Convertibles lower on more selling as AES, Nvidia get hit

By Ronda Fears

Nashville, Tenn., Feb. 15 - Convertibles were lower Friday ahead of the holiday weekend, traders said, as selling in telecom and telecom equipment continued and extended into the cable sector because of its heavy debt-load. AES Corp. also saw a widespread sell-off on credit rating actions, and Nvidia Corp. was sold off on a new SEC investigation. Overall, sellers prevailed but traders noted that volume was light, and some traders seemed to think the light volume was a sign that selling was ebbing or will soon subside.

"People are definitely of the mindset that it's better to be safe than sorry," said the head convertible trader at a major investment bank in New York.

"Maybe they'll be sorry they sold off so quick, but they figure it's better to be sorry about that than hold on to something that evaporates before your eyes and you're left holding a piece of paper that's not worth the paper it's printed on."

A convertible trader at another major investment bank, however, noted that the sloppy, thin market could be interpreted as a sign that selling has ebbed since so many people were absent. "Flow is light, and today it looks more balanced between sellers and buyers," said the trader.

Hedge funds are not quite as frantic as some other market players, since most are still shorting the telecom sector and have been reaping rewards because of their bets on further weakness. The CSFB/Tremont hedge fund index showed Friday that convertible arbitrage had a 1.12% gain in January, which was even better than that the overall hedge fund index's gain of 0.54%. Those measured against a 0.84% decline in the Nasdaq, 1.01% drop in the Dow Jones Industrial Average and 1.56% fall for the S&P 500.

"We are really looking for something to buy, in fact," said a convertible trader at a hedge fund in New York. "Unfortunately, we don't see some of this stuff low enough to where we would be interested. We see a lot more ugliness ahead."

Analysts are frustrated amidst the disparaging pulls in the marketplace, and many hesitate to make firm stands on particular names because of the multitude of developments on so many levels - accounting concerns, credit quality, acquisitions, spinoffs, deleveraging measures, liquidity, insider trading and more.

"Our market is a mess right now," said Jonathan Cunningham, head of convertible research at Jefferies & Co.

"I don't know if the selling is done yet. I'm not sure there is any such thing as oversold in a market like this."

AES had one of the sharpest declines Friday as Fitch cuts its ratings, including the convertibles to B from B+, and S&P put the credit on negative watch. The rating agencies said AES' liquidity position is strained, chiefly due to its exposure to Venezuela. The AES 4.5% convertible notes due 2005 (Ba2/B+) fell 15.75 points on the day to 52.125 bid while the stock lost $2.50 to $7.

Nvidia went south after the graphics chip maker revealed late Thursday that it was the subject of a federal accounting investigation that arose from e-mail messages it provided to the SEC as part of an insider trading inquiry that began in November. Nvidia had risen Thursday after reporting stronger-than-expected earnings for fiscal fourth quarter 2002. But the gains were reversed Friday, with the Nvidia 4.75% convertible note due 2007 falling 9.5 points to 147.5 bid as the stock dropped $81. to $57.35.

Among telecom and telecom equipment names, it was collateral damage but the irony was that Qwest Communications actually saw a lift Friday as its stock closed up 7c to $7.56.

"Maybe the selling was not wholesale like we saw yesterday, because Qwest actually closed higher and Nextel was up a tiny bit," said a convertible trader in New York.

"But the majority was getting hammered, like PCS. And it sort of spread over into cable because of the huge debt-loads in that area, too. There was an exodus in Comcast and Cox both."

Telecom equipment makers and suppliers were getting hit hard because, as telecom providers cut back spending, they have no alternative means of boosting their business.

Riverstone Networks was hit directly because Qwest on Thursday cut its spending budget by another $300 million, one trader said. The Riverstone Networks 3.75% convertible note due 2006 dropped 8.625 points on the day to 73.125 bid and the common stock closed down $1.75 to $7.70.

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