Flow improves on end-of-quarter maneuvering, capital structure arb

By Ronda Fears

Nashville, Tenn., Sept. 25 - Traders said the gain in stocks Wednesday was a nice reprieve and most of the convertibles market was marked up. Flow was still moderately heavy, but traders attributed it mostly to end-of-quarter portfolio polishing and profit taking.

"Overall people are skittish about buying anything right now but they're also skittish about selling with the severe declines," said John Wright, a salesman at Bear Stearns & Co.

"One thing that's interesting is that we're seeing a lot more capital-structure arbitrage trading going on."

Those are opportunities arising from the differential in credit spreads between a company's convertibles and straight debt.

Liberty Media Group's issues were seen moving on that strategy, with the skew in the implied spread on the converts attributed largely to the fact that the issues exchange into other stocks like Viacom Inc. and Sprint PCS Group.

A few EchoStar Communications Corp. converts were also moving on that strategy.

The bulk of trading, however, was event driven with a degree of urgency due to the approaching quarter end.

"There's a good deal of window-dressing going on, a lot of this **** people don't want to show up on their books," said a trader at a convertible fund in New York.

"With that, people are picking up some profits in the better names, situations where people are looking to buy."

A lot of the volume was attributed to the usual high-profile suspects - Electronic Data Systems Corp., Tyco International Ltd., El Paso Corp., Duke Energy Corp., Cendant Corp., Fleming Cos. Inc. and the like.

But there were other names mentioned trading that don't pop up often anymore, like Amkor Technology Inc., Amdocs Ltd. and Enron Corp.

"I don't know what's going on with Amkor, we just saw it move big today," a trader said, noting there was no news out on the company and the earnings call is not scheduled until late October.

The Amkor 5% convertible due 2006 and 5.75% convertible due 2007 both ticked up 4.625 points to 22.125 bid, the trader said. The stock gained 28c to $1.48 on heavy volume.

EDS and El Paso also were higher, rebounding from recent hits as buyers returned for yields approaching 12% in the case of EDS.

The Bisys Group Inc. also gained on heavy buying, although the financial services company warned late Tuesday about earnings in fiscal first quarter ending Sept. 30.

"There were a lot of people buying Bisys converts, both arbs and outrights, and that's very rare," a dealer said. "The stock was hit on the warning early but it came back."

A company conference call on the outlook helped boost the securities, traders said, along with a broad gain in banks and financials.

The Bisys 4% convertible due 2006 was quoted up 0.5 point to 91 bid, 91.5 offered. The stock ended up 11c to $16.61.

Fleming also rebounded sharply on news the company will sell its retail operations, which countered the negative backlash from an S&P downgrade to the credit on its lower earnings guidance.

Fleming's 5.25% convertible due 2009 gained 3.625 points to 39.125 bid while the stock rose 81c to $5.99. The food distributor's junk bonds were seen about 9 points higher early in the session.

Tyco gained despite a reduction to its profit outlook, also, following a conference call featuring the new CEO Edward Breen for the first time.

"Let me reiterate that Tyco's fundamentals remain positive," Breen said at his first conference call since taking over the flagging conglomerate in July.

Tyco's 0% convertible due 2020 rose 0.75 point to 66 bid, 66.5 asked and the 0% convertible due 2021 added 0.25 point to 72.25 bid, 73.25. The company's straight bonds were seen up about 3 to 4 points early in the day after the conference.

Tyco shares closed up $1.41 to $15.

Cendant, however, did not get such a response to its lower profit guidance and dropped sharply.

"Most of the sell-off in Cendant, I think, was because people don't want this name on their books," a trader said.

"There've been too many questions raised there and now with the earnings warning people are just ready to get out."

Cendant's newest convert, the 7.75% mandatory, lost 2.64 points to 34.46 and the newest bond, the 3.875% due 2011 sold in November, dropped 2.875 points to 94.125 bid. The 0% converts were also lower, but on less volume. The February 2021 issue was down 1.625 points to 62.375 bid and the May 2021 issue off 0.25 point to 97 bid.

Cendant shares closed down $1.71 to $11.25.

Energy and power names were mixed, which traders said indicated where the faith lies.

Teco Energy Inc. and El Paso Corp. were higher, while Duke Energy Inc. lost ground.

Teco held a conference call on its lower guidance and ratings cuts by both Moody's and S&P, saying the company still expects 10% or better earnings growth in 2002 and that its plans indicate no need to raise capital through 2003.

Teco's mandatory added 1.17 point to 18.9 as the stock rose $1.72 to $16.16.

BJ Services Co. also rose on buying, with no news out. The discount convertible bond due 2022 added 0.625 point to 76.75 bid, 77.25 asked. The common stock ended up $1.25 to $24.55.

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