Convertibles mixed, flight to quality apparent; power companies, Williams gain

By Ronda Fears

Nashville, Tenn., March 5 - Convertibles were mixed to slightly lower Tuesday with some profit taking in the tech and telecom groups, traders said. Throughout the session, traders said it seemed the market was in an apparent flight-to-quality mode.

Power companies like Calpine Corp. were much higher and Williams Cos. also rose sharply but not until after the closing bell did the company announce a major advance in its separation from Williams Communications Group's possible bankruptcy. Qwest Communications also declined, but news on a downgrade by Moody's also didn't hit the tape until after the close.

"It was a flight to quality today, after a bit of profit taking. But really volume was not anything to write home about. It was moderate to light, I'd say," said a convertible trader at a major investment bank in New York.

"There seemed to be a strong move into utilities, power, energy, financials, brokers, the more stable issues."

Independent power producers rose sharply, apparently on optimism about economic recovery leading to higher electricity demand, traders said. Calpine Corp., AES Corp. and Mirant Corp., all of which have been punished severely in the wake of Enron Corp.'s bankruptcy, gained ground.

Calpine's 4% convertible due 2006 rose 5.875 points on the day to 82.5 bid, 82.75 offered with the stock up $1.29 to $9.15. One trader said the Calpine issue was higher on the market's anticipation of news about the company's financing prospects soon, too. AES' 4.5% convertible due 2005 added 1.5 points to 47.5 bid with the shares up 80c to $5.95. Mirant's 2.5% convertible due 2021 rose 0.625 point to 74.25 bid with the stock up 99c to $10.91.

Also much higher with the power group was Williams Cos. Inc.

Williams announced that it agreed to make interest payments on $1.4 billion of notes issued by WCG Note Trust. The notes were secured by debt of Williams' former telecom unit, Williams Communications Group Inc., which has said it may have to file bankruptcy. Williams, an energy trader and pipeline operator, has been under pressure because of the problems at WCG.

Under the amendment, Williams said it will make interest payments on the $1.4 billion WCG Note Trust notes due March 2004, and now any change in the status of WCG is unlikely to have an impact on the note. Before the amendment, the notes were contingent liabilities of Williams with the full $1.4 billion due upon certain changes in the business condition of WCG or a trigger directly tied to Williams' credit ratings. The restructured terms remove those triggers.

The company plans to release audited 2001 earnings prior to an analyst conference on Friday.

"This is a very positive development, one that we believe will be well-received by credit-rating agencies and lenders. We believe our stockholders also should feel more confident that this eliminates any substantial near term cash requirement related to this issue," said Steve Malcolm, chief executive of Williams, in a company statement.

"We are continuing to resolve these financial issues in a manner that is designed to preserve the financial flexibility and appropriate debt and equity levels that support our investment-grade credit rating."

Qwest Communications has also been trying to improve its standing with the credit rating agencies, but had a setback late Tuesday when Moody's cut its rating again. On Qwest's drawdown of its $4 billion bank revolver a couple of weeks ago, S&P cut Qwest's long-term corporate credit rating one notch to BBB from BBB+ and put the credit outlook at negative. Moody's also downgraded Qwest's long-term ratings to Baa2 from Baa1 and kept the ratings on review for possible further downgrade.

On Tuesday Moody's lowered the long-term ratings of Qwest Communications to Baa3 from Baa2 and again kept the ratings on review for possible further downgrade.

"Obviously, this isn't good for Qwest.," said a convertible trader at a hedge fund in New York.

"The big question is how it's going to impact the plan to issue convertibles. That deal has just been sitting on the calendar and, frankly, a lot of people thought it might just fade away. But there's been talk recently that the deal is very much alive, so it will be interesting to see how it's put together in light of a downgrade. And, you have to wonder if S&P is going to follow suit with a downgrade."

Moody's said the downgrades reflect concerns about Qwest's ability to resolve substantial near-term debt maturities as well as the need to negotiate a covenant waiver under its $4 billion bank facility and repay $850 million of maturing long term debt in July.

Tyco was back in defense mode Tuesday, refuting a news article regarding its accounting for acquisitions. The company said in response to investor inquiries it released the opening balance sheet for Sensormatic Electronics Corp., which it acquired in October, to show how the transaction would be reported.

"This was sort of a downer for Tyco, but really the market is becoming a bit more desensitized when it comes to this story," said a convertible trader at a hedge fund in New Jersey. "The stock has made a nice comeback, slowly, over the past week or so."

The Tyco 0% convertible due 2020 slipped 0.25 point to 65.75 bid, 66.25 offered and the 0% convertible due 2021 was flat at 69.75 bid, 70.25 offered as Tyco shares lost 92c to $32.22.

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