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Deutsche recommends US Bancorp, Baxter, Medtronic, HCC, Markel as put sweetener trading ideas
By Ronda Fears
Nashville, Tenn., May 17 - With another 18 or so convertibles coming putable during the remainder of this year, there are those likely to be put, likely to remain outstanding and some too close to call.
"Bonds in the 'too close to call' section are probably the most interesting, both in terms of gamma trading potential and for the possibility of 'sweetening'," said Deutsche Bank Securities analysts Jeremy Howard, Jonathan Cohen and Robert Barron in a report Friday.
They recommend the US Bancorp 0% due 2021, Baxter 1.25% due 2021, Medtronic 1.25% due 2021, HCC Insurance 2% due 2021 and Markel 0% due 2031 as the best short-term gamma/sweetener trading ideas. Not all of those are in the same category.
Baxter, US Bancorp and Medtronic are in the too close to call category. Others include Household International 0% due 2021, Eaton Vance 0% due 2031, Neuberger Berman 0.43% due 2021 and Office Depot 0% due 2007.
HCC Insurance and Markel are in the likely to remain outstanding category. Others include the XL Capital #1 0% due 2021 and #2 0% due 2021, Wellpoint Health 0% due 2019, Masco 0% due 2031, Manpower 0% due 2021 and Costco 0% due 2017.
Bonds likely to be put have stock prices well below the inflection point - the stock price at which investors are indifferent between holding and putting. Those, in the analysts' view, are the Starwood #1 0% due May 2021, Novellus Systems 0% due 2031 and the Comcast 0% due December 2020.
In December, Comcast took the convertibles market by surprise by offering a cash payment and an additional put to holders who did not exercise the put option, the analysts noted. Since then, other issuers such as Cox, Stilwell Financial, Neuberger Berman and Cendant have all added sweeteners to try to dissuade investors from exercising puts, with varying degrees of success.
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