Gilead plunges 11-30 points on earnings disappointment; Northwest, Elan deals pops up;

By Ronda Fears

Nashville, Oct. 29 - As expected, the outlook for new issue activity now seems more promising for the next few weeks - at least more so than the past six weeks or longer - in the face of low interest rates and year-end swiftly approaching.

The convertible market was eager to snap up two new mandatory issues from PMI Group Inc. and Valero Energy Corp. but in general players said they are not yet wowed.

New paper from Northwest Airlines Corp. was circulating in the overnight market as a bought deal off the Citigroup desk using the cash-to-zero structure. And Elan Corp. plc announced it is planning a new Regulation S convert and stock offering to pay the $500 million put on its existing issue in mid-December.

PMI Group's deal was boosted to $300 million from $250 million, with the books described as "significantly oversubscribed" by bankers involved, and the Valero offering was met with relish.

On heavy volume, the PMI mandatory was closed by co-manager Citigroup at 25.54 bid, 25.59 offered versus the stock at $39.23. PMI shares ended off 6c, or 0.16%, to 38.24.

The two previous overnighters totaling $525 million from United Rentals Inc. and JDS Uniphase Inc., the latter of which was a no-no (0% coupon, 0% yield), however, continued to flag among buyside players.

"Both mandatories, as usual, seemed priced nicely. I can't say the same for the bonds - JDS Uniphase and United Rentals - which sounded like the underwriters again were desperate to do a deal," said a multi-strategy fund manager in New York.

"No-nos are not really meant for companies like JDS Uniphase, but only for much better credits. Both were just priced poorly as you know."

JDS Uniphase's new convert was closed by bookrunner Morgan Stanley up 0.375 point to 99.25 bid, 100.25 offered. The stock closed down 1.4c, or 0.4%, to $3.49.

"JDS Uniphase and United Rentals have traded badly because they were bought deals and the brokers were trying to take market share," said the manager of a big fund in New York.

"They're killing their own market."

Goldman Sachs, lead on the United Rentals deal, however, closed out the new 1.875% convert up 1.25 points to 96.25 bid, 96.5 offered.

Both United Rentals and JDS Uniphase were reoffered by the lead banks at 98.

Some players were speculating that the new Northwest convert would likely be reoffered below par, as well.

The Northwest Airlines issue, a $225 million deal, was seen pricing before the open Thursday with a 7.625% yield-to-maturity and 60% initial conversion premium. The cash-to-zero issue will pay a cash coupon for five years, then become a zero-coupon convert. Citigroup is bookrunner.

The structure is like the existing Northwest Airlines convert, which was sold for a 6.625% yield-to-maturity in mid-May.

Northwest Airlines stock closed Wednesday up 11c, or 0.77%, to $14.31. In after-hours trading, the stock was down $1.16, or 8.11%. The 6.625s due 2023, a $150 million issue, was quoted Wednesday gaining 0.5 point to 123.25 bid, 124.25 offered.

Elsewhere, convertible traders on both sides of the market - buyside and sellside - said there was nice flow, "but it's just the usual suspects," or "story names" like Gilead Sciences Inc. and New Century Financial Corp.

Gilead Sciences dropped sharply in tandem with the stock as the market was disappointed with its earnings. The biotech firm posted nice profits, but it was less than equity analysts had been expecting, so the stock saw a huge sell-off, plunging $7.46, or 12.55%, to $52.

The converts also dropped in dollar points, traders said, but had been under pressure somewhat already from the call/put threat in the market. The 2% due 2007 fell 11.625 dollar points to 128 bid, 128.5 offered and the 5% due 2007 sank 30.75 points to 212.75 bid, 213.25 offered.

On the mention of suspects, several market sources said there is some "grave concern," as one put it, related to charges against a former Lipper Holdings manager and Putnam Investments as well as New York Attorney General Eliot Spitzer's ongoing crusade that is being spun as a clean-up effort.

Edward Strafaci, a former Lipper executive, was indicted Wednesday on allegations that he inflated the values of two hedge funds by hundreds of millions of dollars from 1996 to 2002. He pleaded innocent to the securities fraud and investment advisory fraud charges.

That came on the heels of the federal and state securities fraud charges leveled against Putnam Investments and two former fund managers on Tuesday, which followed headlines from Friday that Putnam had fired four managers for improper trading practices. Putnam has denied fraud.

While the securities industry - or more specifically the professionals in the securities industry - has come under fire since Enron Corp.'s collapse in late 2001 sparked probes of numerous large corporations that led to scrutiny of the financial community, the Putnam charges marked the first investment fund to be hit with formal charges in the newest scandal regarding questionable trading.

"Am I nervous? I am. I can't say I'm surprised [particularly with regard to Lipper] but I'm disappointed," said a convertible manager in New York.

"It's going to raise costs [if new fund regulation results] and right now it's very competitive. Typically, regulation triggers a stampede out. But, then, who knows, maybe a bunch of money gets pulled out of other areas, like funds with the phrase 'market timing' in them and it gets funneled into converts."

Market timing trades, which involve rapid buying and selling of mutual fund shares in a bid to profit from short-term changes in share prices, are at the heart of charges against Putnam. And it has gotten dealers at some big shops, like at Bank of America, in trouble, too.

In the convertible market, with hedge funds seeing their fair share of negative headlines while returns have been somewhat lackluster on a relative basis to the last couple of years of eye-popping double-digit returns, the emotions are mixed.

"It seems likes there's new money swirling all over the convertible market, but at the same time people are talking about redemptions," said a hedge fund manager in Connecticut.

Hedge fund indexes, both within the fund community and elsewhere at Merrill Lynch and other big investment banks that track hedge fund performance, show returns have turned positive over the past two months.

Meanwhile, the convertible market is looking more expensive, which some attribute to more money chasing the paper.

"As for the market in general, converts, the market is rather picked over and it's hard to find things to do," said an experienced convertible manager who is starting up a new fund.

"With vol still falling, a lot of positions are getting close to a point where there is little room left to make money."

As for the bullish stock market, which could spur convertibles higher, he said believers and skeptics alike are at the mercy of those forces.

"As for the stock market, I'm not a believer. But the tape is telling you the market is going quite a bit higher as there aren't that many sellers," the manager said.

"People are afraid of missing the move, and with Fed Funds at 1%, the Fed is implicitly pushing you into stocks."

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