very active was the Lehman Brothers convertible floater from earlier in the week. Hedged convertible players like it, in order to cut their interest rate exposure, but dealers said the issue closed out a tad lower.

"A lot of Wall Street firms have floating-rate assets so it's good for the issuer, but we like it because we don't have to hedge our interest-rate risk," by holding it, said a convertible trader at a hedge fund in Boston, referring to the Lehman convertible floater.

"With the puts, it's basically two-year paper," the trader noted, so the floating-rate aspect of the deal is not even that onerous for the issuer. The trader said Lehman appeared to be shopping the deal chiefly to "get the market interested in the product, because they don't need the money."

It followed Merrill Lynch's convertible floater and was cheaper than the Merrill floater, the trader added. Lehman's was priced to yield 3-month Libor less 90 basis points, while Merrill's priced to yield 3-month Libor less 200 basis points.

Lehman's floater was quoted down 0.375 point to 101.5 bid, 101.75 offered. Lehman shares ended down 53c to $63.99.

Merrill's floater closed down 0.25 point to 103.5 bid, 103.75 offered. Merrill shares ended off 37c to $55.13.

Otherwise in the secondary, Lucent Technologies Inc. retreated, after a brief rebound, on a downgrade by Moody's that followed a cut by S&P last week. Elsewhere, dealers said energy issues were under pressure from stock downgrades and tech and telecom issues were still falling.

Lucent's new 7.75% convertible trust preferred due 2017 lost 3.25 points on the day to 94 bid, 94.25 offered and the 8% convertible trust preferred due 2031 dropped 2.625 points to 90.875 bid, 91.375 offered. Lucent shares closed ended down 20c to $4.59.

Moody's cut Lucent's long term debt cut to B2 from Ba3, citing continued cutbacks in capital spending by Lucent's core customers and the expectation that the downturn in demand will be more protracted and deeper than previously anticipated. S&P downgraded Lucent last week.

Verizon Communications was also suffering from ratings actions.

S&P revised Verizon Communications outlook to negative but affirmed the A+ senior rating. Fitch also affirmed Verizon senior debt at A+. And, Moody's confirmed its A1 senior rating for Verizon.

But Verizon securities moved southward.

Verizon's 0% convertible due 2021 was quoted down 0.25 point to 54 bid, 54.125 offered as the underlying share dropped $1.42 to $45.61.

After the ratings actions, Verizon said it had reaffirmed to the rating agencies a commitment to a cut its overall debt, including a reduction in short-term debt and a higher percentage of commercial paper backed by bank lines of credit, and stressed that its ratings were confirmed.

To reduce overall debt, Verizon said it will apply proceeds from $2.8 billion in wireline and other asset sales in 2002 to debt reduction. The company also plans to cut capital spending from $17.4 billion in 2001 to $15-$16 billion this year.

Verizon said that current plans are to decrease its commercial paper program this year from $12.8 billion at yearend 2001, and that also will increase the percent of commercial paper backed by bank lines of credit. At Dec. 31, Verizon said it had some $7.9 billion of unused bank lines and additional cash to back commercial paper, not taking into account a $1.7 billion on deposit in connection with NextWave licenses in dispute.

© 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.