Market mixed, watching telecoms as Corning deal approaches

By Ronda Fears

Nashville, Tenn., July 31 - Convertibles were mixed in another topsy-turvy session that saw selling in retailing issues and buyers for power names. Meanwhile, Corning Inc. was at bat with a new deal as players eyed telecom and telecom equipment issues.

"We had a lot of inquiries about telecom and equipment makers but we didn't see a lot of buyers step up yet," said a dealer.

Sprint's new bank revolver, an unsecured $1.5 billion bank line replaces an existing $2 billion facility, was a major factor, but the trader said the CNBC report that Warren Buffett was buying Qwest bonds really set in motion a frenzy.

"The Qwest news really got people to looking at the telecom group again," the dealer said.

"Of course, when Warren Buffett does something, anything, makes a change in his philosophical investment strategy, then it gets everyone's attention. The question still haunting people is about valuation. A lot of people just still aren't comfortable with the credit spreads."

Sprint PCS converts were not changed much, although Verizon was seen higher before the phone company reported a wider loss and made a downward revision to its outlook after the closing bell.

Corning converts were lower in line with the stock ahead of its $500 million mandatory deal, which was still seen 1.25 to 1.75 points over par in the gray market.

Some of the hesitation may be due to the irrational pricing patterns in the credit markets that have impacted converts, but some see it as an opportunity for brave investors.

"Credit markets have become irrational, for institutional reasons," said David Goldman, head of research in the Global Markets Group at Banc of America Securities.

"Before WorldCom and Enron, corporate bond investors bought credit despite looming risks in order to keep their portfolios in line with popular benchmark indices. As large cap issues lost investment-grade status, managers rushed to sell them out. If enough large cap issues become distressed, the game turns chaotic."

The situation created the famous, or infamous, price gap between 80 and 40 for troubled bonds, he said.

"Below 80, a credit almost certainly becomes a forced sale for an investment-grade manager," he said, yet "distressed specialists don't show interest until 40."

These factors make valuation in names like Sprint "a matter of mystical intuition," Goldman said.

As such, telecom paper, including the converts, have gyrated as much as 20 to 25 points over the past week.

"At some point, a grown-up has to step in," Goldman said.

With telecom consolidation seeming to be ever-more likely as a matter of survival, Goldman advised "selective and cautious optimism about the telecom sector," saying medium-grade credits in the BBB category are "beginning to look attractive relative to the risks."

Outside of interest in telecom and equipment makers, traders said power names were mostly higher, except for Reliant Energy, which was hurting from a credit downgrade as well as pressure on AOL Time Warner stock. AOL was lower on selling due to another investigation into its accounting practices.

The Reliant Energy/AOL 2% due 2029 dropped 1.125 points to 16.5 bid, 17 asked with AOL shares down 90c to $11.50. AOL's 0% due 2019 was off slightly at 47.625 bid, 48.125 asked.

Optimism in the power group bounced on headlines Wednesday that Williams Cos. made the payment on $300 million of floating rate debt as it secured a $1 billion credit line.

The Williams 9% convert added 0.31 point to 7.71, with the stock up 54c to $2.95.

Drugs and healthcare issues also were gaining ground, also with an exception. Elan selling was accelerated by a credit downgrade on top of the negative earnings and a restructuring that includes job cuts and asset sales.

Sharply lower was Sealed Air, on heavy selling, on an adverse court ruling impacting its asbestos exposure. It all stems from the Cryovac business it bought in 1998 from W. R. Grace, which now is in bankruptcy.

Standard & Poor's put Sealed Air on negative watch because of the development.

Sealed Air is holding a conference call Thursday at 8:30 a.m. ET to review the court ruling.

Meanwhile, Sealed Air securities fell hard Wednesday. The convertible preferred lost 7.2 points to 18.05 while the stock plunged $7.49 to $14.51.

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