CapitalSource, Evergreen Energy trade flat; American Mortgage finally prices; market volatility worries investors

By Evan Weinberger

New York, July 25 - Two new issues from CapitalSource Inc. and Evergreen Energy, Inc. weren't enough to excite convertibles investors Wednesday as wildly see-sawing equity markets had people sitting tight in their existing holdings.

Hedge funds, one trader said, were shuffling around their issues, but not to any great extent as they focused on the gyrations on Wall Street. "You could trade the delta and the gamma. You've got a lot of that going on," he said. "But you're not seeing much action on the new names."

Aside from the CapitalSource and Evergreen Energy new issues, there were two others to report Tuesday.

One came from Hong Kong. The Xinyu Hengdeli Holdings Ltd., a retailer and wholesaler of watches mostly in China, announced an offering of RMB $1 billion in zero-coupon senior unsecured convertible bonds. The bonds, due Aug. 24, 2012 are set to yield 2.1% and have an initial conversion premium of 45.26%. The conversion premium was based on the company's closing stock price on the Hong Kong Stock Exchange July 24.

Xinyu Hengdeli plans to use the proceeds to sell more watches in more retail establishments across China, for strategic acquisitions and for the ever-popular general corporate purposes.

Meanwhile, terms emerged on a smaller deal in the United States. American Mortgage Acceptance Co. priced its $17 million in series A cumulative convertible perpetual preferred shares after announcing them July 9. The preferreds carry a 7.25% coupon and a 25% conversion premium. That translates into 725,000 shares.

The original offering was for $42 million spread over 1.68 million shares. The New York-based real estate investment trust says the proceeds will go toward acquiring additional mortgage-related assets and general corporate purposes.

American Mortgage stock (AMEX: AMC) was down 27 cents, or 3.19% Tuesday to close at $8.19. It was a tough day for REITs and other companies involved with mortgages as it was reported that a rising number of prime loan recipients were joining their subprime cousins as increasing default risks.

And the National Association of Realtors reported that existing home sales fell by a larger-than-expected amount - and for the fourth consecutive month - in June.

Overall, the graph of the Dow Jones Industrial Average looked more like the peaks of the Rocky Mountains than the upward trajectory of a rocket Tuesday. After beginning the day up around 60 points, it fell 20 points after the housing sales announcement at 10 a.m. It then rebounded and jiggled throughout the day.

The Dow ended the day up 68.12, or 0.5%, to finish at 13,785.07. The Nasdaq followed the pattern, finally ending at 2,648.17, a gain of 8.31 points, or 0.31%.

CapitalSource tries to have it both ways

The most glaring part of the prospectus on CapitalSource's $250 million convertible offering came in the fine print, traders and analysts said.

Deep in the prospectus was dividend protection going both ways, and it had a lot of investors up in arms. One trader said that he knew of a lot of clients who noticed the protection and complained. When the convertible senior notes priced Tuesday night, with a 7.25% coupon and a 35% premium, that provision was gone.

There is now only dividend protection moving up. "This paper would have caused a lot of damage on the way down," the trader said.

The convertibles did try to split another difference. The 7.25% coupon came in at the cheap end of talk, which had been 6.5% to 7%, and the 35% initial conversion premium came in at the rich end, which ranged from 30% to 35%.

The issue itself was downsized. It was originally announced at $300 million with a $45 million greenshoe. The greenshoe is now $37.5 million.

The bonds priced at 98. The closing bid was reported at 97.5.

"The terms didn't excite us," one buyside convertibles fund manager said when explaining why he passed on the issues.

Shares in CapitalSource (NYSE: CSE), a Chevy Chase, Md., financial services company that works with small and mid-sized companies, did move higher Tuesday. The stock gained 21 cents, or 1.05%, to close at $20.28.

Evergreen trading lean

If a convertible is issued and nobody moves on it, is it really there? The answer, of course, is yes. But the question was pertinent to Evergreen Energy's $95 million convertible senior notes due Aug. 1, 2012.

The convertibles priced Tuesday night with an 8% coupon and an initial conversion premium of 40%.

And once they hit the market, no traders or analysts could report anyone trying to buy the convertibles. The issue, more than anything having to do with terms, was the dollar amount.

"These tiny little strange deals, they're almost like private placement," one analyst said, referring to a coupon that decreases 300 basis points if the underlying stock trades at the conversion price for 20 days in any 30-day trading period.

The analyst added that in all likelihood a few large investors gleefully picked up the convertibles and are "riding the coupon all the way home."

The convertibles were issued at par, and no bids were reported. The Denver-based coal refiner intends to use the proceeds to fund capital expenditures and operations at its Fort Union plant and for general corporate purposes.

Evergreen Energy stock (NYSE: EEE) finished the day up 0.8%, or 3 cents, at $3.78.

More kind words for SunPower

With SunPower Corp. reportedly pricing its $175 million in convertible senior debentures Wednesday night, more positive feedback was given on the coming issue.

The debentures are talked at a 0.5% to 1% coupon with a 22.5% to 27.5% initial conversion premium.

"Everybody likes the name," one convertibles fund manager said. "The borrow is difficult. We'll see how they manage to price this one. The new ones look better than the existing, looking at them in a balanced way."

Meanwhile, in this space we reported that one analyst had modeled the debentures at 20% cheap. That was a mistake. It should have read that the analyst modeled them at 2% cheap, and the Prospect News Convertibles Daily regrets the error.

SunPower is a San Jose, Calif.-based maker of solar cells, solar panels and solar systems. The company intends to use the proceeds for general corporate purposes, including expansion of solar cell and panel manufacturing facilities, prepayments on raw materials purchases and investment in complementary businesses, technologies or joint ventures.

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