Traders begin to boost hedges but note lack of conviction in rally; three new deals emerge

By Ronda Fears

Nashville, May 12 - It was a thin market, suggesting a lack of conviction in the latest stock rally, but some convertible players were beginning to think about boosting their hedges.

Trading in convertibles was described as light but "a good portion of convertibles gained ground because their stocks were up," a dealer said.

In the primary market, three deals emerged that would add $580 million to the market - from CenterPoint Energy Inc., KV Pharmaceutical Co. and Global Imaging Systems Inc.

CenterPoint Energy's deal was the largest - $400 million of 20-year senior unsecured convertible notes for Tuesday's business.

But the other two, smaller deals were pricing in the overnight Rule 144A market. KV Pharmaceutical Co. launched $130 million of 30-year convertible notes and Global Imaging Systems Inc. was pitching $50 million of 5.5-year senior unsecured convertible notes.

Only the Global Imaging deal was launched before the close, so most of the market's focus during the session was not on pending deals.

With the surge in stocks - both the Dow and Nasdaq rose 1.4% - some hedgers were beginning to think about a heavier hedge and there were some small moves in that direction, traders said.

"We had been at the lower end of our hedge ranges at the beginning of the year so today, we were putting a little more stock on in some names, a little heavier hedge," said the head of trading at a large hedge fund in New York.

"But we're coming off such a low bottom that it's hard to do more than think about any big move right now."

Several other hedge fund traders also noted a lack of conviction in the stock rally, pointing to low volumes in the stock market.

"I have a hard time buying into this rally," said John Siebel, head of trading at Silverado Capital Management.

"I think it's whistling in the dark right now. Basically, the economy is in the same place. I don't hear anything - anecdotal or otherwise - that things, business is picking up."

As for convertible trading, a few names that were mentioned by traders included Inco Ltd., Liberty's exchangeable that converts into Viacom Inc., and several small energy names like Chesapeake Energy Corp. and Evergreen Resources Inc., along with power names like Mirant Corp.

Also noteworthy was some activity in Masco Corp. after the company announced final court approval a settlement involving its Behr paint segment.

With the litigation risks alleviated and reserves for a settlement already taken, Masco securities gained ground. But one market source said the spreads may be signaling it is time to reduce exposure to the name. He noted Masco's 5.875% senior notes due 2012 are trading very tight at 100 basis points over Treasuries.

Masco's 0% convertible added about 0.75 point to 44 bid, 44.5 offered with the stock up 70, or 3%, to $23.50.

While some of the surge in new deals could be attributed to the stock rally, convertible players are expecting a nice flow basically through the summer.

"My guess - issuance stays strong - especially in light of the great deals the companies are getting when coming to our market. I'd raise money all day long if I could issue bonds at 0% priced at par and at 90% premium," said Anu Sahai, portfolio manager for ING Convertible Fund.

"That's a little exaggerated, but at the terms companies are able to raise money, our market is very attractive. With all the redemptions of issues and the cash inflows the convert market is witnessing, my guess is, we're in for a pretty 'hot' summer."

Certainly, convertible origination sources have been talking about a heavy shadow calendar for some time now.

And, in addition to the three deals launched Monday, The Hartford Financial Services Group Inc. plans about $1.6 billion of equity and equity-linked securities in a capital-raising following its $1.7 billion net after-tax asbestos charge. The company also is cutting its workforce by 1,500.

Moody's put Hartford's debt ratings on review for possible downgrade, including the 6% mandatory at A2. The Aa3 insurance financial strength ratings were confirmed, but the outlook was changed to negative from stable.

Moody's said that while the proposed $1.85 billion was a positive step, due to the substantial equity content, it will also increase the amount of ongoing funding needed by the parent to meet increased fixed charges and common stock dividends over time, which will add incremental pressure to coverage ratios.

Of the more clearly defined new deals, CenterPoint Energy launched $400 million of 20-year convertibles with guidance for a 4.0% to 4.5% coupon and 40% to 45% initial conversion premium, with pricing scheduled after Tuesday's close.

CenterPoint Energy shares closed Monday up 3c, or 0.38%, to $8.

When Reliant Energy Inc. separated into two publicly traded companies in 2002, CenterPoint Energy Inc. was formed and Reliant Resources Inc. continued.

Also on Monday, Reliant Resources and the Securities and Exchange Commission reached a settlement on allegations of round-trip trades similar to those that brought down Enron Corp.

Reliant did not admit or deny any wrongdoing. There were no fines levied under the settlement. Instead, the SEC ordered the company to refrain from further violations of securities laws.

KV Pharma's $130 million of 30-year convertibles, which convert into Class A shares of the company, talked to yield 2.25% to 2.75% with a 35% to 40% initial conversion premium.

KV Pharma class A shares ended Monday up 34c, or 1.37%, to $25.10.

Global Imaging's $50 million of 5.5-year convertibles was talked with a 4.0% to 4.5% coupon and 28% to 32% initial conversion premium.

At the midpoint of guidance, Lehman Brothers put the deal 3.13% cheap, using a credit spread of 700 basis points over Treasuries and 35% stock volatility.

Global Imaging shares closed off $1.04, or 5.43%, to $18.10

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