Baxter, XL Capital hold up nicely against huge stock declines

By Ronda Fears

Nashville, Tenn., July 18 - The pendulum swung back to negative on Thursday but some of the potentially drastic impacts on convertibles were cushioned by expanded premiums, particularly for the likes of Baxter International and XL Capital.

Overall, traders described the market as lower in choppy, light to moderate trading.

"It was spotty trading," said a dealer.

"Mandatories were pretty active. Of course, the big news of the day was Baxter."

Baxter and XL Capital shares were reeling from earnings news, but the converts held up nicely due to the huge premiums. In fact, the put on Baxter's issue was seen gaining in value.

Baxter's 1.25% convertible due 2021was quoted down 2.5 points to 97.5 bid, 98 asked as the stock plunged $11.41, or 26.28%, to $32.

"The embedded put [on the convertible] is worth a lot of money now," said Jeff Siedel, head of U.S. convertible research at Credit Suisse First Boston.

"It's a great set up, with the premium having expanded nicely. If you're a convert arb, you should be sitting pretty right now."

In July 2003 the issue is putable at par.

"I think it looks pretty decent. The credit looks good," said Stuart Novick, a convertible analyst at Salomon Smith Barney.

"After going through the earnings figures, I don't feel like the miss today affects the credit. They have a good amount of cash and bank line availability. It's A rated and with 11 months to the put date, the yield-to-put is about 4.6%."

Baxter, which makes health products, reported second quarter profits fell 21%, largely due to some $121 million in special non-cash charges from investments in other companies.

Standard & Poor's said the charges will not result in changes to Baxter's ratings or outlook, but said it raises questions about Baxter's ability to fully realize value from previous investments and points to potential erosion in investment economics that could diminish future operating cash flow, if not offset by alternative sources of growth.

XL Capital suffered similarly, but due to just a warning.

XL Capital said its earnings would be hit by hefty claims from the Sept. 11 attacks and losses on telecom investments that include WorldCom Inc. and Adelphia Communications Corp.

The Bermuda-based insurance company said it was increasing its reserves by $200 million due to higher Sept. 11 business-interruption claims and more exposure to victims of the attack on the World Trade Center than anticipated. Also, the company said it would report investment losses of $120 million in the second quarter from telecom investments.

XL Capital's 0% due September 2021 was quoted down 1 point to 57.75 bid, 58.25 asked. The XL Capital 0% due May 2021 was quoted down 1.5 points to 59.5 bid, 59.75 asked. The stock plummeted $9, or 12%, to $65.50.

Much like Baxter's issue, the XL Capital convertible's upcoming put became more valuable.

The XL Capital 0% due September 2021 is putable Sept. 7 at 58.137.

Elsewhere on the earnings front, it was notable that Sprint PCS did not disappoint and in fact reported a narrower net loss.

That boosted most of the wireless phone group, including Nextel Communications, as well as several PCS linked convertibles.

Sources said there also was considerable trading activity in the Tyco convertibles, although the impetus was not immediately known. The company reports earnings next Tuesday.

Tyco shares closed off 6c to $11.92. The 0% convertibles were quoted mostly unchanged to slightly lower, with the 2021 issue at 68.125 bid, 69.125 asked and the 2020 issue at 58.375 bid, 59.375 asked.

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