Convertibles quiet, under pressure; Quicksilver adds, UAL drops amid higher oil; Evergreen Solar upsizes

By Rebecca Melvin

New York, June 27 - The convertible market ended on a quiet note, but remained under pressure Friday, after a "challenging" week in which stocks tumbled precariously and currently stand at the brink of a bear market, market participants said.

Friday was basically more of the same as Thursday, they said, but if oil prices were weighing on the market Monday through Thursday, they were seemingly more of a concern on Friday.

"It's all about energy prices," a New York-based convertibles buysider said, characterizing the week's market as "challenging."

Crude prices climbed more than $2 intraday to a record high of $142.99 per barrel. They eased slightly toward the end of the day, to settle at $140.21 per barrel on the New York Mercantile Exchange.

Energy and oil service names were higher. Quicksilver Resources Inc. jumped on Friday, but airline names, which generally move inversely to oil prices, were lower.

UAL Corp. changed hands near the end of the day and were down on a 100% delta, one trader said; while JetBlue Airlines Corp. was offered "on the short dated at a ridiculous 14% yield to 16-day maturity," the New York-based sellside trader said.

Not much traded overall, however, sources said. And looking forward to the upcoming shortened holiday week, little activity was expected beyond Monday and Tuesday, with quarter end spurring some activity especially on Monday.

"Nothing's traded. It's the week before the July 4 holiday weekend, and our flows were very slim," a trading source said.

Regarding other market concerns like credit issues and the weak economy, a West Coast sellside trader said. "It's two steps forward, one step back. It's a process to be worked through."

Convertibles players were relatively sanguine that while credit spreads have been widening out this month, it has been nothing like the blowout seen in March.

"Sentiment about credit isn't as bad as it was," a Connecticut-based sellside analyst said.

Evergreen Solar Inc.'s new 4% convertibles were released to the secondary market Friday but weren't heard in trade as the borrow facility was set up by underwriter Lehman Brothers Inc.

The Lehman trading desk was reluctant to comment on the "unique deal," but one source put the close at 101.3.

Convertibles were "acting pretty well, and doing their job as an equity alternative," the New York-based buysider said. In support of that, Lehman Brothers published a report Friday in which it advised investors who want exposure to General Motors Corp. to choose from among its three senior convertible bonds, which are attractive relative to the common stock.

Quicksilver higher, UAL lower

Quicksilver Resources' 1.875% convertibles due 2024 jumped Friday, with the bonds quoted late in the day on Trace at 268.374. They had been trading in the 240s.

Shares of the Fort Worth, Texas, natural gas and oil producer (NYSE: KWK) jumped $2.44, or 6.7%, to $38.98.

Quicksilver priced 7.75% straight notes earlier in the week, which traded with bids a little lower than might be expected given its name in the energy sector.

Meanwhile, in the airline sector, UAL's 4.5% convertible bonds were at 41 versus a share price of $5.56, which was unchanged on the day.

A month ago, on May 27, the No. 2 U.S. carrier's 4.5% convertible paper was at 52 versus a share price of $8.00.

Trading in the shares of the Chicago-based airline (Nasdaq: UAUA) was choppy amid heavy volume, but they still ended unchanged.

Looking for a safe financial play

Being overweight energy and materials and underweight financials has been a strategy that has recently served well, according to a New York-based buysider. But the portfolio manager said if pushed to play financials, he would consider SLM Corp., known as Sallie Mae, and SVB Financial Group, which is the holding company for Silicon Valley Bank.

SVB priced an offering of $200 million of convertibles on April 1, and if one is looking for financial exposure through convertibles, this might be a good candidate, he said. The stock has declined but the convertibles have held up.

On Friday the SVB 3.875% convertible senior notes due April 2011 closed little changed at 111.17. While shares of the Santa Clara, Calif.-based bank (Nasdaq: SIVB) ended down 57 cents, or 1.1%, in thin trade at $49.66.

Sallie Mae was also considered safer than most financials as the issues that have been affecting the nation's largest student lender have mostly gone away, he said.

The Sallie Mae's 7.25% series C mandatory convertible preferred traded Friday at 970 versus a share price of $19.00, compared with the price about a month ago of 1,060 versus a stock price of $21.00.

Shares of the Reston, Va.-based student lender (NYSE: SLM) closed down 84 cents, or 4.1%, at $19.48 on Friday.

GM convertibles 'attractive'

The GM 5.25% convertibles due 2032 (NYSE: GBM) and the 6.25% convertibles due 2033 (NYSE: GPM) were seen by Lehman to be the most interesting of the company's three senior convertible bonds. A third issue is the 1.5% convertibles due June 2009 (NYSE: GRM).

The convertibles have a total face of $8.4 billion and a market value of $5 billion.

The GRMs mature in 0.9 years with a yield to maturity of 18.3%. The GBMs have a 5.7 year put and the GPMs have a 10.1 year put.

Should the stock price appreciate by 20%, Lehman estimates a 27.9% total return on the 6.25% convertibles, compared to a total return of 28.7% for the common. The current yield on the convertible is 11.9%.

On the other hand, should the stock price decline by 20%, Lehman estimates a minus 3.1% total return on the convertible versus a total return of minus 11.3% for the common. The upside/downside participation of 97%/28% is attractive in Lehman's view.

For the 5.25% convertibles, should the shares appreciate 20%, Lehman estimates a 32.3% total return on the convertible versus a total return of 28.7% for the common. The current yield on the convertible is 9.6%.

On the other hand, if the stock price should decline by 20%, Lehman estimates a minus 2.6% total return on the convertible versus a total return of minus 11.3% for the common.

"Our analysis shows that the converts are more attractive and defensive than common and investors seeking exposure to GM should consider doing so via the convertibles rather than the common, in our opinion," the Lehman report stated.

Shares of the Detroit-based carmaker closed up 12 cents, or 1.1%, to $11.55.

Evergreen Solar upsized

The Evergreen Solar 4% convertibles were upsized to $325 million from $300 million.

The deal lacked borrow and the facility put in place to facilitate borrow precluded many people from playing in the deal. The notes were closed at 101.3 versus a share price (NYSE: ESLR) of $9.72, which was down $1.11, or 10.25%, on the day.

The five-year senior convertible notes priced on the cheap end of talk, which was 3.5% to 4% for the coupon and 27.5% to 32.5% for the initial conversion premium.

Marlboro, Mass.-based Evergreen Solar makes solar power panels.

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