Curagen plunges amid big sellout; Level 3 founders; XM rises, Sirius dips; Wynn bid up; airlines plunge

By Ronda Fears

Nashville, April 26 - Convertibles on whole went south with stocks Tuesday as consumer confidence data for April recorded the third consecutive monthly decline. Traders on both sides of the market, however, also attributed a fair portion of the drop in convertibles to ongoing liquidations.

It has been quiet on the primary market front, as well, and the prospects seemed to dim as Chiquita Brands International Inc. announced late Monday that its $855 million purchase of Fresh Express would be delayed by a review of how to account for the acquisition. The banana giant has been planning a $75 million perpetual convertible preferred to be sold in conjunction with $150 million of senior bonds along with plans for a new $650 million bank credit facility to fund the purchase.

"We're getting sort of shell-shocked," said a trader at a convertible arbitrage hedge fund. "It is just ugly."

Curagen Corp. was a name mentioned in the context of a convertible fund liquidating its portfolio, and just ahead of the genomics-based biotech reporting earnings on Thursday.

Specifically, the buyside trader said there was a "big" position in Curagen's $120 million 4% convertibles sold off in the mid-50s versus a close on Monday for that issue at 65 bid, 68 offered. The Curagen 6% convert due 2007, a $150 million issue, also was said to have seen some heavy selling, with Curagen shares losing 17 cents on the day, or 4.91%, to close at $3.29.

There were some takers for convertible paper, though, mostly from yield-seekers, some of which were crossing over from the junk bond and distressed debt pastures. And, convertible analysts are saying they are beginning to see a bottom in the market.

Bargains, yield subjective

To that end, somewhat due to liquidations already made or in progress, sellside analysts say there are potential wins for the long-haul convertible players among the crop. But it's not so simple as picking up an issue at a bargain basement price, managers say, because it's only a bargain relative to where its getting marked down from versus what a potential buyers thinks it is really worth.

Curagen has perhaps too much questionable investment value, one manager suggested, to find any enthusiastic bidders on the mark down.

Risk tolerance is low, indeed, but there were buyers seen Tuesday reaching for yield with the 5.25% convertible due 2010 of Nextel Communications Inc., and a sellside desk analyst said he was pitching the BEA Systems Inc. 4% convertible due 2006 and Mercury Interactive Corp. 4.75% convertible due 2007 for yield-seekers with a short, two-year horizon objective. All three of those converts are trading in the mid- to high 90s, he said.

But another sellside market source added that the yield pickup on a particular convertible is not always enticement enough to lure buyers.

Nortel Networks Corp. traded off Tuesday with the 4.25% convertible due 2008 in the 92 area, down from around 96, the sellside market source said. He said, however, that it was more of a concern about financial restatement risk than Nortel's announced $448 million cash purchase of PEC Solutions, which was announced Tuesday.

Level 3 interest dims

Even though Level 3 posted improved results for first quarter and proffered a stream of news with a positive spin on Tuesday, convertible market onlookers said interest in that paper was nil, illustrated by a cavern between the bids and offers on those bonds.

"Our trader has a 5-point market on the bonds. You could say that's the world we are living in," said a sellside desk analyst. "But the willingness to move out the risk curve has diminished significantly. No one wants these [convertibles]."

Level 3's 5.25% convertibles due 2011 were pegged at about 61 bid, 66 offered and the 2.875% convertibles due 2010 at 40 bid, 50 offered.

For first quarter, Level 3 reported a net loss of $77 million, or 11 cents a share, versus a loss of $147 million, or 22 cents a share in first quarter 2004, while revenue rose 12% to $1.01 billion from $899 million.

The company expects second-quarter communications revenue to decline to $350 million to $370 million, following a reported 31% gain in revenues from that segment in first quarter. Yet, the direct dial-up internet service provider, which is trying to add voice-over-internet protocol business, stressed in its conference call that it will lose only a small amount of business from the Verizon-MCI and SBC-AT&T mergers.

In fact, Level 3 said it sees opportunity for winning more business and bragged of recent VoIP contracts with AOL and Adelphia, adding that it doesn't anticipate a loss of business from the pending Time Warner/Comcast buyout of Adelphia.

Pointing to its balance sheet, Level 3 said it has $1.5 billion liquidity pro forma a recent $880 million note deal - the private placement from February, a 10% convertible due 2011 with a strike price of $3.60 - and said it could use those proceeds for existing debt, among other possible uses, but wouldn't elaborate at this time.

Level 3 shares closed Tuesday lower by 2 cents, or 1.1%, at $1.79.

XM picked up, Sirius sold off

In advance of XM Satellite Radio Holdings Inc.'s earnings on Wednesday, a sellside trader said there were some new buyers for its 1.75% convertibles as well as some holders adding to their positions. The stock also gained 20 cents, or 0.73%, on Tuesday to $27.60 and was up another 1.27% in after-hours trading.

XM Satellite also was getting some volatility players, the trader said.

Conversely, rival Sirius Satellite Radio Inc. - which is due to report results on Thursday - was the target of selling. It has been a headline-making name in recent months as it aims to match XM's dominance in the satellite radio market, hiring former Viacom Inc. executive Mel Karmazin as its new chief, plus adding controversial radio deejay Howard Stern and celebrity homemaker turned ex-con Martha Stewart to its lineup.

Sirius has 1 million subscribers to XM's 0.38 million and both have raced to get their dedicated radios in virtually every source of transportation, including boats , airplanes and rental cars along with the mass produced consumer vehicles.

"You could make an argument for either one of these," the trader said. "It could be argued that XM has a slower rate of growth than Sirius, or that Sirius is growing at a quicker rate, but the valuations are richer for Sirius than XM based on the subscription figures."

Banc of America Securities LLC on Tuesday reiterated a buy rating and $42 target price on XM, saying the company is better funded than Sirius. The research firm said Sirius lags XM in terms of long-term profitability per subscription. In 2005, Sirius is expected to add subscriptions at an economic loss of about $300 per subscription, while XM should create $35 of value per subscription, according to Banc of America. The firm reiterated a neutral rating and $5.50 target price on Sirius.

Wynn bid up

Wynn Resorts Ltd.'s convertible - already deep in the money - was getting bid up further Tuesday, just ahead of its Wynn Las Vegas casino - touted as the most expensive casino in the world - opening Thursday, but some players watching from the sidelines think the stakes are too high.

One fund manager, who is eyeing the gaming sector, said the situation has "lots of risk in a market that hates risk [but is] in a loved sector."

"I suppose the thinking is that gaming is insulated from [the] rest of [the] economy. I do not buy it," he said. "Large short interest keeps a bid, but maybe I have it wrong along with all the shorts. The bonds are so deep it would take more to have them open up. I feel the best is priced in. Wait till the first weekend and the air conditioning goes on the fritz! For what it is worth, Wynn has cheaper equity valuation than Las Vegas Sands so maybe that is why it has a bid as well?"

Wynn's 6% convertibles due 2015 were quoted up 6.5 points to 256 bid, 256.5 offered Tuesday as the underlying stock shot up $1.49, or 2.72%, to $56.35. The run-up flew in the face of a Merrill Lynch downgrade to the stock on Monday to sell from neutral.

The $2.7 billion Wynn Las Vegas resort, the brainchild and namesake of Steve Wynn - the gaming magnate renown for transforming the face of Las Vegas into ritzier resort-type casinos like The Mirage and Bellagio - is set to open for this weekend.

Major airlines see major dive

With Delta Air Lines Inc. flipped back into the possible bankruptcy courts following its much-anticipated big first-quarter loss, convertible paper in the airline sector took a sharp dive on Tuesday. The loss was no surprise, traders said, but it just provided extra downward pressure on Delta and the entire field of airline convertibles.

Bankruptcy chatter was not news, for that matter, either as skyrocketing jet fuel prices have clipped profit margins for virtually the entire group and intensified the efforts of Delta and other legacy carriers to curb costs.

Pension reform legislation has been introduced in Congress that would solve pension issues for Delta and Northwest, but onlookers are left wondering if liquidity can hold out. Delta has said it is talking to lenders about amending covenants because of fuel price hikes.

Northwest Airlines Corp. and others like Delta may be a beneficiary of the settlement agreement last week between bankrupt UAL Corp. and the Pension Benefit Guaranty Corp. over termination of the company's pension plans, too, analysts said. Under the proposed agreement - which must by approved by the bankruptcy court - the pension regulator will terminate UAL's four pension plans and become trustee.

AMR Corp., parent to American Airlines Inc., seems to be among the favorite of the major carriers, having weathered a financial storm a couple of years back, pointed out a sellside desk analyst.

"The [AMR] credit is OK and the company cash positive so long as oil is in the mid-$40s or lower," he said. "Above that - God forbid $70 oil - then it gets messed up."

Regional flyers' flight curbed

Regional airlines, which had been remaining fairly steady throughout the stormy weather downing many legacy carriers, took a dive as well Tuesday. AirTran Holdings Inc., which reported Tuesday that it reversed into a net loss for first quarter, was blamed in large part for the group's decline.

"It was just horrible. I hated it. I sold those [AirTran] converts today, but I hated it," said a convertible hedge fund manager. "Considering everything, considering the rest of the airlines, it wasn't bad. I really liked AirTran up until this."

AirTran reported a net lost $8 million, or 9 cents a share, compared with net earnings of $4.1 million or 5 cents a share, a year before, citing a 66% rise in fuel costs, eclipsing labor costs, which rose 25%. "Everything is overshadowed by the increase in energy prices," said AirTran president Bob Fornaro.

JetBlue Airways Corp. has been a rising star among the regional names but previously had been viewed as an expensive issue to get involved with.

"JBLU had a nice turnaround in March, but the bonds are already well bid as compared to the others," said another convertible fund manager. "We have small exposure to regional airlines - sort of a hedge to falling crude - except that at this point crude will have to fall more!"

That said, he added, "JetBlue is the only airline that consistently makes money without major fuel hedges. The slight profit in first quarter should be replicated for the next three quarters."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.