Mandatory dates approach on five issues

By Ronda Fears

Nashville, Tenn., July 22 - On Aug. 16, five different mandatory convertibles face settlement dates. With the stocks of most of them so low, they are looking at maximum conversion ratios.

Settlement, or maturity dates, come Aug. 16 for the Texas Utilities 9.25%, Georgia Pacific 7.5%, Coastal Corp. 6.625% into El Paso shares, and Cox Communications 7.0% and 0.25% issues.

The Texas Utilities situation "has been the most interesting case as its underlying has fallen through both the lower and the higher threshold prices in a matter of two weeks," said Merrill Lynch & Co. convertible analyst Tatyana Hube.

"In the best-case scenario for TXU mandatory preferred holders, the common price stays low for the next two weeks, locking in the maximum ratio of 0.5997 for the holders, and rebounds shortly after."

Up until the second week of July, TXU common stock had been trading consistently above 49.19, the higher threshold for the mandatory, Hube said in a report Monday. If that level had persisted through the pricing period, the mandatory would have settled at the minimum ratio.

Then, between July 9 and 17, the stock dropped between the lower and higher threshold prices. That would have put it settling at the intermediate ratio, calculated as being the par value of 25 divided by the applicable market value of between 0.5082 and 0.5997.

But last Thursday, TXU common closed at $40.39, below the lower threshold price.

If the stock continues to trade at such a depressed level throughout the 20-day averaging period, the mandatory will settle at the maximum ratio of 0.5997.

Texas Utilities shares closed Monday down 6c to $38.59.

The same would be the case for the other issues, as well.

Cox shares have been trading below the lower threshold price of $34.69 since May 28 and closed Monday off 58c to $27.12.

At this level, Hube said both the Cox Income and Growth PRIDES will settle at the maximum ratio of 1.4414.

Georgia Pacific's 7.5% mandatory looks as if it also will be settling at the highest ratio, with the stock more than 50% below the lower threshold price of $47.38.

Georgia Pacific shares ended Monday down $1.11 to $20.85.

Coastal's 6.625% mandatory exchangeable, which converts into El Paso shares, however, will settle at a ratio of 0.6622 regardless of the price level for El Paso, the analyst pointed out.

Following Coastal's merger with El Paso, the mandatory lost its PRIDES status as it was treated as if settled at the time of the merger, she said.

Texas Utilities 9.25% mandatory

Market Value: $302 million

Price: 23.13

Parity: 19.64

Percent Premium: 17.73%

Current Yield: 10.00%

Conversion Ratio: Low $41.688 (0.5997) High $49.193 (0.5082)

Credit Ratings: BBB/Baa3

Theoretical Value: 23.45

Discount to Theoretical: 1.39%

Investment Value: 0.58

Investment Premium: 3887.07%

Implied Volatility: 47.50%

Parity Delta/Delta: 0.947/0.804

Stock Price: $38.65

Historic Volatility/Cap: 30.55%/50.00%

Annual Stock Dividend Yield: 6.21%

Treasury Yield (5-10-30 Yrs.): 4.03% - 4.57% - 5.50%

Credit Spread (bps. 5-10-30 Yrs.): 330 - 343 - 357

Cox Communications 7% mandatory

Market Value: $477 million

Price: 40.75

Parity: 33.14

Percent Premium: 22.98%

Current Yield: 8.59%

Conversion Ratio: Low $34.688 (1.4414) High $41.799 (1.1962)

Credit Ratings: BBB/Baa2

Theoretical Value: 40.75

Discount to Theoretical: 0.00%

Investment Value: 0.87

Investment Premium: 4574.73%

Implied Volatility: 40.94%

Parity Delta/Delta: 1.166/0.948

Stock Price: $27.70

Historic Volatility/Cap: 41.40%/50.00%

Annual Stock Dividend Yield: 0.00%

Treasury Yield (5-10-30 Yrs.): 4.03% - 4.57% - 5.50%

Credit Spread (bps. 5-10-30 Yrs.): 288 - 277 - 282

Cox Communications 0.25% mandatory

Market Value: $52 million

Price: 40.00

Parity: 33.14

Percent Premium: 20.72%

Current Yield: 0.27%

Conversion Ratio: Low $34.688 (1.4414) High $41.799 (1.1962)

Credit Ratings: BBB/Baa1

Theoretical Value: 39.90

Discount to Theoretical: -0.25%

Investment Value: 0.03

Investment Premium: 133233.33%

Implied Volatility: 0.00%

Parity Delta/Delta: 1.161/0.962

Stock Price: $27.70

Historic Volatility/Cap: 41.40%/50.00%

Annual Stock Dividend Yield: 0.00%

Treasury Yield (5-10-30 Yrs.): 4.03% - 4.57% - 5.50%

Credit Spread (bps. 5-10-30 Yrs.): 288 - 277 - 282

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