Convertibles marked up but focus remains on decliners

By Ronda Fears

Nashville, Tenn., Feb. 13 - Convertibles were marked up for the most part as stocks posted strong gains, but traders said the focus remained cautious as several key names were lower, like Tyco, Calpine and Nortel. The underlying concerns about reporting and creditworthiness continue to weigh on players, keeping much of the secondary market idle. The lift in stocks continued to stir a bit of primary market activity, however, with an overnight deal from Lear Corp.

"Most of the market was higher but it was very mixed. There were some big drops that were weighing on the mood, keeping a lot of people on the sidelines still," said a convertible trader at a major investment bank in New York.

"Having some new deals is good in one sense because the market is really hungry for new paper. But in another sense it's not so good because with stocks still relatively low, it doesn't bode well for the issuers who are bringing deals to market right now."

Lear Corp. launched an overnight deal right after the closing bell, pitching $200 million of zero-coupon convertible senior notes. Pricing guidance puts the yield at 4.25% to 4.75% with a 25% to 30% initial conversion premium. The company plans to use proceeds to pay down debt. S&P rated the new issue at BB+ and Moody's is expected to rate it at Ba1.

A sell-side analyst said the Lear convert was about 3.865% cheap to fair value, assuming a credit spread of 300 basis points and 29% volatility in the stock, but some analysts thought the spread should be more like 350 basis points.

Lear shares closed up 38c to $41.60.

The Michigan-based company, which makes seats and other components for vehicles, said last week it will cut 6,500 jobs, or about 6% of its work force, and close 21 sites worldwide to cut costs amid slower vehicle production. The company posted a fourth quarter net loss but profits for 2001 before special items. The company said it sees first quarter revenues down 2% to 4%, with earnings per share in the range of 26c to 30c before goodwill amortization of 28c a share. For 2002, Lear forecast earnings of $2 to $3 per share, excluding one-time items.

Car sales were down 4.3% in January, according to the U.S. Commerce Department, and the drop in car sales pushed total retail sales down by 0.2% for the month while, excluding automobiles, overall retail sales rose by 1.2% in January. Still, Ford was higher and convertible traders said the Ford convert was one issue where buyers were seen. The Ford 6.5% convertible trust preferred gained 1.5 points on the day to 52.35 bid, 52.4 offered with the common up 65c to $14.99.

"This deal will probably go very well, the yield is pretty hefty. But there's not a lot of incentive in it anywhere else," said a convertible trader at a hedge fund in New Jersey. "The terms are better than what we've been seeing, but the Lear deal also brings back the contingent features and puts and all those type of bells and whistles."

Indeed, new paper was another focal point for buyers, dealers said.

Cymer's new 3.5% convertible subordinated notes due 2009, which sold with a 22.7% initial conversion premium, added another 2.25 points on the day to 103.25 bid, 103.75 offered, while the underlying shares regained $1.24 to $39.54.

And, syndicate sources said the books for Computer Network Tech's $125 million of five-year convertible subordinated notes were filled before the opening bell. Final terms on the deal were not set until after the close, however. Price talk puts the yield at 2.75% to 3.25% and initial conversion premium between 20% and 24%. Analysts said the CNT deal was about 2.5% cheap, assuming a credit spread of about 900 basis points and 50% volatility in the stock. CNT shares closed down $1.23 to $15.71.

Beyond the primary, traders said the market remained quiet in terms of real activity. But there was a good deal of buzz, albeit negative, related to Tyco, Calpine and Nortel. Nortel's 4.25% convertible note due 2008 (Baa2/BBB-) continue south, dropping 2.625 points to 86.75 bid, 87.25 offered with the stock down 31c to $6.11.

Calpine Corp. announced it amended its third quarter financial filing to include additional information at the request of the Securities and Exchange Commission, but the market mostly focused on reports that the company did not close on $1 billion revolving credit line.

"This whole Calpine thing is blown out of proportion," said Jonathan Cohen, a convertible analyst at Deutsche. "The whole thing was overblown. The deal on the credit line wasn't expected to be closed yet."

Calpine's new 4% convertible due 2006 (Ba1/BB+) fell 3.375 points on the day to 79 bid, 79.5 offered with the stock off 58c to $7.98.

Tyco held its first weekly investor conference and the market reacted to Chairman Dennis Kozlowski guiding the company's earnings for the quarter down by 10c to 15c. The Tyco 0% converts (Baa1/BBB) slipped with the 2020 issue down 0.5 to 64.625 bid and the 2021 issue down 0.25 to 68.375 bid as the stock dropped $1.60 to $28.90.

Also sinking was the Jardine Matheson 4.75% exchangeable that converts into J.P. Morgan Chase, because the bank's shares were getting hit on market worries that ratings agencies are poised to downgrade the credit, which has not been indicated. "This was just a free-floating comment that began to take on steam like we've seen so much lately," said a convertible trader at a hedge fund in New York. "As far as can be seen, there is nothing really going on with JPMorgan at S&P or Moody's." The exchangeable, due 2007, dropped 1.125 points to 91.25 bid, 92.25 offered with the underlying stock down $1.11 to $48.38.

Fleming Cos. Inc. reported improved fourth-quarter earnings, but it was dragged down on a one-time charge related to Kmart. Fleming said it took a pre-tax charge of $19.8 million in fourth quarter for reserves against $37.8 million in pre-bankruptcy receivables from Kmart and slow-moving Kmart-related inventory. For fourth quarter, the food distributor posted a profit before unusual charges of $31.1 million, or 64c a share, compared with adjusted income of $21.2 million, or 53c a share a year ago. Including one-time charges, GAAP net income was $5.7 million, or 12c a share, versus a loss of $37.4 million, or 96c a share, as adjusted net sales climbed 19%, to $3.99 billion from $3.35 billion. Fleming said said it expects sales, excluding Kmart, to increase by around 5% this year in its distribution unit.

The Fleming 5.25% convertible due 2009 (B2/B+) dropped 2 points to 84.75 bid, 85.75 offered with the stock down 69c to $18.69.

J.C. Penney was also lower, although most of the retail group was higher on the January sales report from the Commerce Department. J.C. Penney, however, is still weighed down by concerns about its Eckerd drugstore unit, traders said. The J.C. Penney 5% convertible due 2008 (Ba3/BB+) lost 1.25 points to 101 bid, 101.5 offered as the stock declined 46c to $23.13.

Retailers moving up were lead by Office Depot and Genesco. Office Depot's 0% convertible due 2007 (Baa1/BB+) added 6 points to 86.25 bid, 86.75 offered with the stock up $2.30 to $18.49. Genesco's 5.5% convertible due 2005 (B2/B) gained 1.75 to 121.75 bid, 122.75 offered as the shares rose 50c to $24.

There were plenty of upward swings elsewhere, as well.

Johnson & Johnson announced that its board has approved a stock repurchase program that authorizes the company to buy back up to $5 billion of its common stock, and the old Alza 0% converts (Aa1/AAA) headed north. The 2014 issue gained 2 points to 147.5 bid and the 2020 issues added 1 point to 81.75 bid as J&J shres rose 79c to $58.09.

NCO Group Inc. got a boost after the accounts receivable and collection services provider raised analysts' earnings guidance for coming quarters. Late Tuesday, the company said it expected to report first quarter income of 40c to 42c a share and second-quarter income of 47c to 50c, up from analysts' expectations of 35c for first quarter and 40c for second quarter. The company posted a fourth quarter profit of 31c a share, which was within the analysts' range of 29c to 32c for the quarter.

The NCO 4.75% convertible due 2006 climbed 10.5 points on the day to 93.75 bid, 94.25 offered with the stock up $4 to $23.15.

© 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.