Activity muted as focus turns to new issue with stocks seesawing

By Ronda Fears

Nashville, Tenn., Sept. 9 - As stocks seesawed through the session, ending higher, activity was muted in convertibles. The new-deal buzz from last week materialized into a $300 million mandatory from Hartford Financial Services Group, which was getting a nice reception.

"It's been slow today," said Stuart Novick, convertible analyst at Salomon Smith Barney.

"I wouldn't say people are just sitting by waiting for Sept. 11 to pass, but it probably will have some impact on the market this week."

Issuance is expected to pick up soon, but he said nothing is expected to launch for pricing Wednesday.

The Hartford deal was quoted bid at its issue price of 50 in the gray market. The stock was lower early in the day, but closed up $1.01 to $47.49.

"Hartford is a no-brainer. It's investment grade, very strong and the terms look really decent," said a convertible trader at a hedge fund in New York.

Moody's Investors Service rated it A2 and Standard & Poor's rated it A.

Otherwise trading was choppy and slow as stocks began lower and turned around to end the day higher.

"There wasn't a lot to focus on today, no major news," said a dealer. "We weren't very busy in terms of trading."

Nextel Communications Inc. and Xerox Corp. both provided some good news but there was a mixed reaction to the news.

AOL Time Warner Inc. gained ground, too, although it issued a warning about America Online results.

Most areas were strong by the end of the session, which convertible traders attributed to bargain buying in the stock market. Bonds were higher early on, but weakened somewhat as stocks grew stronger.

Homebuilders saw another strong session, despite the ongoing debate about the possibility of a housing bubble.

Lennar Corp. got a pitch from Morgan Stanley as a balanced way to play the home game and rose nicely.

The Lennar 0% convertible due 2018 added 2.125 points to 77.5 bid, 77.875 asked and the 0% due 2021 gained 0.625 point to 46.5 bid, 47 asked. Lennar shares closed down 42 cents at $35.08.

But the debate has spread into real estate in general and traders noted mostly weakness in that group of converts, which are nearly all mandatories or preferreds.

In a report last week, Lehman Brothers Inc. high grade analysts Kris Grimm and Jane Gillard cut the recommended weighting on real estate investment trust, or REIT, bonds to underweight from overweight.

"The REIT sector's performance may have reached an inflection point. Unfortunately, we see little improvement in either fundamentals or technicals over the near term," the analysts said in the report, noting that weak results will limit participation in any flight-to-safety trade spurred by investors' fears of a double dip recession.

"We also believe the [credit rating] agencies are growing increasingly uncomfortable with the performance of certain companies, and we expect more negative actions in coming months."

Pockets of oversupply and steady home purchases have clearly hurt both occupancies and rents, the analysts said.

As a group, the analysts said, industrial REITs, including CenterPoint Properties Trust, have the weakest financial profile because they generate a higher proportion of their income from asset sales, merchant development, fund management and other sources.

CenterPoint's 7.7% convertible preferred lost 0.13 point to 65.42 as the stock closed down 24c to $55.71.

Lehman remains cautious about Rouse Co. because of weak financials and land sales, but the Rouse convert gained ground while the stock slipped.

Rouse's 7.5% convertible preferred added 0.25 point to 46.5. The stock ended down 2c to $31.73.

Related to upbeat news out from Xerox and Nextel, reactions were widely mixed.

Xerox chief executive Anne Mulcahy said during the company's annual shareholders meeting that the office equipment maker still expects to deliver a profit for 2002.

Xerox's 7.5% convertible preferred due 2021 slipped 0.25 point to 47 bid, 47.5 asked while the stock closed up 4c to $6.90.

Nextel said it expects to meet or beat its wireless subscriber growth estimates for the year, driven by a strong third quarter. Nextel expects 2003 capital expenditures to be roughly $2 billion, in line with 2002, but 2004 capex at $1 billion.

Nextel's 6% due 2011 shot up 3.25 points to 73.25 bid, 73.75 asked and the other two converts - the 4.75% due 2007 and 5.25% due 2010 - were up to a lesser degree. But Nextel shares closed off 9c to $7.89.

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