War scare sparks emotional trading, but defense names struggle ahead of conflict

By Ronda Fears

Nashville, Feb. 13 - The convertible market watched stocks slide mostly from the shadows Thursday, traders said. It was an emotional session, underscored by security scares in New York and London.

Stocks were deep in negative territory for most of the day until buyers emerged and during the last hour or so of trading stemmed the losses.

Convertibles held up rather well, though, thanks to the market's lack of delta and hefty premiums.

"It's not a rational, logical time," said John Siebel, head of trading at Silverado Capital Management, a convertible hedge fund manager.

"It's an emotional time and the market reflects that. I'm just trying to keep a low profile, keep my head above water."

Given the nature of the nervousness in the market - namely, a war - one would think defense issues would be showing some strength.

But Northrop Grumman Corp. and L-3 Communications Inc. both were rocked Thursday and spent most of the session sharply lower. Like much of the broader market, however, they ended with only small changes.

"Northrop and L-3 were getting creamed today," said a convertible trader at a hedge fund based in Connecticut.

"It was ugly today. The bottom line: nothing is safe right now. So, we're trading vol, trying to find higher ground."

L-3's converts were down 2-3 points around midday but ended less than a point lower.

The 4% due 2011 closed down 0.875 to 106 bid, 106.5 asked. The 5.25% due 2009 closed off 0.125 point to 121 bid, 121.5 asked.

L-3 shares lost $1.65 on the day to close at $38.96.

Northrop's 7.25% mandatory ended up 0.25 point to 102.25 on the New York Stock Exchange, but a dealer quoted the issue at 100.375 bid, 100.625 asked.

Northrop shares added 15c on the day to close at $91.40.

Terrorist scares at the Brooklyn-Battery Tunnel and London's Gatwick Airport spooked market participants, most of whom had already been warming the benches all week due to heightened security alerts in the U.S.

Volatility provided a focal point for hedge fund players, with most of concentrated in the new issues of late.

The Deutsche Bank Luxembourg/USA Interactive floater tranche A, which was issued at 134.5 on Tuesday, was quoted at 137.125 bid, 137.375 asked. tranche B, which was issued at 125.2 on Tuesday, was quoted at 127.125 bid, 127.375 asked.

USA Interactive shares closed down 42c to $22.05.

Tyco International Ltd. was weaker although the convert market breathed a sigh of relief as the redemption of its 0% due 2021 came to pass.

Both new Tyco converts were down by about 0.75 point on the day, traders said. The 2.75% due 2018 was quoted at 97 bid, 97.5 asked and the 3.125% due 2023 at 96 bid, 96.625 asked.

Tyco shares closed off 15c to $14.47.

There could be some negative reaction in Tyco on Friday, however, to a Standard & Poor's release after the close.

S&P said Tyco's ratings could be slashed to junk unless it executes guarantees relating to certain intercompany debt to address structural subordination concerns.

Tyco's ratings, including the convertible senior debt at BBB-, remain on negative watch, S&P said, until that matter is resolved.

S&P acknowledged that the $4.5 billion of new convertibles and Tyco's new $1.5 billion bank revolver has alleviated liquidity concerns, but said that if Tyco does not address intercompany debt guarantees, the holding company debt-level ratings would be lowered one notch, including the senior unsecured debt to BB+.

If the guarantees are executed and S&P is satisfied that they successfully address these concerns, S&P said the ratings are likely to be affirmed with a stable outlook.

Power issues continued weaken, which extended to the new Sierra Pacific Resources convert on Thursday. The 7% converts dropped 0.75 point to 109 bid, 109.5 asked as the underlying stock ended off 15c to $3.60.

El Paso Corp. is feeling the brunt of the pressure in the power group, as traders said Calpine Corp., AES Corp. and Duke Energy Corp. seemed to stabilize on Thursday.

Several telecom names were pulling back, also, traders said, after seeing a fairly nice run in the past few weeks.

"There had been some optimism based on maybe a better balance sheet position," said a convertible dealer.

"But the fundamentals from an operating standpoint haven't improved one iota. There's no revenue growth and eventually there's a load of debt service to contend with."

Nextel Communications Inc. was the most notable, as it is one of the most heavily traded telecom names on convertible desks. The converts were down a little over 1 point, the dealer said, while the Nextel junk bonds lost over 2 points.

Nextel shares closed down 45c to $12.31.

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