Market better bid but volume still lagging due to vacations; players eye dividend risk lists

By Ronda Fears

Nashville, Aug. 21 - It was another slow summer session in the convertibles market Thursday but dealers reported there was a bit of nice two-way activity going on as convertibles for sale were finding buyers. There did not seem to be an overwhelming theme to the buying or selling, however.

"In general, there are people looking for insulation from interest rate risk or looking to pick up cheap volatility or take some profits is some names that maybe have played out," said a sellside convertibles trader.

"But that's generally been going on all summer, since around May or June."

Dealers reported some relief in the market as buyers were better represented Thursday, and much of the convertible market tracked stocks upward.

Bond yields have backed up so much, however, that many onlookers don't find much comfort in the gains stocks are seeing in late summer, particularly with low volume. To boot, the market volatility index has sank to below the 20 mark.

"I don't understand the strength in the stock market. It's like these people are wearing rose-colored glasses," said John Siebel, head of trading at Silverado Capital Management.

"Just because Williams-Sonoma has a strong quarter I don't think it's a sign the economy is picking up sharply."

Shoppers in the convertible market, though, began to place active bids this week, one dealer said Thursday and now that the initial "sticker shock" has worn off there have been some trades executed.

"Buyers showing up, too," the trader said.

"There have been a few bids out there, sitting there. They are lower, not in a freefall, but definitely there has been some shock to sellers as the market cheapens."

Photronics Inc.'s new 2.25% convert gained 4-5 points on the day to 165 bid, 165.5 offered, traders said, in the wake of strong fiscal third quarter results. One trader also noted that Photronics' news was an impetus for a nice gain in DuPont Photomasks Inc. as well.

Northrop Grumman Corp. also was "being discovered, again," as one buyside trader put it, after the company announced Thursday an $80 million settlement with the U.S. Department of Justice. Northrop's 7.25% mandatory climbed around 2 points, he said, to 106 bid, 106.375 offered. The stock added $2.89, or 3.07%, to $97.11.

The trader said, however, that he has become concerned that there may be some risk of Northrop boosting its common stock dividend, so there could be some selling sparked in the name. Another name where he is concerned about dividend risk is Cummins Inc.

A couple of buyside traders were talking Thursday about a smaller sellside shop circulating a new list of convertible names considered dividend candidates that hadn't shown up before. Lehman Brothers and several other large sellside shops have had reports out this year highlighting issues with dividend risk.

Mentioned by one trader from the list, which totaled around 30, were Pep Boys, Fair Isaac Co., Interpublic Group of Cos., HCC Insurance and Harris Corp.

The Pep Boys 4.25% convertible due 2007 was quoted at one big sellside shop Thursday at 104.5 bid, and at 100.125 bid at another. The stock closed up 60c, or 3.65%, to $17.02.

Fair Isaac's new 1.5% due 2023 was up 1.25 points to 105.625 bid, 106.125 offered while the stock gained 44c, or 0.77%, to $57.88.

Interpublic is included among the names with dividend risk, one trader said, but its newest convert has dividend protection so it has been firming up. The 4.5s gained 1.375 points to 136.75 bid, 137.25 offered while the stock closed Thursday up 26c, or 1.91%, to $13.89.

HCC's 2% due 2021 was quoted at 100.875 and the 1.3% due 2023 at 100.75 while the stock closed up 14c, or 0.47%, to $30.05.

Harris' 3.5% due 2022 was quoted at 103.625 bid, 104.625 offered. The stock ended up 52c, or 1.62%, to $32.70.

Another trader also mentioned Analog Devices, DaVita Inc., Barnes & Noble, Chiron, Quest Diagnostics, American International Group, LabCorp, Prudential Financial and Brinker International.

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