Flow improves on new deals, belief that rally gets traction

By Ronda Fears

Nashville, Tenn., Oct. 15 - Activity picked up sharply in the convertibles market Tuesday, traders said, as a couple of small new deals were launched and the stock rally looked to be getting some traction.

Credit spreads also were improving on positive earnings from Citigroup and Bank of America.

"The markets overall are stronger," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

"There's a lot of trading going on today."

Players continue to jockey around with utility mandatories, but otherwise traders did not see any trends.

"Even if the market turns up, it will be a while before converts feel it," said Stuart Novick, a convertible analyst at Salomon Smith Barney.

"The premiums are going to have to contract quite a bit before we'll be able to see it."

With the market so busted, converts have been trading more in reaction to the credit markets than movements in the underlying stocks. There are a few exceptions, traders say, but most of those issues are too deep in the money to trade much.

Credits were continuing to improve, along with the stocks, and both are positive for converts.

"Declining bank risk reduces one risk factor facing the credit markets," said David Goldman, head of the global markets group research, and Jeff Rosenberg, head of credit strategy research, at Banc of America Securities.

"On a risk-adjusted basis, credit spreads are off the bottom, but still have room to improve."

Positive earnings from Citigroup and Bank of America help support the argument that not only bank profitability but lending capability are strong, the analysts said in a report Tuesday, and somewhat counter concerns about loan portfolios and bad loans.

It doesn't mean the group is out of the woods, yet, though, the analysts added.

A buyside trader said the fixation with mandatories is two-fold. First, people are looking to boost cash flow. But, also, they are searching for delta, a leg-up to get nice participation with the stock on the way up.

"If a trade is there it needs to be made soon, particularly if it is predicated on a common stock dividend cut," the trader said.

"Also, volatility has been declining and that has cheapened up a lot of these mandatories, so that creates a bit of urgency because that could reverse itself rather quickly."

Kimberly Brody, a convertible analysts at Wachovia Securities, Inc., also said in a report Tuesday that declining volatility over the past week has likely contributed to a cheapening in mandatories.

The VIX closed at 42.61 on Monday, or 13.3% lower than the Oct. 7 close, she said.

Over the same period, she said, the average cheapness of mandatories went to 1.93% from 0.85%.

On Tuesday, the VIX closed down another 2.78 points, or 6.74%.

Utility mandatories account for about one-third of the mandatory universe and with numerous, repeated hits in recent weeks, that group is getting the most attention as an area where the biggest returns may be possible.

Mirant Corp. was hit again Tuesday while peers like Dominion Resources Inc. and El Paso Corp. headed north.

Mirant said Tuesday it would delay filing second quarter financial statements with the SEC so that its auditors can finish reviewing them. Mirant expects to file the statements around Nov. 1. Third quarter financial statements are expected to be filed the week of Nov. 18.

A dealer said Mirant is liable to see buyers step in on the weakness, however.

Miran'ts 5.75% due 2007 dropped 1.125 points to 29.625 bid, 31.625 asked. The 6.25% convertible trust preferreds due 2030 were quoted down 1 point to 8.625 bid, 8.875 asked, but another dealer quoted the preferreds at 9.5 bid, 10.5 asked.

Mirant shares ended off 12c to $1.09.

Several names in the tech group were aided by the boost in stocks, but more so by event-driven demand.

Aether Systems Inc. announced a modified dutch auction tender for about half, or $100 million, of its 6% convertible due 2005 at a price of 70 to 75, and the issue shot up 5 points to 71 bid, 73 asked. The bid/ask spread also narrowed, one dealer pointed out, from 62 bid, 66 asked on Monday.

Aether shares ended up 29.9c to $2.63.

"This is a name I've been pounding the table on," said Matt Hempel, convertible analyst at Bear Stearns & Co.

"They've got cash. It's not a sinking ship."

The convertible calendar was revived from a month-long dormant period on Tuesday with a couple of small deals.

PMA Capital Corp. is selling $75 million of 20-year convertible senior notes talked to yield 4.25% to 4.75% with a 27% to 32% initial conversion premium after the close Wednesday via joint book-runners Banc of America Securities and Credit Suisse First Boston.

Moody's Investors Service has rated the deal Baa3 while Standard & Poor's rated it BBB-.

PMA shares closed off 87c to $12.74.

"This [PMA deal] is something that normally wouldn't trigger my radar screen, it's so small," said a portfolio manager at a hedge fund in Connecticut.

"But with there being such a dearth of new deal, we're looking at this one. It seems to be appealing, but it will be difficult to get a position because it's just $75 million."

Guidance also emerged on the mandatory that's part of Platinum Underwriters Holding Group Inc. spin-off from The St. Paul Cos. Inc., but pricing isn't anticipated until the last week of October.

Price talk puts the $125 million of three-year mandatory convertibles pricing to yield 7.0% to 7.5% with an 18% to 22% initial conversion premium. Joint book-runners are Goldman Sachs & Co., Merrill Lynch & Co. and Salomon Smith Barney.

Platinum is selling 34 million common shares in the IPO, which is filed at $22.50 to $23.50.

St. Paul just sold a mandatory in July that has done exceptionally well given the market tone, another buyside trader pointed out.

That will likely provide increased interest in the Platinum mandatory, the trader said, even though it is somewhat difficult to model the new deal because it's part of an IPO.

St. Paul's 9% mandatory closed Tuesday up 3.5 points to 64.75 while the stock ended up $2.10 to $32.66.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.