Mixed bag, as convertibles track stocks in another slow session; Xerox issue soars on dividend

By Ronda Fears

Nashville, Aug. 26 - Amidst a great deal of studying their portfolios, convertible players on Tuesday were picking up the Xerox Corp. mandatory as the company declared a premium dividend on the issue.

Otherwise, it was a slow session "for obvious reasons," as one dealer put it.

The late summer lull, particularly in the new issue parade that has blasted through the convertible market this year, has given fund managers some time to study their holdings though.

Dealers say it appears that selling has waned and the market seems to be better bid lately, but Tuesday it was a mixed bag as converts trended alongside their respective stocks.

According to some fund managers, especially in the hedge fund community, there has indeed been some money taken off the table. It is difficult, however, to get a grasp on the magnitude of redemptions and/or liquidations.

International fund managers have talked about looking harder at the European convertible market, and even more so at the Asian convert market, while they have been pulling money out of the U.S.

"It's been a tough period of late for the convertible managers. Convertible implied vol has been under pressure all over the world," said Steve Howell, chief investment officer of Australia based Basis Capital.

"The goal is to both grow and protect investor's capital - and be performance driven. The job at hand is to protect and grow investors' capital in all market conditions, to act decisively and employ systematic risk management disciplines.

"Some of our key principles of portfolio and risk management are diversification, liquidity, relative value and reasonableness. Importantly, reasonableness to Basis means employing a conservative and sometimes cynical approach to the markets."

All that led to Howell noting that Basis Capital's allocation to U.S. convertibles is now at 10%, down from 15% a year ago.

Fund managers have not given up, however, and are looking for opportunity - searching still for value, yield and delta, depending on one's strategy thesis.

"Everyone's looking for an idea, an angle," said one market source in New York.

"It's just very hard to come by."

There certainly were buyers showing up for Xerox.

SG Cowen on Tuesday raised its investment rating for Xerox Corp. shares to strong buy from market perform, citing improvement in revenue trends and margin.

The stock shot up, as did the convert, but really driving the convert, traders said, was the company's declaration of the quarterly dividend, payable Oct. 1, to holders of record Sept. 12.

Xerox said the payment will be $1.6667 per share on the 6.25% mandatory - above the ordinary rate of $1.5625, as this first dividend also covers the period from June 25, when the series C preferred stock was issued, to June 30.

The Xerox 6.25% convert gained 6.375 points on the day to 104 bid, 104.5 offered. The stock rose 85c, or 8.91%, to $10.39.

Traders also noted sharp declines in Lincare Holdings Inc. and Photronics Inc.

While buyside sources have lamented the dearth of research from the sellside shops this year, Deutsche Bank Securities had a 25-page report out Tuesday screening for value among the new issues that have been put into play in 2003 so far (see story on page one of this issue).

Also, for anyone eyeing delta, Deutsche circulated a screening of high gamma converts. High gamma implies that the slope of delta will change rapidly with stock movements. In these issues, typically premium expands on downside and is retained on upside.

Gamma also is the key variable for hedge fund investors, as high gamma means high returns for set-up positions if the stock is more volatile than the price the convertible implies. The higher the gamma the greater the potential of hedge funds to capture volatility in the underlying stock.

The top 10 are the TelMex 4.25% due 2004, Roche/Genentech 0% due 2015, Cendant's No. 1 zero-coupon due, First Data 2% due 2008, Waste Connections 5.5% due 2006, General Mills 0% due 2022, Markel 0% due 2031, Reebok 4.25% due 2021, Medtronic 1.25% due 2021 and Brinker International 0% due 2021.

The TelMex convert was quoted up slightly Tuesday at 108.8125 bid, 110.3125 offered. The stock closed up 12c to $30.40.

The Roche/Genentech issue lost about 0.625 points on the day to 77.5 bid, 78 offered as the underlying shares fell $1.75, or 2.18%, to $78.50.

Cendant's No. 1 zero-coupon convertible was off 0.25 point to 67.375 bid, 67.875 offered as the stock ended down 19c, or 1%, to $17.30.

The First Data convert lost 0.25 point to 107 bid, 107.5 offered with the stock down 17c to $38.21.

Waste Connection's convert was quoted at 107 bid, 108 offered as the stock ended unchanged at $33.75.

The General Mills issue was down about 0.375 point to 69.625 bid, 69.875 offered. The stock slipped 1c to $46.27.

The Markel convert added 0.25 point to 35.125 bid, 35.375 offered while the stock soared $3.45, or 1.29%, to $271.75.

The Reebok convert was off 0.25 point to 106.875 bid, 107.875 offered. The stock closed down 26c to $33.44.

The Medtronic convert was off 0.25 point to 103.5 bid, 103.75 offered as the stock lost 38c to $50.12.

Brinker's convert added about 0.375 point to 66.75 bid, 67.75 offered with the stock gaining 33c, or 1%, to $33.44.

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