EDS up on IBM bid buzz; Covad offered at plus 2 points in gray; Calpine firms on deal revival talk

By Ronda Fears

Nashville, March 4 - Activity in the convertible market Thursday was again described by traders as a bit lethargic but with steady flow. There seemed to be a focus on the better quality credits, sources said.

Yet, the headline-making moves were in high-yield names, like Calpine Corp., or those on the cusp, like Electronic Data Systems Corp. Calpine gained on buzz that it was reviving its junk bond, and EDS rose on rumors that International Business Machines Corp. was considering making a takeover bid.

The same was the case on the primary side of the market, with Covad Communications Group Inc. returning to tap convertible investors after having filed bankruptcy in 2001 just a few months after selling a convertible. The small $75 million deal was seen offered at 2 points over issue price in the gray market, with no bids.

Also at bat was Willbros Group Inc. with another small deal, for $60 million. A buyside source said this deal seemed to be building a healthy book of orders, but he added that there wasn't a gray market for it.

"I don't think either one of these deals [Covad and Willbros] are heavily oversubscribed," said a buyside trader at a hedge fund.

"Two years ago, we wouldn't even bother with these little deals. Now we kind of have to. In this market, you're forced to because you have to put capital to work somewhere."

Walt Disney Co. convertibles are still getting a lot of action, traders said, but the bonds were pretty much standing pat on the news that chief executive Michael Eisner would remain at the helm but step down as chairman of the board of directors.

Imclone Systems Inc. was another notable mention insofar as movers, with the converts gaining in tandem with the stock. The shares rose about 5.75% on reports that investor Carl Icahn has been buying and now holds a 6.9% equity stake in the controversy-ridden biotech.

Covad, Willbros deals afloat

Covad's new deal, talked to yield 2.5% to 3.0% with an 18% to 23% initial conversion premium, was expected to price at the cheap end of guidance, buyside sources said.

Aside from the digital subscriber line service provider's history in the convertible market, hedge funds complained of a very tough borrow on the stock.

The stock price is very low for a convertible offering, also. Covad shares on Thursday plunged 54.1 cents, or 16.74%, to $2.69.

"People who traded or held the old bonds may have a bad taste in their mouth," said a convertible trader at a big buyside shop in New York.

Covad's former convertible bond was erased by its 2001 bankruptcy a few months after the issue was sold. On exiting bankruptcy, Covad eliminated $1.4 billion of outstanding debt by giving bondholders $257 million, or 19 cents on the dollar, and issued about 35 million shares of stock - an equity stake of about 15%.

"It's a lay-up for the company. They are refinancing 11% debt with this new convert," the buyside trader said. "If it [the new Covad convertible] trades to par and a half the underwriter will probably be happy."

The Willbros deal, however, was doing fairly well, according to buyside sources that expected the oilfield services company would get it printed at or near the midrange of guidance.

Willbros' $60 million of 20-year convertible notes were talked to yield 2.75% to 3.25% with a 28% to 32% initial conversion premium.

Willbros shares ended down 63 cents, or 4.1%, to $14.75.

Calpine up on junk buzz

Calpine's convertibles, particularly the shorter dated paper, picked up about 1 point, traders said, on rumors that the company was preparing to revive its recently shelved $2.3 billion junk bond and bank financings.

The independent power producer's bank debt surged a bit earlier this week on the same speculation.

In mid-February, Calpine withdrew its big construction refinancing packages amid a buyer's strike of sorts, complaining about unfavorable market conditions.

San Jose, Calif.-based Calpine has said it hoped to resubmit the offerings at least by June, but onlookers in the convertible market said they may be thinking sooner would be better than later.

"If rates go up in May, like some are speculating, then they will do better now than what they could get in June," one source said.

"Definitely, no matter when rates go up, they aren't going lower so what they can get now is probably as good as it gets."

Calpine's convertible preferreds were the biggest riser among its five issues, a trader said, because those are next in line for redemption.

EDS firms on IBM chatter

EDS convertibles were higher and saw heavy volume on a wisp of a rumor that IBM would make a $24 stock and cash bid for the Plano, Texas, computer services firm founded by billionaire and past presidential also-ran Ross Perot.

The EDS 3.875% convertible due 2023 gained 2.75 points outright and about 1 point on swap to the 99 area, traders said. The 7.625% mandatory issue due 2004 climbed 1 point to 19.

EDS shares surged $1.23, or 6.42%, to close at $20.40.

"The only thing we've seen was a blurb on Briefing.com, but it was making the rounds in the rumor mill all day," a dealer said. "It sure moved the bonds."

Regardless, sellside sources had been saying recently that the EDS converts were beginning to look attractive after prices cratered on its fourth-quarter earnings report in early February.

EDS recorded a $354 million net loss for fourth quarter due to a $599 million write-off of its Navy Marine Corps intranet contract. In addition, the company guided free cash flow estimates for 2004 lower. The news also prompted all three credit rating agencies to put EDS credit (Baa3/BBB) on review for downgrade.

Another factor that had been weighing on the EDS bonds was the Securities and Exchange Commission inquiry into EDS' accounting practices that dates back as far as October 2002; the probe became a formal investigation in January 2003.

New paper mostly flat

New convertible paper from earlier this week continued to flag for the most part amid thin volume in those bonds, traders said.

PSS World Medical Inc. was still the stand-out, however. The 2.25%, up 45% convertible added about 1.5 points on Thursday to 108 bid, 109 offered, while the stock added 60 cents, or 4.67%, to $13.44.

First Horizon Pharmaceutical Corp.'s 1.75%, up 35% issue added 1 point to 100.125 bid, 100.625 offered as the stock gained 38 cents, or 2.36% to $16.50.

Bell Microproducts Inc.'s 3.75%, up 32.5% convertible slipped about 0.75 point to 102.25 bid, 103.25 offered. The stock closed up a penny, or 0.12%, to $8.18.

Amdocs Ltd.'s new 0.5%, up 54% issue edged up 0.125 point to 99.625 bid, 100.125 offered, while the stock gained 27 cents on the day, or 0.95%, to close at $28.59.

Avnet Inc.'s new issue was pegged at 102.25 bid, 102.75 offered with the stock up 3 cents, or 0.13%, to $22.90.

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