Full-blown summer session very quiet, but a few buyers emerge for cheaper issues

By Ronda Fears

Nashville, Aug. 20 - Noise on convertible desks had little to do with trading and less to do with new issues amid the delayed onset of a summer lull. Yet there were a few bids emerging from bargain-hunters.

Dealers reported that in general it seems like the market is lacking any conviction, with lots of converts for sale while a few buyers look for cheap opportunities to bolster a position or begin to build one. The buying, though, isn't of the magnitude that any hefty positions are being formed anew.

"I'm definitely seeing some bids in cheap names, but it's just selective bidding, as the market has gotten a lot cheaper," said one trader.

Kansas City Southern was mentioned in that vein.

Another hinted that there may have been some big blocks of a metals-related name like Freeport-McMoRan Copper & Gold Inc. sold this week. Gold prices have been on a tear, the trader noted, and a seller likely would be taking some nice profits.

"If new issues really dry up, there could be some severe cheapening, most likely as a result of money begin taken off the table," said the head convert trader at one of the bulge-bracket firms.

That line of thought dovetails with recent market speculation about liquidations and redemptions of convertible funds. The argument goes: if there are new issues, then the money stays in the asset class; otherwise, it will go elsewhere.

"Let's face it, the new issue market has dried up. The market has gotten a lot cheaper. You're going to have people take money off the table. They are going to sell their most liquid stuff first, what's liquid and trading on a daily basis," said a hedge fund convert trader.

"If Treasuries back up much more, say half a percentage point, it will get a lot cheaper. That concerns us a great deal."

Mentioned sharply lower, some due to selling and a few just following stocks south, by dealers Tuesday were American International Group Inc., Credence Systems Corp., Global Imaging Systems Inc., Allied Waste Industries Inc. and Nextel Partners Inc.

On higher ground with active bids, traders said, were Mentor Graphics Corp.'s new floater, the new 1.5% Medicis Pharmaceutical Corp. issue, created out of the tender for the old 2.5s that also remain outstanding, and Flextronics International Ltd.

For those looking for ideas, Deutsche Bank Securities was circulating Tuesday lists of high rho - for shelter from interest rate risk - and high Vega converts - for opportunity related to speculation on stock volatility. And the list included several recent new issues.

Vega is the sensitivity of a convertible price to changes in the volatility of the underlying stock, but can also be applied to interest rate volatility.

Rho is the sensitivity of a convertible price to movements in interest rates, usually expressed as the point move in a convertible price for a given 100 basis point move in interest rates.

The top 10 on the high rho list were the Tribune Co. 2% due 2029 exchangeable into AOL Time Warner Inc. , Liberty Media Group 3.75% due 2030 exchangeable into Sprint PCS, Liberty Media Group 4% due 2029 exchangeable into Sprint PCS, Liberty Media Group 3.5% due 2031 exchangeable into Motorola Inc., Nextel Communications Inc. 5.25% due 2010, Schlumberger Ltd. 2.125% due 2023 (tranche B), Deutsche Bank exchangeable into Interactive Corp. due 2012 (tranche B), Wells Fargo floater due 2033, Diamond Offshore Drilling Inc. 1.5% due 2031 and Level 3 Communications Inc. 6% due 2010.

The top 10 on the high vega list were the Deutsche Bank exchangeable into Interactive Corp. due 2012 (tranche A and tranche B), Computer Associates International Inc. 1.625% due 2009, HCC Insurance Holdings Inc. 1.3% due 2023, Manor Care Inc. 2.125% due 2023, Carnival Corp. 2% due 2021, Triarc Cos. Inc., 5% due 2023, Fair Isaac Corp. 1.5% due 2023, AtheroGenics Inc. 3.375% due 2033 and Affiliated Managers Group Inc. floater due 2033.

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