Central European Distribution up 6 points as beaten-down names catch a bid; market quiet

By Rebecca Melvin

New York, Aug. 29 -The convertible bond market saw a bid in some of its recently beaten-down names on Monday, which corresponded with a surge in stock market prices. But action was by no means full throttled given that many players on the East Coast were sidelined in the aftermath of Irene by transit problems and other challenges like no electricity.

The hurricane had weakened to a tropical storm by the time it reached New York over the weekend, and its punch was less powerful than initially feared. Nevertheless, she barreled over inland areas with heavy rains that were rejected by already saturated ground, causing widespread flooding, tree damage and infrastructure problems.

Central European Distribution Corp. was one name that got a boost Monday, with the vodka maker and beverage distributor piling on a jumbo-sized 6-point-gain outright as its underlying shares surged 48% on word that an investor has picked up a big stake in the company.

Mortgage insurers also saw some action Monday. Radian Group Inc.'s bonds picked up about 3 points as shares of the Philadelphia-based mortgage insurer jumped 18.6%. Fellow mortgage insurer MGIC Investment Corp. was also pulled higher.

MGM Resorts International was another name, recently weakened by the risk-off trade, but bid higher on Monday. United States Steel Corp. was also mentioned as a trader.

"There was a bid in some of these names that have been kicked down the road," a New York-based sellside trader said.

Quiet Monday trade

Volume was very light and trading desks were not fully manned, sources said.

"There's not a lot going on with most of the folks out on the East Coast having trouble getting back," a Chicago-based trader said. "We'll see how we do the rest of the week, depending on how fast people can get back on their feet."

A second trader, based in New York, said, "It's dead. People are out. This week is usually awful anyway. But toss in people out due to hurricane and it's a total non-event."

The trader was referring to the fact that this is the last unofficial week of summer, and it leads up to the long Labor Day weekend, both of which encourage a bump up in the number of people on vacation.

On light volume, the equities markets rallied sharply. The Dow Jones Industrial Average rose 245 points, or 2.3%, to 11,539.25, close to break even for 2011. The S&P 500 stock index gained 33 points, or 2.8%, to 1.210.08, and the Nasdaq Stock Market added 82 points, or 3.3%, to 2.562.11.

The markets appeared to be relieved that Irene was not as devastating as feared, and a few other good headlines also helped fuel the gains.

Stronger-than-expected consumer spending data gave the market a boost. The Commerce Department showed that Americans increased spending by 0.8% in July, and income rose 0.3% as wages and salaries grew.

Also European markets improved after news that two Greek banks are set to merge, including EFG Eurobank and Alpha Bank. The tie up boosts hopes that takeovers can help banks weather the sovereign debt crisis.

The move also extended gains notched Friday after Federal Reserve chairman Ben Bernanke told central bankers and economists at the Fed's Jackson Hole Summit in Jackson Hole, Wyo., that a one-day meeting in September was lengthened to two, making it more likely than before than the Fed may take additional steps to pull the economy out of its doldrums.

Nevertheless, Bernanke said the Fed's powers are limited, and responsibility for significant economic policies rest primarily with the U.S. Congress.

Central European bid higher

Central European's 3% convertibles due 2013 traded early Monday at 68.25 bid, 68.50 offered. Later they moved up to 70.625 and then up to 74.

Shares of the vodka maker and beverage distributor, with U.S. headquarters in Pennsylvania, skyrocketed 50%, or $2.73, to $8.20.

News of an investor filing in which individual investor Mark Kaufman reported a 9.6% holding in the Polish vodka maker was attributed for the gain. Kaufman, with dual Russian and Israeli citizenship, may engage in talks with CEDC management and the board concerning the company's financial condition and strategy, the filing with the Securities and Exchange Commission said.

"Seeing some busted names jump like CEDC," a trader said. "Even relative to the common, that's a big move."

CEDC trades outright and seems to trade with the common although it doesn't trade on a delta hedge.

"Some of these names will trade with the common even though the flow is definitely driven by outrights," a trader said, referencing the old Nuvasive convertibles and the old Hologic bonds as other examples of names that do not trade on delta but still move with the common stock.

"They are tricky to hedge when driven by outrights, but they tend to move with the stock," the trader said.

Mortgage insurers add

Radian Group's 3% convertibles due 2017 traded at 55.75 bid, 56 offered on Monday, which represented a 3-point gain, while shares of the Philadelphia-based mortgage insurer jumped nearly 50 cents, or 18.5%, to $3.51.

While insurance companies were helping lift the equity indices due to relief that Irene wasn't likely to be as costly as initially expected, that wouldn't be a good reason for the mortgage insurers to likewise trade higher.

"These are the mortgage guys involved in down payments on houses," a New York-based sellsider said, chalking up the gains to the same influences that pulled up CEDC and MGM.

"These names have been beaten down and there was a bid today," he said. "This is another sector kicked down the road. If anything, buying in the stocks was short covering. That's what it looks like," the trader said.

MGIC Investment's convertibles were seen at 62.75, which was up 2.5 points to 3 points.

Shares of MGIC were up 47 cents, or 19%, at $2.93 on Monday.

PMI Group Inc., which has become a very distressed situation, was not seen in trade.

MGIC is the largest of the three mortgage insurers, followed by Radian and then PMI.

"Of course we didn't have the full complement of market players," the trader said.

Mentioned in this article:

Central European Distribution Corp. Nasdaq: CEDC

MGIC Investment Corp. NYSE: MTG

MGM Resorts International NYSE: MGM

PMI Group Inc. NYSE: PMI

Radian Group Inc. NYSE: RDN

United States Steel Corp. NYSE: X

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