Veritas DGC, Ivax hover at par; Pride plunges on loss related to deepwater rigs; New Century up

By Ronda Fears

Nashville, Feb. 27 - It was a mixed bag in convertibles Friday, but the market ended up still better bid although dealers noted considerable weakness persisting in the technology arena with declines mentioned in Amazon.com Inc., Juniper Networks and LSI Logic Corp. issues.

One of the big movers of the day, southerly, was Houston-based drilling contractor Pride International Inc. The convertibles took a sharp dive - at least insofar as outright investors were concerned - on a big loss directly linked to several deepwater drilling ventures.

To the upside, New Century Financial Corp. moved several points on increasing excitement that the Irvine, Calif.-based specialty mortgage lender would convert to a real estate investment trust. The company announced in late January, when it reported 2003 earnings, that it was investigating the possibility.

"It's an interesting situation," one sellside dealer said, referring to New Century.

The New Century 3.5% convertible due 2008 added 2 to 3 points outright to 151.5 bid, 152.5 offered. The underlying stock gained $1.40, or 2.94%, to close Friday at $49.

On Jan. 22, when New Century said it would hire a consultant regarding the possibility of converting to a REIT, the company estimated it would be around 75 days before a decision would be made.

Issuance tops year ago

Meanwhile, the primary market finished February on a strong note.

The year-to-date issuance was propelled past the year-ago level with a total of $11.66 billion from 68 deals, according to Prospect News data. The Prospect News total, which includes investment bank deals, compares to $10.62 billion from 31 deals in the first two months of 2003.

Citigroup Global Markets Inc. was the top underwriter for the month and year to date. (See full league tables elsewhere in this edition.)

Rounding out the month was the $350 million overnighter from Ivax Corp., which priced to yield 1.5%, up 26% - at the cheap end of yield talk of 1.0% to 1.5% and at the cheaper end of premium guidance of 25% to 30%. UBS Investment Bank, bookrunner on the deal, took it out at 100 bid, 100.5 offered. It had traded as high as 3 points over issue price in the gray market.

Also, Houston-based oil well servicing firm Veritas DGC Inc. sold $125 million of convertible floaters to yield the three-month Libor minus 75 basis points, up 47%.

The Veritas DGC deal, which was sold on swap, priced aggressively outside of yield talk for the three-month Libor minus 25 basis points to plus 25 basis points and at the rich end of premium guidance of 43% to 47%. Bookrunner Deutsche Bank Securities closed it at 100.5 bid, 101 offered.

Pride goeth for a fall

While Veritas DGC capitalized on the positive momentum recently in the oil and gas industry - due to climbing oil prices - drilling contractor Pride International plunged Friday on a big loss chalked up as a result of four troublesome deepwater drilling projects.

Dealers said the Pride converts sold off dramatically.

"On a dollar-neutral hedge, they were down just slightly," one trader said, "but outright convertible holders were hammered."

Pride's 2.5% due 2007 fell 11.75 points outright to 116 bid, 116.5 offered, and the 3.25% due 2033 lost 6.125 points to 104 bid, 104.5 offered.

Pride shares plummeted $2.70, or 13.61%, to $17.14.

Houston-based Pride reported a net loss for the fourth quarter of $38.45 million, or 28 cents per share, compared with net income of $1.14 million, or 1 cent per share, in fourth quarter 2002. Revenues totaled $434.85 million, up from $349 million.

For 2003, Pride reported a net loss of $23.9 million, or 18 cents per share, a widening from the 2003 net loss of $8.34 million, or 6 cents per share. Revenues rose to $1.69 billion from $1.27 billion.

The chief culprit for the losses, Pride said, was trouble with four deepwater platform rigs, which the company has previously disclosed. For the fourth quarter, some $34 million of the net loss was attributed to these rigs. For the year, a $64 million net loss was recorded in connection with the projects.

On the news, Standard & Poor's put Pride's credit ratings on negative watch and Merrill Lynch & Co. cut the rating on the stock to neutral from buy.

Buying on Pride softness

With positive sentiment driving virtually every segment of the oil and gas industry higher, some investors said any weakness is an opportunity to buy.

Although Pride converts sold off drastically, late in the afternoon there indeed was some buying interest on the weakness.

"We are looking at this as an opportunity to get involved in this name. We don't see that much more [in losses] could come of these projects," said a buyside convert trader at a huge outright convertible fund in New York.

"With oil prices just going out the roof, drilling is going to pick up so we think any weakness would be an opportunity to buy."

As supply concerns abound, due to OPEC's ongoing vow to curtail output, oil prices just keep rising. The April contract for crude oil, which became the lead futures contract Friday as February ended, shot up 65 cents a barrel on Friday to close at $36.16 a barrel on the New York Mercantile Exchange.

Higher oil prices have been a factor in an uptick in the active rig count, too.

Houston-based Baker Hughes Inc. reported Friday that the U.S. rig count was up 20 after gaining just three the week before and losing six in the second week of February. The rig count at Friday stood at 1,134, according to Baker Hughes, versus 912 a year ago.

The U.S. rig count peaked at 4,530 in 1981 during the height of the oil boom, according to Baker Hughes, and hit a bottom of 488 in 1999.

Airlines pass on fuel costs

With crude prices rising, transportation fuels have been on the rise too, so the airlines have come under pressure as well.

Airline paper in the convertible market lost ground Friday although volume in those issues was described as fairly light. Most of the convertibles were lower as a result of the underlying stocks dropping as oil prices rose.

There is a dozen or so airline converts and all were soft, except for slight ticks up for JetBlue Airways Corp. and ExpressJet Holdings Inc.

Continental Airlines has been the only one thus far to boost ticket prices directly as a result of higher fuel costs, however, according to a dealer. He noted that most are pressured to keep fares low as the summer travel season approaches, particularly from low-fare competitors like Southwest Airlines Inc., which does not have a convertible in play.

On Friday, Continental announced a $5 increase for one-way tickets and a $10 increase for round-trip tickets within the continental United States, or the lower 48 states.

"Fuel prices, which we can't control, are the highest we have ever seen," said Jeff Misner, chief financial officer of Continental, in a media statement on the fare hike. "Meanwhile, Continental travelers in 2003 paid the lowest fares since 1994."

Continental's 4.5% convertible was quoted at 88.75 bid, 89.25 offered with the stock closing off 21 cents, or 1.41%, to $14.65.

The AMR Corp.'s, parent of American Airlines Inc., new convert, the 4.5s, were quoted at 99.5 bid, par offered with the stock down 15 cents, or 0.98%, to $15.20.

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