El Paso's dive takes energy, power lower; Mentor, Medicis, TXU higher in gray market

By Ronda Fears

Nashville, Tenn., May 29 - The convertibles secondary market was lower for the second straight session, underscored by a huge decline in El Paso that sent several energy and power names southbound. But pending new issues were quoted sharply higher in the gray market.

Nortel Networks also lost ground as it announced another 3,500 job cuts and a lower revenue forecast due to the ongoing slump in the telecom sector. Novellus declined after raining on the hopes of those looking for a turnaround in chips by saying it has raised its outlook for second quarter, but skirting questions about the second half of 2002.

Adelphia was tracking lower still and taking most of the cable sector with it. Charter Communications got hit as market buzz that speculated it would be a bidder for the Adelphia assets on the auction block.

"It was not a good day, all around. But we were pretty busy," said a convertible trader at a major investment bank.

"You have people pounding the table on some of the energy trading names and then, wham, something else happens and everything gets kicked into the gutter. There was a huge sell-off in El Paso, Williams, CMS."

El Paso was the culprit in Wednesday's slide in energy and power names.

The company announced it would curtail its energy trading, cutting half the workforce in that area, and increase its investment in its core gas business, which were seen as a positive moves. In addition, El Paso said it would cut over $2 billion of debt by issuing $1.5 billion in equity and selling $800 million of assets.

Due to the asset sales, lower trading revenues and other factors, El Paso also lowered its outlook for 2002 and 2003. The company is projecting EPS of $2.60 to $2.75 for 2002 compared with analysts' average estimate of $3.33, and EPS of $2.75 to $2.90 for 2003 compared with the analyst average of $3.70.

S&P and Moody's both said the move was positive for El Paso, and neither made any changes to the credit ratings for the company.

"It's [El Paso] going to be a different company, and there will be a lot of people more comfortable with it, in light of what's been disclosed over the past few weeks," said a convertible trader at a hedge fund in Connecticut, referring to a higher comfort level from El Paso reducing energy trading activities.

"But the upshot is that it's going to be a smaller company, with a dimmer outlook, at least near-term. We, and maybe a lot of other people, are selling out because we just don't want to be involved with any of these characters anymore."

The El Paso 4.75% convertible preferred due 2028 fell about 7.75 points. It was quoted at 27.25 bid, 27.75 offered by a dealer and closed on the NYSE down 7 points to 39.8.

El Paso shares plunged $8.26 to $27.01.

Most of the energy and power group joined in the southward trend, also.

Williams Cos. dropped on the heels of its own plan, announced Tuesday, to boost its balance sheet over the next year, including selling up to $3 billion in assets and a stock sale for up to $1.5 billion. The company also was downgraded by S&P, which one dealer said moved sentiment negative and was compounded by the El Paso situation.

The Williams 9% mandatory dropped 1.61 point to 18.89. The stock ended fell $1.64 to $15.47.

Duke Energy lost ground on heavy selling as well, said a trader at a convertible fund based in New York, but there could be buyers show up Thursday due to the weakness.

"They [Duke Energy] are a victim of guilt by association," the trader said.

"I think there will be a movement into the name on this weakness."

Duke Energy's new 8% mandatory closed down 0.5 point to 23 and the older mandatory ended off 0.45 to 23.44. The underlying stock fell $1.08 to $33.51.

Utility holding company TXU Corp.'s new deal has not seen any backlash from the sector's upheaval, according to a source familiar with the deal.

"The deal is going fine. The market is familiar with the name and the credit," the source said.

The TXU 8.75% mandatory ended off 0.8 point to 53.5, which the source said could be attributed to some holders switching into the new mandatory. TXU shares closed down 95c to $51.60.

TXU's new issue was bid up 0.125 point from par in the gray market.

New deals from Mentor Graphics and Medicis were both sharply higher in the when-issued market.

Mentor Graphics' deal was quoted up 2.75 to 3 points over par. The stock ended down $1.15 to $16.05.

The $150 million deal, talked to price to yield 6.875% to 7.375% with a 40% to 45% initial conversion premium, is cheaper than the trend has been, sources said.

Deutsche Bank Securities puts it 5.4% cheap at the midpoint of guidance, assuming a credit spread of 750 basis points over Libor and 45% volatility in the stock. Bear Stearns puts it about 5.5% cheap, using a spread of 750 basis points over Treasuries and 45% volatility. Wachovia Securities puts it 6.45% cheap, using a spread of 800 basis points over Treasuries and 45% volatility.

Medicis' deal was quoted up 1.5 to 2 points over par in the gray market. The stock closed up 13c to $46.48.

The $350 million deal, which is being sold on swap for net proceeds in the neighborhood of $161 million, is not so cheap, but sources said is way over-booked already. Wachovia Securities puts it 2.17% cheap, using a spread of 500 basis points over Treasuries and 31% volatility. Bear Stearns puts it about 3% cheap, using a spread of 500 basis points over Treasuries and 32% volatility.

Speaking of new deals, Nortel's name popped up again after the company mentioned in a conference call that it might make an equity or equity-like offering as part of its latest overhaul.

"They're [Nortel] name seems to make the rounds every month or two," said a convertible trader at a hedge fund in New Jersey.

"I don't know. I had been dismissing it, but if Agere can do a deal, then why not Nortel? They might have to come up with some funky structure like the SHARCS, but hey, if the price is right, just about anybody can do a deal."

Agere Systems, the Lucent spinoff, is planning to sell $200 million of convertible subordinated notes in two tranches - a seven-year note and 12-year note. The company had planned to sell shared appreciation redeemable convertible securities (SHARCS), consisting of a five-year senior subordinated note and associated put rights.

The structure was scrapped when the limit for Lucent stock issuance was relieved. Timing has not been pinned down on the Agere deal, but market sources expect something next week.

Agere shares closed down 14c to $3.54.

Nortel was lower due to the newest restructuring plan, which entails 3,500 more job cuts and further asset sales. The plan was announced as the company moved its revenue outlook for second quarter downward from flat to as much as 5% lower than in first quarter.

The Nortel 4.25% convertible notes due 2008 were about 1 point lower. The issue was quoted at 56.125 bid, 56.25 offered by one dealer and at 55.75 bid, 56.25 offered at another.

Nortel shares closed off 17c to $2.35.

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