Motley trading, mostly up; State Street launches deal

By Ronda Fears

Nashville, Jan. 10 - It was a mixed bag Friday, but convertibles ended mostly positive.

The frenzy over Tyco's new paper had almost entirely died down, and State Street Corp. launched a new deal for next week with a new structure to pique some interest.

"I look for new deal activity to pick up pretty strong in the next couple of weeks," said Rao Aisola, head of convertible research at Bear Stearns & Co.

Converts were mostly higher, traders said, with the more junky paper taking most of the leaps.

"It was really a motley crew of active names today, no real stand-outs in terms of sectors or anything like that," said a dealer.

Yet, some continue to note the definite outperformance of high yield names versus high grades.

"Distressed is doing very well," said Barry Nelson, a convertible portfolio manager for Advent Capital Management, adding that his fund does not hold any distressed names.

"It's frustrating to watch the garbage do better than the good stuff."

However, Nelson said that credit spreads tightening and credit markets opening up to the more risky names like Tyco are good signs for the markets overall.

Indeed, Bank of America Securities strategist Jeffrey Rosenberg said the spike in capital markets activity in January "feels more like a drag race, as the market went from a standstill [in the December break] to top speed rather than moving at the steady and sustainable fundamental pace."

While both high yield and high grade issuance in corporates picked up, he also noted that the outperformance of high-yield paper has "made it significantly more difficult to outperform the market."

The Tyco deal helped converts keep pace to a large extent, but with volume in Tyco converts trailing off considerably by week's end, the market was looking for a new deal to be launched for next week's business.

State Street accommodated that expectation, launching $275 million of mandatory convertible Spaces with price talk but, given the new structure and it being Friday, there wasn't much buzz about it.

The three-year deal is talked to price at a yield of 6.75% to 7.25% with an 18% to 22% initial conversion premium. Pricing is set for after the close Tuesday following a roadshow in Boston and New York that begins Monday.

State Street shares ended up 4c to $40.23. The company also announced earnings Friday.

In the secondary, trading was described as moderate and it was a mixed bag of movements.

Veeco Instruments Inc. ticked up nicely on the news its merger with FEI Co. was called off, although many still think there needs to be some consolidation in the semiconductor sector.

Veeco's 4.125% convertible due 2008 added 1.75 points to 81.625 bid, 82.625 asked while the stock closed up 92c to $15.39. An upgrade to the stock on the merger news by Bear Stearns helped move the stock.

The reaction was more tepid with regard to FEI, although Standard & Poor's affirmed its credit rating and lifted a review on the merger news.

FEI's 4.4% convertible due 2008 was quoted up 0.5 point to 87.875 bid, 88.875 asked. The stock ended up 19c to $18.94.

Capital One Financial Corp. got a nice spike ahead of its earnings next week, with the 6.25% mandatory up 1.65 points to 35.1 and the stock up $2.49 to $39.

Alpharma Inc. also moved upward with a rosy guidance release. Citing strong volume growth in its human drugs (the company also markets animal drugs), Alpharma said expects 2003 earnings will rise 28% to 39% from 2002.

The Alpharma converts were quoted up 5-6 points with the 3% due 2006 at 96.5 bid, 100 asked and the 5.75% due 2005 at 90.625 bid, 92.625 asked. The stock ended up $2.54 to $16.

EchoStar Communications Inc. also gained after announcing it would raise the price of four basic programming packages by $2 a month, or an estimated 4%.

EchoStar's converts were both up about 2 points with the 4.875% due 2007 quoted at 95.375 bid, 96.375 asked and the 5.75% due 2009 at 98 bid, 99 asked. The stock closed up $1.17 to 26.22.

There was some activity in a couple of retail names, but on specific news rather than the retail sales figures that headlined on Thursday.

J.C. Penney Co. Inc. went south on layoff plans that will lead to restructuring costs, which will cut into fiscal 2004 earnings by 10c a share.

But, Skechers USA Inc. soared after saying it expects fourth-quarter revenue will come in about 5% above the top end of its previous estimate of $160 million to $170 million, resulting in a narrower loss than expected for the quarter.

Nortel Networks Corp. also saw another sharp gain, traders said. The 4.25% convertible due 2008 added 3.25 points to 64.75 bid, 65.75 asked and the 7% mandatory gained 2932.75 points to 44,837.25 bid, 44,887.25 asked. The stock ended up 20c to $2.35.

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