Tyco bucks stocks, heads north; convertibles overall mixed, lower

By Ronda Fears

Nashville, Tenn., June 14 - Convertibles trading was thin Friday and the market was described as mixed but mostly lower.

However, Tyco continued to head north although the stock slipped after a conference call in which the company emphasized its goal of returning the conglomerate to investment-grade status once the IPO of CIT is complete.

"There's some speculative trading going on but it's really slow," said Jeff Siedel, head of convertible research at Credit Suisse First Boston.

"It's Friday afternoon and it's summer. There's soccer in the morning and golf in the afternoon."

He was referring to the World Cup and the U.S. Open, which several desks were tuning into as trading was grindingly slow.

"Yeah, we've switched to ESPN several times today," said a convertible trader at a major investment bank in New York.

"We're all probably going to get out of here early and get on with the weekend."

After another week of stressful headlines, several traders at buyside shops were ending the week early, too.

"It's really depressing," said a convertible trader at a hedge fund in New Jersey.

"It's been a tough year. I think on average the convert arbs are running about 2% ahead. But I was at a hedge fund party last week, mostly convert arb guys, and everyone is licking their wounds. The most troubling is the fraud, Tyco, Adelphia. Who do you believe? How do you hedge yourself?"

The trader said he exited Tyco a couple of weeks ago.

"It wasn't any fun," the trader said.

"There were too many things going on [at Tyco] that you can't get your head wrapped around."

Tyco's 0% convertibles gained nicely, traders said, although the stock closed off 40c to $13.40.

The 2020 issued added 3.5 points to 62 bid, 63 offered and the 2021 issue rose 1.5 points to 70 bid, 71 offered.

"In the conference call, there wasn't really anything new. They're attempting to call the markets," Siedel said.

"But with Tyco, there remains execution risks."

Traders said there were more buyers showing up Friday as some holders just decided to bail out, two days after Moody's downgraded the credit further into junk territory.

"We're extremely disappointed as to the ratings," said Tyco CFO Mark Swartz in the call.

"We do deserve and should be at a higher rating than where we are. We do believe that those ratings, across-the-board, have nothing to do with our fundamentals."

Once the CIT offering is complete, assuming proceeds are at least $5 billion, Swartz said Tyco anticipates in the next six months repaying $10 billion of debt for a remaining debtload of $17 billion plus have cash in excess of $1 billion.

Over the next 18 months, through 2004, he said the company expects to get debt down to $14 billion and have sales of $36 billion with EBITDA in excess of $7 billion.

"We need to stop the noise out there so people can focus on our fundamentals," Swartz said.

"Our ratings should improve as they catch up with our fundamentals."

John Fort, lead director of Tyco, acknowledged during the call that the last couple of weeks have been especially stressful and said the company needs to return to basics, but the outlook remains bright.

"Last week, we confirmed our guidance for the third [quarter]," Fort said.

"As of today, we're not changing our guidance for the fourth [quarter]."

Fort also said Tyco has put finding a new CEO on a fast track, with a time frame of three to six months.

Not all the response to Tyco was positive, however.

Lee Cooperman of Omega Advisors spewed some harsh criticism during the call regarding corporate governance.

"You said something on the June 7 call that I found very offensive," Cooperman said.

"What you said was that the board of directors has been working hard over the last six months for the stockholders.

"The board of directors has been totally asleep. They've abandoned the 270,000 employees and stockholders."

Cooperman said the stock price collapse - he noted that Tyco shares were at $46.25 in January when the breakup plan was announced - seems to be inconsistent with what Tyco is saying about its businesses.

Tyco needs to change the composition of its board, share more about all the investigations with stockholders and somehow repair the "total disconnect with regard to what you guys are saying and what's going on in the market," Cooperman said.

Fort said, with regard to the board's diligence or lack thereof, "in the coming weeks, you'll find that has not been the case at all."

The market is not expecting to have to wait much longer for the other shoe to fall in the Adelphia story, however.

It is widely anticipated that the cable company will file bankruptcy soon, perhaps on Monday.

The Adelphia convertible bonds were still being quoted, however, and were higher by 0.25 point to 1.25 points at the close Friday. One shop quoted them, both the 3.25s and the 6s, at 9 bid, 11 offered and another had a level of 10 bid, 12 offered.

In over-the-counter trading, Adelphia shares added 1c to 16c.

While many see Adelphia heading to bankruptcy court on Monday, some said it could be delayed as the company just Friday hired PricewaterhouseCoopers to replace Deloitte & Touche as its auditor.

"It's just a matter of time, Monday, Tuesday, whenever," said a dealer, referring to the seemingly inevitability of Adelphia filing bankruptcy.

"I can't believe there are still buyers for this paper. Certainly, there are still people wanting to sell."

Buyers are anticipated to show up next week for El Paso, which announced a $500 million mandatory on Friday. Guidance is expected early Monday.

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