Market settles into improved tone, but poised for declines

By Ronda Fears

Nashville, Tenn., Oct. 18 - There were no noticeable trends taking place in the convertibles market Friday, traders said, other than an overall improved tone on the earnings seen thus far. That said, traders cautioned players appear to be ready for a decline.

Lucent Technologies Inc.'s announcement it will seek a reverse split of its stock, following the likes of Nortel Networks Corp., pretty much stalled its securities, and traders said the news got a mixed reaction.

"It was a rough start today but the tone remarkably stayed pretty upbeat. It got real slow this afternoon, though," said the head convertible trader at a major investment bank.

"The mood still is sort of cagey, like people don't really think this [stock] rally will have any legs to stand on."

Lucent said it will seek a reverse stock split aimed at getting its stock to between $15 and $25.

Like Nortel, which announced plans for a reverse split to get its stock to $10 to $20, the measure was forced by the need to avoid getting delisted.

And the reaction to Lucent's move was similar to that of Nortel's, a bittersweet development for holders of the convertibles.

"We didn't trade any of the [Lucent] converts," said a dealer.

"If you look at the stock today, it had the lowest volume we've seen in weeks."

The Lucent 8% convertible was quoted flat at 21 bid, 22 asked and the 7.75% flat at 19.25 bid, 20.25 asked.

Lucent shares closed down 7c to 68c.

"If you believe they will be able to conserve cash like they say, then you're a buyer," said a buyside trader.

"You don't mind holding this if you believe they can pay off the puts, although some of the arbs could get stung. Then again, if there's a lot of short selling Lucent could get decimated. It depends on how things go and it looked today like the hedge funds were sitting on the sidelines for the most part."

Lucent said it ended June with $4.4 billion of cash and expects to close the year with $2 billion. The company reports third quarter results next Wednesday.

Nortel ended third quarter with $4.6 billion in cash and expects to end the year with about $3 billion.

Nortel's converts were not trading much Friday, either.

The Nortel 7% mandatory, which was issued at 28,751, was quoted flat at 16,036.8. The 4.25% convertible bond due 2008 was at 31.5 bid, 33.5 asked.

Nortel shares closed up 4c to 63c.

Both proposals for a reverse split are months away, the trader pointed out.

Lucent said it plans a vote in February. Nortel said it would present its plan to shareholders sometime next spring.

"Some people think Lucent and/or Nortel will be filing bankruptcy, and of course that would be devastating to convert holders," the buyside trader said.

"We don't think so. Not that we're looking really to add to our position even at these prices, but we're not selling out either."

A dealer said there have been inquiries made that suggest some investors believe Lucent and/or Nortel will be looking to buy back some of their convertibles, given the depressed prices, which "would make sense if they're sitting on enough cash."

Buybacks in the open market have been a theme in the convertible market for quite some time.

Analysts at Wachovia Securities think Atmel Corp. and Advanced Energy Industries Inc. are two such candidates right now.

"We believe Atmel Corp. will continue to repurchase its [0%]converts due 2018 over the next several months. We think it is highly unlikely that the company will use stock to meet the upcoming put. The company has plenty of cash to meet the $146 million convertible put in April 2003," said Wachovia Securities, Inc. convertible analysts Henry Voskoboynik and Dmitry Melnick in a report Friday.

Atmel has $182 million in leases and other debt coming due in the next 12 months. This is the only debt with covenants that Atmel has, the analysts said, and the company intends to repay all of it to avoid any covenant issues.

After repayment of these two obligations, the company should be left with cash and investments of $170 million and long-term debt of $460 million. Atmel also expects to generate free cash flow of $100 million in the next 12 months, they noted.

The Atmel 0% convertible due 2018 was quoted at 40.5 bid, 41.5 asked and the 0% due 2021 at 16.25 bid, 17.25 asked. The stock ended off 33c to $1.27.

Voskoboynik and Melnick also think Advanced Energy is a likely candidate for some buybacks.

"We believe AEIS's converts also offer attractive return potential to outright investors," Voskoboynik and Melnick said in a report Friday.

"We also believe the company will likely repurchase part of its 5.25% converts due Nov. 15, 2006."

The Advanced Energy 5% convertibles due 2006 are trading at an implied credit spread of 1,489 basis points. The analysts said they believe the right spread is 1,000 basis points, which using a 55% volatility puts the convert as 12.92% cheap.

"Advanced Energy will likely announce yet another round of restructuring to address its mounting operating losses. The company will try to bring down its break-even revenue level from $70 million to $55 million-$60 million," the analysts said.

"We believe there is plenty of room for cuts on operating expense lines, including recent acquisitions."

Advanced Energy ended the September quarter with cash and equivalents of $189 million, down from $198 million the previous quarter, and long-term debt of $224 million, $207 million of which is the two converts.

The analysts expect Advanced Energy to burn $12 million of cash in the fourth quarter, and total cash bottoming at $160 million in the third quarter of fiscal 2003.

The Advanced Energy converts were quoted up 1 point with the 5% at 70.375 bid, 72.375 asked and the 5.25% at 69.875 bid, 70.875 asked. The stock ended up $1.03 to $8.73.

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