Genworth talk pat, bid up in gray despite hitch in IPO; Wild Oats at 100.75 offered; energy issues up

By Ronda Fears

Nashville, May 24 - Genworth Financial Inc.'s $600 million mandatory convertible was bid higher in the gray market, at the original price talk, although market sources said there was apparently less enthusiasm for the General Electric Co. insurance unit's initial public offering and the stock had to be cheapened.

Otherwise, convertible players were looking at a small new deal, for $100 million, from Wild Oats Markets Inc. and it, too, was bid up in the when-issued market.

In secondary dealings, traders said record prices for crude oil and gasoline had stirred some buying zeal for energy issues, especially drilling companies like Pride International Inc., Diamond Offshore Drilling Inc. and Nabors Industries Ltd. Refining names also were very hot, and with the dearth of paper in that sector, traders noted that Amerada Hess Corp. and Unocal Corp. got a nice spike on heavy buying.

"The rig count is reflecting the record oil prices," one dealer said.

Charter Communications Inc. stock also was higher in after-hours trading on an upgrade by Standard & Poor's, which a convertible trader said may boost the convertibles past the quarter-point gain seen Monday.

Wild Oats for Tuesday

Around breakfast time for many people, Wild Oats launched a $100 million 30-year convertible note offering for two full days of marketing.

The issue was talked to yield 2.75% to 3.25% with a 40% to 45% initial conversion premium, with pricing scheduled after the close Tuesday.

In the gray market Monday, the issue was offered at 0.75 point over issue price, but there were no bids yet.

Wild Oats stock lost 92 cents, or 6.86%, to close Monday at $12.50.

The Boulder, Colo.-based health food grocer plans to use proceeds to accelerate its growth plans and for general corporate purposes, which may include allocating up to 25% of proceeds to buy stock either concurrent with the offering or from time to time in the future.

Wild Oats operates 102 stores.

Genworth convertible higher

General Electric Co. apparently had to rally buyers with a price reduction to entice buyers for stock in its Genworth Financial Inc. unit, but convertible market sources said there was no such balking on the mandatory offering. A $100 million preferred stock offering also is on the table, but there was no buzz about it.

"On the tape, it looks like they are cutting the IPO price to a range of $20 to $20.50 a share instead of $21 to $23," a buyside trader said.

"Nothing like that was going on with the mandatory. The price talk is the same as when it first came out almost a month ago."

Another buyside trader said he saw the Genworth mandatory trade at 0.125 point over issue price - $25 par - and it was seen near the close at a bid of 0.125 point over issue price with and offer of 0.25 point over.

The Genworth mandatory is still talked to price with a 5.75% to 6.25% dividend and 18% to 22% initial conversion premium.

GE announced in January that it would spin off a 30% interest in Genworth and later might sell the remaining stake. The IPO, which comprises substantially all of GE's life insurance and mortgage insurance businesses, has been anticipated as far back as November, however. GE said proceeds would be used to invest in growth initiatives and reduce parent-supported debt at GE Capital Corp.

Fitch has assigned an A- rating to the convertible.

Moody's has rated the senior notes in the mandatory units at A2.

Fuel prices entice bids

With record prices for oil and gasoline and few convertibles in those spaces most of what was available was finding buyers Monday, traders said.

"Well, most of the real action was in the majors and we don't have anything from that group, but we do have some big drillers," a dealer said. Those mentioned were Pride International, Diamond Offshore and Nabors.

Crude for July delivery closed at a record $41.72 a barrel, up $1.79.

Gasoline refiners are even more scarce in the convertible market, but Valero Energy Corp. - the largest refinery operation in the United States - has a 2% mandatory due 2006 outstanding. However, a trader said it is sitting in a "handful of hands" with no one willing to let it go yet.

The June contract for gasoline settled at an all-time high of $1.4578 a gallon, up 4.1 cents.

As a result, Amerada Hess and Unocal saw heavy buying.

Unocal's mandatory added 0.65 point to 51.65 on the New York Stock Exchange with the stock up 85 cents, or 2.43%, to close at $35.88.

Amerada Hess's mandatory climbed 1.75 points to 67.25 bid, 67.75 offered, according to a dealer. The issued closed on the NYSE up 1.52 points to 66.9. Amerada Hess shares ended up $2.38, or 3.41%, at $72.14.

With the summer travel season at hand, the dealer said the market has little faith that Saudi Arabia's proposal Friday to boost the cartel's daily oil output by 2 million barrels, or a similar measure by OPEC when it meets next month to consider a production increase, will make much difference near term.

Charter upgraded

Standard & Poor's revised its outlook on Charter and subsidiaries to positive from developing, largely due to the company's improved maturity profile following the refinancing measures earlier this month.

Charter shares closed Monday up 2 cents, or 0.55%, to $3.68, but a convertible trader at a small sellside shop noted that the stock was up 19 cents, or 5.16%, in after-hours trading.

That, he said, may be an impetus for the Charter convertibles to build on the 0.25-point gain seen Monday. He said the paper has been steadily getting bids, but a vote of confidence - "albeit somewhat shaky" - from S&P might fuel some real buying oomph.

The Charter 4.75% convertible due 2006 was quoted at 93 and the 5.75% convertible due 2005 at 95.5.

S&P said operating improvement also was a factor in the outlook revision but added that pressure to refinance the $588 million 5.75% convertible weighs on Charter.

"Repayment of this debt could depend on access to external financing, which will hinge on Charter's demonstration of sustainable positive operating momentum," S&P said.

Charter has largely completed its extensive system-rebuilding projects and resulting declines in capital expenditures have helped the company narrow sizable negative discretionary cash flow. However, S&P said cash flow growth will be restrained in the next two years as cash interest payments commence on discount notes.

S&P also said that Charter maintains a minimal cash balance at a level of roughly $150 million and relies on bank borrowing availability to fund negative discretionary cash flow. As of the April 27 closing on its amended credit facility, about $1 billion was available from the revolver.

Hedge returns continue slide

The Merrill Lynch U.S. convertible hedge index was down 0.30% net of a 2% annual management and a 20% performance fee in the third week of May, bringing the year-to-date net return to a decline of 0.42% before hedging out interest rates.

Shorting sufficient two-year Treasuries - a rho hedge - to reduce the index duration from 1.7 to 0.75 has been an effective hedge against rising yields, and Merrill convertible analyst Tatyana Hube said in a report that year to date, a rho hedge would have pushed returns upward by 1.34% compared to a loss of 1.44% from rising yields. Adding back the 107 basis points - 134 basis points minus the 20% performance fee - would take the net return for the index to a gain of 0.65% year to date.

It was noted that last week's announcement of cash takeover of Kroll by Marsh & McLennan subtracted about 6 basis points from the hedge index return as Kroll shares rose 31.5% during the week, while the Kroll 1.75% convertible due 2014 went up only 1.4%.

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