Ciber popular amid lull in new deals; Ford gains on buying due to better data

By Ronda Fears

Nashville, Nov. 25 - The "usual suspects" were trading in convertibles Tuesday - new issues, a few high-profile industrial, telecom and/or tech names, etc. One trader described the overall convertible market as "flatlined," perhaps as a double entendre regarding both the level of activity and its impact on the market.

"There was nothing very sexy going on," said a dealer. She noted that tightening credit spreads and the sharp drop in volatility Tuesday compounded the already slow flow in converts.

Spreads were snapping back, particularly for Ford Motor Co., and there was activity in its securities across the board, the trader added. Ford's credit default swaps, equity and debt all were very active and the convertibles were not overlooked.

"The data [Gross Domestic Product] was very strong, stronger-than-expected, and a lot of that is expected to translate into better sales, less need for incentives, for the automakers," the trader said.

Ford's 6.5% convertible trust preferred closed on the New York Stock Exchange up 1.21 points, or 2.51%, to 49.41 on heavy volume, with 2.7 million shares changing hands versus the running three-month average of 594,241. The stock was equally active and higher; Ford shares ended up 37 cents, or 2.93%, to $13.

Tyco International Ltd. was also mentioned along with Nextel Communications Inc., Lucent Technology Inc. and Nortel Networks Corp.

Nextel is one of the usual suspects in convertibles, with or without news, but there was a bit of good news Tuesday.

Around midday, Moody's upped Nextel's credit outlook to positive, citing significant balance sheet improvement since July and ongoing operating success in the marketplace. Particularly, Moody's noted that Nextel had gained market share, or added gross new subscribers, without price discounting, despite increased levels of competition.

Moody's said that if Nextel continues to succeed in the face of expected turbulence from number portability and push-to-talk competition, the ratings could move upward.

Nextel paper, including the converts, has been largely propped up by the company's debt repurchase activity over the past year. Nextel made debt-for-equity exchanges, plus sold additional common stock, that combined to reduce net debt by more than $800 million since June 30, Moody's noted.

The Nextel convertibles were better by about 0.5 point on swap and up by around 1.5 points in dollar points, dealers said. The 5.25% due 2010 was at 99.125 bid, 99.625 offered, and the 6% due 2011 was at 116 bid, 116.5 offered.

Nextel shares closed up 24 cents, or 1%, to $24.33.

There also was some focus directed to the healthcare and drug sectors again Tuesday as the much-anticipated Medicare reform bill finally won approval in Washington. It has been hailed as the most widespread update to the Medicare bill since the medical aid program was enacted in 1965.

Lincare Holdings Inc. was mentioned in that vein but was also active on its earnings.

Virtually all healthcare providers, hospitals and drugmakers will be affected by the new reform bill, although many of the changes will not take effect until 2006.

With the looming Christmas shopping season, which traditionally begins the Friday after Thanksgiving, or Black Friday as it is called, most convertible traders said retail convertibles are very well bid but analysts are advocating a short position in the stock. Many of the retail converts, like Best Buy and Lowe's have gotten rather rich, anyway, so as one trader put it, "There's little room for buying."

"There's not likely to be many surprises in the retail space," he added, so "unless you think there's a chance of a negative surprise, why do something and then [have] your returns get squeezed."

Also of note in the secondary playing field, convertible market watchers - and there are more watchers than players this week - said they are preparing for the market to begin to cheapen.

"Most people have made money on the interest rate trades and credit spread tightening, since volatility is getting crunched," said one such observer.

"I expect things to get cheaper. We're already seeing it in the CDS [credit default swaps] market, and eventually it will show up in convertibles."

Last week, he noted that spreads widened, at least in automotive swaps, on some big sales, although they have tightened back a bit now, as with Ford.

While convertible traders have noted plenty of bids with no offers - a good sign in that there is not a selloff taking place - the source continued. The source added that in the credit default swap market the opposite is the case: "People are looking to sell; there are lots of offers, but no bids."

Already there are signs that some people might be looking to add some profits in convertibles.

"I am just selling out of some things I can make money on," said a convertibles trader at a huge hedge fund.

Williams Cos., AirTran Holdings Inc. and General Cable Corp. were some he mentioned selling Tuesday.

Buyers were aplenty, though, on the deal from Ciber Inc. circulating though the gray market Tuesday. It was seen with a bid at 4 points over issue price early in the session.

Ciber shares were hit fairly hard, suggesting healthy hedge fund participation. The stock closed down 42 cents, or 4.42%, to $9.09.

After the closing bell, Ciber was at bat with a small $100 million deal, but market participants expect another deal to pop up before Thanksgiving Day, and perhaps a new deal of moderate size.

Despite Ciber's deal being small, or maybe because it is so small, as some onlookers assert, it was seeing a good deal of gray market activity, buyside traders said.

Ciber spent the day marketing the 20-year convertible notes which are talked to yield 2.875% to 3.25% with a 46% to 50% initial conversion premium. There will be a full day of marketing, though, with pricing set for after Tuesday's closing bell.

Lehman Brothers analysts put the Ciber deal 3.5% cheap, at the middle of price talk, using a credit spread of 475 basis points over Treasuries and a 42% stock volatility.

Merrill Lynch analysts put it 3.22% cheap, at the midpoint of guidance, using a credit spread of 550 bps over Treasuries and a 40% stock volatility.

Another sellside shop put the Ciber deal 1.4% rich, at the middle of price talk, using a credit spread of 550 basis points over Treasuries and a 36% stock volatility. The firm used Keane Inc., which has a convertible in play last seen with an implied spread of 535 basis points over Treasuries, to benchmark the credit, plus a discount for the small captalization of the company. If the Ciber deal priced at the cheap end of price talk, this firm put the issue right at par.

"You can get more aggressive on the credit spread," one analyst said about Ciber, noting the small IT consulting firm basically has no other debt.

While there have been rumblings of concern in the convertible market about redemptions among hedge funds, according to Tremont TASS, the third quarter saw another record inflow for U.S. hedge funds. The funds raked in $24.6 billion. The firm reported Tuesday that the quarter far surpassed the previous record in the second quarter of $13.8 billion.

Investors have so far put $45.4 billion into hedge funds in 2003, compared to $16.3 billion for all of 2002, according to Tremont TASS.

Hedge Fund Research reported last week that assets under management at U.S. hedge funds grew in the third quarter to $687.7 billion from $665.2 billion in the second quarter and were up 10.47% for the year.

Many convertible players from the hedge fund community said there have been some redemptions, but that has been offset by the inflows.

Moreover, both developments have sparked debate over the valuation process for convertibles.

"There was an IDD [Investment Dealers' Digest] article today on this matter: How to value convertibles," said a hedge fund manager in New Jersey.

The article used the shakeup at the Clinton Group earlier this year, which involved a couple of convertible managers, to springboard into the convertible bond valuation dilemma that was at the heart of the controversy there.

It's an ongoing debate, though, that is not especially limited to hedge funds. Nor, is it limited to convertibles. There have been efforts many times in the past to make the corporate bond market pricing process more transparent.

Hedge fund performance is not very visible either, but there the big investment firms track their version of how that segment of the market is doing. For example, Merrill Lynch's convertible hedge fund index is up 13.42% year to date through last Thursday, before fees.

The biggest contributor to hedge fund returns in the week was a richening of the convertible universe, but volatility ticked up last week, too. Volatility has since backtracked, and Merrill analysts look for it to lag in the medium to long term.

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