Ford sets premium; Intel, ExpressJet active again; fund managers 'double down' in comfort zones

By Evan Weinberger

New York, July 30 - The beginning of the trading week saw convertibles investors continuing to shore up their positions in issues they like and get away from issues they deemed risky. Rises in equity markets Monday allayed some fears of a stock market meltdown, but investors, according to analysts and traders, were still looking to cover themselves from any falling financial debris.

Friday saw another extremely active day in convertibles trading. Just a day after setting a two-year high in dollar-volume of trades at $4.6 billion Thursday, according to the National Association of Securities Dealers Trace system, traders exchanged $3.562 billion Friday, according to Trace.

"There was definitely some portfolio turnover going on, fund managers trying to get out of riskier positions into safe positions," one sellside analyst said. "There was probably a preference to get it done by month's end."

Another factor could have been at play Friday, the analyst added. Most of the biggest single-day drops, he said, occurred on Mondays. With two consecutive days of steep declines in equity markets and swirling concerns about mortgage and corporate capital crunches, fund managers may not have wanted to get caught in another epic decline.

"[They] might have thought they'd better not go home on a weekend exposed," the analyst said.

Also on Monday, Ford Motor Co. set the premium on its tender offer for its 6.5% convertible trust preferreds due 2032. The car maker announced its tender offer for the $5 billion offering July 2, and holders of the issue will have until Tuesday at 5 p.m. to accept the offer.

Fears of further equity market slides were unfounded, at least for a day, Monday, as stock markets rallied. The Dow Jones Industrial Average picked up 92.84 points, or 0.7%, to close at 13,358.3. The Nasdaq followed suit, picking up 21.04 points, or 0.82%, to finish the day at 2,583.28.

Not all market news was bright Monday. According to London's Financial Times, investment banks are tightening up terms on loans to hedge funds to protect themselves from further collapses, like the two Bear Stearns funds linked to subprime mortgages that collapsed earlier this month.

Investment banks have now raised the margin requirements for hedge funds heavily invested in the American mortgage market, the newspaper reported one investment banker saying.

"Financing terms for hedge funds are being tightened and this is forcing a further deleveraging of risk across global markets," Gerald Lucas, senior investment adviser at Deutsche Bank, told the FT.

The newspaper added that fixed income-focused hedge funds were the worst performing hedge funds in June, returning an average of 0.2%. Overall, hedge funds produced an average return of 0.8% in June, down from 2.3% in May, the FT reported.

"I think it will be a problem, and I think people think it will still be a problem [in the future]," a convertibles analyst said.

One new issue came across the wire Monday. Hong Kong gaming company Melco International Development Ltd. and Sydney-based Publishing and Broadcast Ltd., which together form the combined entity Melco PBL Entertainment (Macau) Ltd., priced $200 million in convertible exchangeables. There is a $50 million greenshoe on top of that.

The bonds are meant to fund a share purchase program for the purchase of American Depository Shares, each of which represents three ordinary shares of the company.

Melco PBL Entertainment is a Hong Kong-based casino operator that focuses on operations on the Chinese gambling island Macau.

Trading slows, but still active

Following last week's frenzy, trading slipped a bit Monday.

"[Convertibles] here are quiet," a trader said.

Analysts and traders added that investors and fund managers might have been sitting tight while the stock markets rebounded after the beating they suffered at the end of last week.

"I think people are still somewhat sitting on the sidelines to see how it all shakes out here," a sellside analyst said.

But that doesn't mean there was no trading Monday. With no new issues driving the market, though, much of the trading was end-of-the-month maneuvering and people getting themselves into safe positions just in case Monday's mini-rally is short-lived.

The analyst said he saw a lot of fund managers getting out of issues where the felt uncomfortable and "doubling down" on positions they felt strong. "It's all subject to the new increased credit volatility that we haven't seen in quite some time," he said.

As has been the case in recent days, investors and fund managers turned to safe issues and got out of ones they thought had weak credit as spreads continued their widening.

Among names on the move, Intel Corp.'s 2.95% junior subordinated convertible notes due 2035 closed the day at 96.75 versus a stock price of $23.85. They finished Friday at just over 97 3/8 versus $23.54. Stock in the Santa Clara, Calif.-based computer chip maker picked up 31 cents, or 1.32% Monday.

Another mover Monday was ExpressJet Holdings Inc's 4.25% convertible notes due 2023, which an analyst referred to as a "safe haven." They finished the day at 97.25, according to the analyst, versus a stock price of $5.38. They began the day at 97.125 versus $5.32.

Stock in the Houston-based regional airline - it operates Continental Express - gained 6 cents, or 1.13% on Monday.

Ford preferreds rally

Ford on Monday announced the premium for the tender offer on its 6.5% convertible trust preferreds due 2032 Monday, and the announcement didn't immediately send the preferreds in the direction the company expected.

"It doesn't look like it excited the market," one sellside analyst said. "An exchange offer should always raise the price."

Holders of the preferreds would receive a premium of 1.7468 shares plus the regular 2.8249 shares of Ford common stock for a total of 4.5717 shares if they accept the tender offer, which expires at 5 p.m. Tuesday night. Ford began the tender offering on July 2.

Rather than shoot up like Ford probably expected, the preferreds hovered nearly a percentage point lower Monday on significantly below average trading volume, but rallied as the day went on. The preferreds (NYSE: F-PS) finished the day at $37.58, a pickup of 35 cents, or 0.94%.

Stock in the Dearborn, Mich.-based carmaker also finished the day on an upswing, picking up 51 cents, or 6.2%, to finish the day at $8.74.

The $5 billion offering was a record when it was issued in 2002.

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