Converts marked up as stocks soar but faith, volume still lag

By Ronda Fears

Nashville, Tenn., July 24 - Although the sharp rise in stocks provided for a good deal of the convertible market to get marked up, volume was still very light amid a lagging faith level. Market turmoil also was said to have stalled, if not nixed, Orbital Sciences' new deal, which did not price but nothing else could be confirmed.

"We're not too much better, really. It was pretty bad for a while this morning," said the head convertible trader at a major investment bank.

"No one really believes it," the trader said, referring to a one-day gain, albeit sharp, which has happened several times in recent weeks, only to be erased by ensuing declines.

"Our market is dislocated," the trader continued. "Liquidity is low. Volume is low. Spreads are wide."

With earnings misses abounding, sentiment overall remains negative, traders said, despite any small encouragement about corporate governance getting a boost of confidence from the arrests of the Rigases that allegedly brought Adelphia Communications down and the looming Aug. 14 deadline for CEOs to personally sign off on their companies' books.

"I don't think one day's going to make much of a difference," in sentiment, said a convertible trader at a hedge fund in New Jersey.

As for the Aug. 14 day of reckoning for CEOs in regard to companies' accounts, he said he's not sure that will provide any real comfort.

The comfort will come more in the form of real results, improving results.

"This week, with credit spreads widening so much, a lot of the convert market is shell-shocked," the trader said.

"Every day it just keeps getting worse. It's pretty nerve-racking."

Mandatory converts, seen as a source of safety as well as a yield-boosting security, were hit hard by the spike in volatility, which mutilates the security because they are so equity sensitive.

"Volatility hit a 14-year high," the trader said.

"And a lot of these mandatories are utilities, which were hit especially hard."

A trader at a convertible fund in New York, however, was heartened by the Rigases' arrests and the impact that might have on the looming Aug. 14 date.

"The fact that they arrested them, cuffed them, I think should make a lasting impression on a lot of the CEOs out there, especially if they've been anywhere near a gray area in their books," the trader said.

"What will be interesting is to see how many extensions are requested, or granted. Like Tyco."

Tyco's new chief executive has said he would not sign off on the company's books until after he is satisfied with them through an internal investigation. The former CEO, Dennis Koslowski, was arrested for tax evasion.

Wednesday, Tyco continued to slide while most of the market headed north, but traders noted very little activity in the converts.

The Tyco 0% converts both lost 1 point, with the 2020 quoted at 58 bid, 59 asked and the 2021 issue at 68.75 bid, 69.75 asked. The stock closed down 65c to $10.

Several telecom names, like Nextel Communications, and media names, like AOL Time Warner, were also lower. Most energy names were higher, although Reliant Energy proceeded south.

AOL Time Warner vacillated during the session in anticipation of earnings but sentiment quickly turned sour after the company also announced that the SEC is investigating its accounting practices.

"AOL straight paper was all over the place, 300 basis points wider early and then tightened to almost unchanged at one point," said a dealer.

"The converts, at about 47.5, traded at a yield of about 13.5%."

AOL's 0% due 2019 was quoted ending down 1.25 points to 46.75 bid, 47.25 asked, for a yield of 13.3%. The stock ended down 15c to $11.40.

Other AOL-linked paper, issued by Reliant Energy and Tribune Co., was lower as well.

Clear Channel Communications also continued to get rocked but was seen ending higher on some trading activity.

While nothing except the fact that the Orbital Sciences deal was not priced could be confirmed, several market participants believe it may have been scrapped for now, if not altogether. The company has until the October maturity date to refinance its $100 million of 5% convertible subordinated notes.

The new $100 million of four-year convertible senior notes are talked to yield 7.5% to 8.0% with a 15% to 20% initial conversion premium were basically a victim of market conditions.

"It's a joke to try to do a deal right now, any deal," said a market source.

"Even junk bond issuance has dried almost completely up," the source said, due to lack of demand as rattled investors opt to "sit still until the storm passes."

Orbital posted second quarter net income of $5.4 million, or 12c per diluted share, versus net income of $66.6 million, or $1.75 per diluted share, a year before. Revenue grew 25% to $135.4 million in from $108.5 million. Operating income was $7.2 million as compared to an operating loss of $8.5 million.

Several market sources talked of hearing trouble with the deal, as Orbital shares fell below $5, but that could not be confirmed.

Orbital shares closed down 85c to $4.43.

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