Players sit out stock sell-off, dragging convertibles along

By Ronda Fears

Nashville, Tenn., June 19 - Convertibles dived and traders said most of the market sat on the sidelines as stocks drove the southward decline, with chips leading the way.

"There wasn't really much going on today," said a convertible trader at a major investment bank in New York.

"Most people have got positioned for earnings. There's still some selling going on, but most everybody is set and ready to take off for the summer."

Indeed, the market showed signs of summer vacations and early departures for the day.

But, as expected, chips were bludgeoned following the late-day warning from Advanced Micro Devices on Tuesday.

There was not a huge exodus in convertibles, traders said, mainly due to thin trading.

"Most of the focus was in the stocks today," one dealer said.

With a slim calendar, however, low trading volumes are expected to be the norm for the next couple of months.

DTE Energy was at bat after the close with a small $125 million mandatory and El Paso's $500 million mandatory prices after the close Thursday.

DTE shares closed up 32c to $43.65.

El Paso stock ended off 30c to $21.55.

Salesmen and traders said there was very good response to both deals, even though energy names have taken a hit lately and were slammed again Wednesday.

"El Paso is really not in the same group as the usual suspects. It's a much stronger credit," said a convertible trader at a hedge fund in New Jersey.

"We really see it as a buy opportunity on the weakness and like the new deal. The yield is decent and volatility is great."

Bear Stearns puts the El Paso deal 3.6% cheap, assuming a credit spread of 300 basis points over Treasuries and 43% volatility in the stock.

Deutsche Bank Securities puts it 1.5% cheap, assuming a credit spread of 300 basis points over Libor and 55% volatility.

Both also factor in a common dividend of about 4%.

The market is looking forward to a new deal from Goodrich Corp., too.

Goodrich announced it is buying TRW Inc.'s aeronautical systems unit for $1.5 billion, and will pay for it with a $400 million mandatory and a $1.1 billion straight debt deal.

Timing is uncertain, though, as the acquisition is expected to close in fourth quarter.

The Goodrich deal stepped on the toes of Northrop Grumman Corp., which has been pursuing TRW for several months. But Northrop said it will continue its pursuit for the remaining TRW, as the aeronautical unit is only about a quarter of the company.

Investors responded by moving Northrop higher.

Northrop shares ended up $2.80 to $132.50. The 7.25% mandatory added 2.95 points to 138.53.

"We think they [Northrop] should forget about the TRW deal," said a dealer.

No one has forgotten about Adelphia, but there has not been a bankruptcy filing.

Adelphia shares were down 5c to 17c in over-the-counter trading.

The Adelphia converts are still quoted roughly in the 9 to 12 range but not trading much if at all.

"It's getting to be like a broken record: Adelphia will file [bankruptcy] any day now," said one market source.

"The stock was up a nickel [Tuesday], so go figure. But, then Enron stock is still at 11 cents."

As tech and telecom issues continued to slide, traders said there were some inquiries into a few healthcare and biotech names. That, despite ImClone getting notice that it may face violations from the SEC over its fiasco stemming from the late 2001 rejection of its Erbitux application at the FDA.

Even ImClone was higher.

The 5.5% due 2005 was quoted up 0.5 point to 76.25 bid, 77.25 asked as the stock rose 33c to $11.41.

LifePoint's new 4.5% due 2009 gained 1.375 points to 111 bid, 111.5 asked. The stock added 91c to $41.31.

Inhale Therapeutics' 6.75% due 2006 was quoted up 2.375 points to 66 bid, 67 asked. The 5% due 2007 and 3.5% due 2007 were also quoted higher, but to a smaller degree. Inhale shares gained 50c to $7.75.

"Everyone is looking for bargains," said a convertible trader at a hedge fund in Connecticut.

"The market is really picked over, though. So, you really have to bump up your comfort zone with regard to risk."

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