Convertibles fall on credit concerns, Tyco battered again

By Ronda Fears

Nashville, Tenn., Feb. 5 - Convertibles were ready to rebound early in the session, traders said, but stalled as several big names like Tyco, Ciena, Corning and Elan dragged the market sharply lower. Telecoms were among the worst casualties in the mounting hysteria in the market, but credit issues were the latest big concern. Although the primary market has slowed somewhat due to the market's anxiety, Qwest Communications said it was planning to sell $1.25 billion of convertibles in the next few weeks - an offering that had been abuzz last week. Market sources said structure and terms obviously would lean more to buyers now than a few weeks ago, but demand for new paper is very high.

"There's a lot of pain right now," said a convertible trader at a hedge fund in New York. "The last couple of days have been very difficult. There's not much you can do. You try to stay away from anything dangerous, but unfortunately with so many things in trouble, it's very difficult. You sort of think on a day like today it's reached a point of capitulation, but who knows."

Another hedge fund trader said there was really nowhere to hide, given that credit spreads are blowing out for some of the more touchy situations like Tyco.

It had looked as if buyers were going to dip into the market early in search of some bargains, said a trader at one of the major investment banks, but "everything went to hell in a hand basket, and suddenly. With nowhere to hide, the action got shut down pretty quick except for the selling and that was heavy but tapering off quite a bit today."

Fund managers were looking for new paper to relieve some of the tension, but there has been little to focus on. The LaBranche-linked mandatory was priced at the rich end of yield talk and at the midpoint of premium guidance, and was slightly upsized, but Solutia had just canceled its deal due to a downgrade. The market had been anticipating a hot and heavy lineup, but the market rout put a chill on the action until Tuesday, when Qwest announced it would do a deal, as had been rumored in the last week.

"Terms are not as advantageous to the issuer as a couple of weeks ago, but a deal can definitely get done right now," said a convertible hedge fund manager in New York. "It's a little tricky when the stock's in single-digits, but there's an easier borrow on Qwest now and pretty decent volatility, in the mid-40s to mid-50s. There would be a big response to new deals right now. But, we hope it won't be one of the funky mandatories."

Of course, everyone stressed that the reaction to the Qwest deal, or any other, would depend on the terms and structure of the deal

Qwest shares closed up 28c to $9.24, but most of the telecom and telecom equipment names were slammed. Along with Ciena's warning that it would miss analysts' earnings expectations, there was the banks holding debt of Williams Communications announcing a possible default by the Williams Cos. spinoff. Ciena warned its fiscal first-quarter forecast would not meet analysts' expectations and said it would cut about 12% of its work force, and the stock dropped $1.12 to $9 and the 3.75% convert due 2008 lost 2.375 points to 63.75 bid.

Everything linked to Sprint PCS fell sharply after the wireless phone company late Monday posted a net loss. The Comcast 2% exchangeable due October 2029 lost 3.625 to 69.5 bid and the Comcast 2% exchangeable due November 2029 lost 4.75 to 31 bid. The Cox 0.426% exchangeable due 2020 was off 0.5 to 42 bid. And, the Liberty Media 3.75% exchangeable due 2030 dropped 2.5 to 47.5 bid while the Liberty Media 4% exchangeable due 2029 lost 3.75 to 53.75 bid.

Nextel got a bounce early in the day after reporting results that beat forecasts, but it was quickly enveloped by the negative sentiment on the telcom sector. The Nextel 4.75% converts fell 8.5 to 54.75 bid, the 5.25s lost 5.375 to 50.625 bid and the 6s dropped 7 points to 54.125 while the stock lost $1.75 to $5.05.

"In this post-Enron environment, everything is swallowed up with any hint of negativism," said a convertible dealer. "At Nextel, like so much of the telecom sector, the big concern is debt load."

Tyco's troubles continued to mount, and market sources on Tuesday were beginning to wonder if the conglomerate would be able to follow through with its breakup plan with the stock down some 50% in less than two weeks, accessibility to the capital markets in question and a series of downgrades to the credit. Tyco stock fell another $6.80 to $23.10 and the Tyco 0% convertible due 2020 lost 3.75 points to 61.25 bid, while the 0% convertible due 2021 dropped 2.875 points to 65.125 bid.

"If you've resisted the urge to sell up until now, you have to hold on and wait until the smoke clears," said a convertible trader at a hedge fund in Chicago. "The hit is just too big right now. At some point, you'd have to take your losses if you really though this was going to be another Enron situation, but I don't honestly feel that's the case."

Analysts for the most part are telling clients to hold on, as well.

"If you don't own it, I definitely wouldn't say get into these bonds," said Sri Nadesan, convertible analyst with Wachovia Securities. "I'm with the crowd holding on. From everything we can tell, the company has sufficient liquidity. The problem is that at this point, people are very nervous. People are more worried about what they don't know about Tyco than what they know."

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