Tyco, ImClone rebound but convertibles tank overall as stocks retreat

By Ronda Fears

Nashville, Tenn., June 13 - Convertibles tanked as stocks reverted to negative ground on a slump in retail sales and higher jobless claims. But Tyco was rebounding nicely on high hopes for the credit as the IPO of CIT got clearance and ImClone regained some ground as biotechs rallied.

Traders said a batch of negative headlines from the likes of Lucent sent telecom and techs lower, even though Nextel put out some positive news. Also, Omnicom was still reeling on worries about its accounting practices, a situation one trader said "firmly got the wrath of investors" amid an atmosphere of distrust with regard to corporate governance.

"Generally, people acknowledge it's a difficult market, particularly for outrights. But the arbs are finding it difficult to make money in this market too," said Venu Krishna, head of convertible research at Lehman Brothers.

"There is opportunity on the credit side if you have a relatively short horizon. A lot of substantial credits have come under pressure. Still, it we look at, say 15 converts, we probably like three. But, that's the environment we're dealing with.

"Right now, everyone's concern is that they are not stepping on any landmines."

Nasdaq and the Dow industrials both retreated and dragged most of the convertible market along.

"In a consumer-driven recovery, lower retail sales hurt," said a convertible trader at a hedge fund in New York.

"But we're still getting profit warnings, that's what's really hurting us."

Lucent Technologies on Thursday issued a new warning, saying fiscal third quarter revenues are likely to fall 10% to 15% from the previous quarter, but also said its credit facility has been amended to give it more flexibility as it struggles to return to profitability.

The changes allow it to report losses, before interest, taxes, depreciation and amortization of up to $325 million for fiscal fourth quarter and up to $300 million in fiscal first quarter 2003 without violating its loan covenants.

Lucent said it continues to target a return to profitability and positive cash flow during fiscal 2003 and it continues to have sufficient liquidity to fund its operations as it has no outstanding balance on its credit facility.

"The bank facility news was good to the extent that Lucent now has some breathing room, but not to the extent that they anticipate those kind of losses," said a dealer.

Lucent's new 7.75% mandatory due 2017 dropped 2.875 points to 73.75 bid, 74.75 offered and the 8% mandatory due 2031 lost 3.5 points to 76 bid, 76.5 offered. The common closed down 15c to $2.80.

Nextel reiterates it should be free cash flow positive by 2004 or sooner, but that failed to move the converts much, traders said. Nextel shares ended 7c lower at $4.15.

"There's not much that will move the telecom group upward," one trader said.

Tyco headed north, however.

In addition to getting SEC clearance to proceeds with the CIT offering, which will help the company's credit standing, the stock was upgraded by Merrill Lynch and JPMorgan.

The market pretty much disregarded S&P's statement about keeping the Tyco ratings on negative watch, which followed a downgrade by Moody's on Wednesday, traders said. Buyers were also discounting that anything material will come of the SEC investigation into Tyco's expenses, an outcrop from the former CEO's tax evasion indictment.

"The news was positive for Tyco, no matter what S&P and Moody's says," said a convertible trader at a hedge fund in New Jersey.

"If CIT doesn't happen, then that will be a total disaster. But the likelihood of that not happening is pretty slim, although I won't go so far as to say it's impossible. Still, the worst is that they are not going to get all they wanted out of CIT, roughly about half what they paid for it, but it will be money they can use toward debt reduction."

The Tyco 0% convertibles both improved.

The 2020 issue was quoted 6.25 points higher at 58.5 bid by one shop and up 4.5 points to 60.25 bid by another. One shop was quoting the 2020 issue at 60 bid.

The 2021 issue was quoted 4.5 points higher at 68.5 bid at a couple of shops.

Tyco shares rose $3.65 to $13.80.

On Friday, at 10 a.m. ET, Tyco is holding a conference call to discuss recent events.

Traders said ImClone edged up, as well, as former CEO Samuel Waksal took the Fifth at a U.S. congressional inquiry on Thursday into activities at ImClone.

ImClone's 5.5% convertible due 2005 gained about 1 point to 72 bid but was quoted at 73 bid at one shop, with the bid/ask spread at 2 points at both shops.

Omnicom, however, continued in a freefall as investors fled.

"There have been several [Wall Street Journal] articles about the accounting situation at Omnicom. I think people are reacting out of fear that where there's smoke, there's fire," said a convertible trader at a hedge fund in New Jersey.

"I mean, why else would they be dogged about this if there isn't something to it."

Some convertible analysts, like Sri Nadesan at Wachovia Securities, think the market has overreacted. (See story elsewhere in this issue)

But Omnicom fell sharply again.

Omnicom shares plunged another $7.55 to $54.62. The 0% convertible due 2031 lost 3.25 points more to 92 bid, 92.5 offered. The 0% convertible due 2032 was quoted 1.5 point lower at 91.375 bid, 91.875 offered.

Charter Communications briefly headed north but ended the day lower as the media sector continued to feel heavy pressure.

Adelphia still wasn't budging as the market awaits a bankruptcy filing.

The grace period for its missed interest payments ends Friday.

"The cure period ends Friday, but I suppose they could even wait until Monday to file [bankrutpcy]," said a dealer.

"They probably will want to do that on Friday, though, so they've got the weekend to dodge calls."

The Adelphia convertible bonds are still quoted at 8.75 bid.

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