Buyers emerge from sidelines to bid up high delta, gamma issues

By Ronda Fears

Nashville, Nov. 14 - As stocks headed north, convertible buyers were out chasing equity-sensitive paper and volatility.

"The market was very, very well bid today. This shows there was lots of money on the sidelines," said the head convertible trader a major investment bank.

"With options out of the money, [arbs] are willing to bid up to get gamma. They've been forced to become volatility traders again. And the outrights need delta exposure."

Tom Sugiura, convertible analyst at Bear Stearns & Co., said retail names were active and tech issues were firmer than last week.

A recent spate of new deals, at least relative to the summer and early fall, including the overnight 0% convertible offering from 3M Co., helped stimulate buyers.

But the market gain was more reflective of an improved tone due lower jobless claims and higher consumer spending, countering the negative snap caused by lower interest rates and fear of a war with Iraq.

"In general, people are feeling better about the market, especially high-yielding paper," the head trader said.

"The new deals is just part of it. The 3M deal is good. It's really aggressively priced but I'm sure it will go very well. It's a unique opportunity for issuers right now."

Opportunistic pricing was a phrase repeated several times by different people referring to the 3M deal and Teva Pharmaceuticals' new deal.

The 3M deal, for $500 million in proceeds, was talked to price at a yield of 0.25% to 0.75% with a 36% to 40% initial conversion premium.

It was estimated between 0.8% rich to 1.3% cheap, but was bid up 0.375 points to 0.625 points in the gray market. 3M shares ended up $1.32 to $130.

Teva's new deal, which was estimated anywhere from 0.5% rich to 2.6% cheap, gained another 1.75 points on the day to 105 bid, 105.5 asked. Teva shares closed up $2.23 to $74.54.

Teva's other converts rose about 0.75 point, a dealer said. The 1.5% due 2005 was quoted at 109 bid, 110 asked and the 0.75% due 2021 at 107 bid, 108 asked.

Most drug and healthcare names were marked higher on the day and several, like ImClone Systems Inc., saw trading action.

In general terms, converts were mostly higher.

Notable gains were seen in tech names like Agere Systems Inc. and Corning Inc.

Agere's 6.5% convertible due 2009 was erratic on trading activity, one source said.

"They [Agere converts] are all over the place," said the source on a trading desk.

"There were huge spreads, I'm talking like 20 to 30 points, because no one knows where to quote these things at."

The Agere convert was closed out at a major convertible trading desk up 7 points on the day to 74.625 bid, 77.625 asked. Agere shares ended up 23c to $1.39.

Corning's 3.5% convertible due 2008 was quoted up 2 points to 69.5 bid, 71 asked and the 7% mandatory up 2.5 points to 189.75 bid, 190.75 asked. The stock closed up 43c to $3.37.

Headlines about Warren Buffett becoming a bigger holder in Omnicom Inc. did not move its converts a lot, but the stock added $6.61 to $66.31. The 0% converts were quoted up 1.5 points with the 2031 issue at 99.75 bid, 100.25 asked and the 2032 issued at 99.125 bid, 99.875 asked.

Interpublic Group of Cos. Inc. somewhat weighed on Omnicom, one trader said.

The day wasn't without a big disaster, though.

Affiliated Computer Services Inc. became the "big bang" of the day during the afternoon when its quarterly filing at the SEC revealed its defense unit been subpoenaed by a federal grand jury in connection with an antitrust investigation.

Affiliated Computer's 3.5% convertible due 2006 fell 7.5 points to 122.625 bid, 123.625 asked. The stock plunged $4.45 to $42.25.

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