Tyco deal buzz resurfaces, El Paso hit again on S&P cut, retail names get grateful lift

By Ronda Fears

Nashville, Dec. 2 - The convertible market's strong start fizzled as the day wore on, but moods turned positive late in the session on a blurb that revived talk of a big new deal from Tyco International Ltd.

Market sources expect at least one new deal this week, although no details have surfaced yet.

With better-than-expected post Thanksgiving sales, retail names firmed nicely, but the positive tone was dampened by weak manufacturing data. J.C. Penney Co. Inc. was one of the strong retail gainers.

Tech and telecom names like Advanced Micro Devices Inc. and Nortel Networks Corp., though, remained positive for the entire session.

On a negative note, El Paso Corp. sank again as Standard & Poor's cut the credit to junk, on the heels of a Moody's downgrade to junk last week.

"No one knows how much it's going to cost El Paso due to the Moody's downgrade, and now there's the S&P downgrade," said Stuart Novick, convertible analyst at Salomon Smith Barney.

"It's hard to really get a handle on their liquidity situation."

El Paso said there will be additional collateral requirements due to the Moody's cut, but did not quantify the amount. And, there are bank agreements to be renegotiated now that the company decided to draw down $1.5 billion of its $3 billion bank facility.

The uncertainty lured more sellers than buyers for El Paso, trader said.

El Paso's convertibles were all quoted roughly 0.5 point lower on the S&P downgrade.

The 0% convertible bond was quoted at 29.5 bid, 30 asked. The 4.75% convertible preferred due 2028 was quoted at 18 bid, 18.5 asked. The 9% mandatory was quoted at 28.375 bid, 28.625 asked.

El Paso shares ended off 26c to $8.26.

Most of the news out there, however, had a positive spin and helped edge the market slightly higher.

Retail names were strong on sales news from J.C. Penney and Wal-Mart Stores Inc.

J.C. Penney said sales during the Thanksgiving weekend hit a record and were "significantly above" last year's level, although no exact figures were reported.

The J.C. Penney 5% convertible due 2008 gained 1.875 points to 110.5 bid, 110.625 asked as the stock rose 84c to close at $24.57.

Chipmakers like AMD rose on an upgrade to the stock by Lehman Brothers that accompanied a boost to the rating of Intel Corp. shares.

AMD's new 4.5% convertible due 2007 was quoted climbing 12.625 points to 151.5 bid, 151.75 asked and the old 4.75% convertible due 2022 gained 1.5 points to 70.625 bid, 71.125 asked.

AMD shares closed up 43c to $8.93.

The mood was also definitely positive on the new-issues front following the spate of new deals in November.

"I think, all things being equal, we should see a robust December," regardless of whether the Tyco deal materializes or not, Salomon's Novick said.

The buzz about Tyco's plans for a $2.5 billion to $4 billion convertible, which began a couple of weeks ago, resurfaced as an outcrop of a blurb on Briefing.com that the accounting probe of Tyco's books could be completed as early as Tuesday. Reportedly, the new deal hinged on getting the probe finished first.

"The theories on both sides make sense," said a buyside source.

"They [Tyco] may just go ahead with it, with a pretty positive tone in the market, and that would put a nice finish on this year for converts. Or they may wait until next year for whatever reason. It would be a nice big new deal to start the year with."

Tyco shares ended off 3c to $17.72 but both convertibles were quoted up 0.25 point. The 2020 issue was at 71.25 bid, 71.5 asked and the 2021 issue at 75.125 bid, 75.625 asked.

The surge in convertible issuance has been accompanied by a huge rally in the credit markets in general that encouraged new issues. Corporate issuance and junk bond deals also have risen sharply in the past few weeks, and more is expected for the remainder of the year.

"Until mid-October, portfolio managers focused on the risk of exposure to credit disasters," observed David Goldman, head of research in the global markets group at Banc of America Securities, in a report Monday.

"With Baa/BBBs tightening by 93 basis points during November, and the high yield market better by 9 points since its October trough, the risk became missing the rally. The fourth quarter of 2002 stands to go down as the fastest credit market recovery in the record books."

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