Convertibles lag gain seen in stocks; Tyco, CMS, ImClone hamper market

By Ronda Fears

Nashville, Tenn., June 12 - It was a mixed bag Wednesday but for the most part convertibles were described as lower. Bad news hurt several groups of convertibles, although the stock indexes reversed into positive territory.

Traders said volume was moderate as events at ImClone, Tyco, CMS and others like Adelphia - although there was no news Wednesday - continue to spook many players.

"We're still in an area where there's a lot of bad news coming out," said Yaw Debrah, head of U.S. convertible research at Merrill Lynch & Co.

"Our strategist, Richard Bernstein, is calling for very, very poor performance for quite a period of time. When you have the kind of excesses we saw in 1999, its takes a while to correct this."

Convertibles are holding up when you benchmark them against the broader markets, but perhaps the roughest period will be how they fare when the market really turns north.

"The convertible market is busted, so it's not surprising that the market is holding up well. In March 2000 at the height, the average premium was 25%. Now it's 77%," Debrah said.

"So, we've got to eat through quite a lot of premium. We need equities up about 20% from these levels," he said, which could bring on convertible issuance with lower premiums.

New convertible issues would have lower premiums if stocks are in a rising pattern, thus moving the convertible market's overall premium levels lower.

Agere's new deal is the high spot of the calendar this week, and otherwise sources expect it will continue to be slow for the summer.

The Agere deal is seen cheap and the reactions were mixed among buyside sources, but the deal is seen getting a strong book of buyers. It is talked to yield 6.25% to 6.75% with an initial conversion premium of 32.5% to 37.5%.

Bear Stearns puts the Agere deal - at the midoint of guidance - 6.9% cheap using a credit spread of 1,000 basis points over Treasuries and 60% volatility in the stock.

Lehman Brothers puts it 6.6% cheap, using a spread of 900 basis points and 45% volatility.

Wachovia Securities puts it 5.3% cheap, using a spread of 1,000 basis points and 55% volatility.

While the Nasdaq and Dow Jones Industrial Average both gained about 1%, there were too many upsets in convertible names for the market to join the party, traders said.

"The disaster du jour was ImClone, of course," said a convertible trader at a hedge fund based in Chicago.

The idea that is being kicked around about personal liability for these corporate executives would really ease a lot of minds, the trader said.

"It's really scary out there. I mean, even with something seemingly as innocuous as revenues, which seems like something that would be easy to trace, it isn't what it seems anymore," the trader said.

"You've got Adelphia lying about the number of subscribers and the Enrons of the world counting money that isn't really there."

Adelphia is widely seen only hours away from filing bankruptcy as the grace period for its missed interest payments draws nigh, but there was nothing new in the situation Wednesday.

In addition to the energy names getting hit again, with CMS Energy feeling the most pain, several telecoms and tech names sank further.

CMS Energy shares dropped $2.10 to $13.01. The new convertible preferred lost 1.95 points to 18.2 and the old convertible preferred fell 2.9 points to 15.27.

Cable and media were hurt not only still because of Adelphia, but also a lawsuit against Clear Channel and a humongous dive at Omnicom in reaction to another Wall Street Journal report on the company's accounting practices.

Omnicom shares fell $15.28 to $62.28. The 0% convertible due 2031 fell roughly 2.5 to 3 points, quoted at 95.25 bid at one shop and at 96.375 bid at another.

Traders said most market players are "holding on and fighting fires," because of the dramatically swift reaction to headlines in the stock market. They are doing homework and getting comfortable or tweaking positions, then staving off the urge to react in kind with the stocks.

"You try to know what you've got, really know, the best you can, and then just stick to your guns," said a convertible fund manager in Boston.

"It is really an internal battle some days when you see the headlines and the pundits extrapolating some issue into the broader sector or market. You can hardly resist the urge to bail out. Sometimes you do have to react that way, like with Adelphia. But with ImClone we'd been trying to hold on, until today."

Traders said there was not a huge exodus in ImClone on Wednesday, however, as the former CEO Samuel Waksal was arrested and charged with securities fraud and insider trading. Federal authorities allege he tipped off two people to sell stock a day before federal regulators rejected ImClone's application for a cancer drug.

Waksal, 54, who resigned as chief executive of ImClone almost a month ago, was arraigned in federal court in New York on two counts of conspiracy to commit securities fraud, six counts of insider trading and one perjury charge. He was released on $10 million bail.

Biotech, drug and healthcare names saw a mixed reaction to the news.

Traders said there was some selling in biotech and drug names, but some buying healthcare.

ImClone's 5.5% convertible due 2005 fell 3 points to 70.375 bid but also was quoted at 72.5 bid at one shop.

Tyco also was lower, on a Moody's downgrade to junk even though the conglomerate has been given SEC approval to proceed with the IPO of CIT. The separate launch of a formal SEC investigation into the company as a result of the indictment of former CEO Dennis Kozlowski for tax evasion overshadowed the news on CIT.

"Tyco was on a roller coaster today. The news was bad, good and then bad again," said a trader.

The Tyco 0% convertibles both ended about 1 point lower but the 2020 issue was seen down as much as 2.25 points intraday. The 2020 issue was quoted at 54 bid by one shop and at 56.5 by another. The 2021 issue was quoted at 64 bid at one shop and at 65.25 at another.

Tyco shares dropped 90c to $10.15.

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