Alcatel-Lucent slips on profit warning; Alpha Natural extends weakness; new Hologic mixed

By Rebecca Melvin

New York, July 17 - Alcatel-Lucent SA's convertibles slipped outright in active trade Tuesday as the underlying shares of the French telecommunications-equipment maker plunged on news that it will post a second-quarter loss next week and miss full-year guidance due to weak demand in Europe in the first half.

Alcatel-Lucent also said that the second half should be better than the first, based on current order books.

Alpha Natural Resources Inc. weakened further Tuesday, a day after BMO Capital Markets downgraded the stock of the Bristol, Va.-based coal producer to "underperform" from "outperform."

The bulk of the Alpha Natural move occurred Monday, but there was further weakness on Tuesday, a New York-based trader said.

Hologic Inc.'s newer 2% convertibles traded flat to better amid no particular catalyst, sources said.

The Bedford, Mass.-based diagnostic imaging and surgical products company did say it has gotten approval from German regulators for its planned purchase of Gen-Probe Inc.

Elsewhere, Lennar Corp. looked to be pretty much in line with where they have been, with the underlying shares near their 52-week high, although slightly lower on Tuesday.

The Miami-based homebuilder was selling $300 million of 2017 straight notes, which were rated B2 by Moody's Investors Service, to tender for $267.7 million of 4.95% straight notes due in 2013.

Lennar's 2% convertibles due 2020 were seen at 125.625 bid, 126.375 offered versus a share price of $31.06.

"The straights came a little tighter than expected, which gives you an indication of the demand for high-yield paper," a New York-based trader said.

Convertibles players appeared to be focused on defensive names, buying more short-dated, higher quality issues in decent size, a West Coast-based trader said.

For example there was a good bit of Transocean Ltd. in trade at steady pricing slightly under par as that paper will exit the market in December.

"The housing number got the equity market to rally, so that puts a better tone on a lot of convertible names. But overall it's pretty quiet," the trader said.

The National Association of Home Builders said Tuesday that its housing market index soared to a better-than-expected 35 this month, its highest level since March 2007 and up 6 points from a month earlier.

Economists surveyed had expected a reading of 30.

He suggested that with light liquidity and heading into heavy earnings season, he suspects many hedged players are "trading their deltas," while outrights are "content to wait and see how earnings look."

Equities on Tuesday were higher after initially sinking ahead of Federal Reserve chairman Ben Bernanke's testimony before lawmakers on Capitol Hill. Stock trading volume was light as well.

Alcatel-Lucent slips

Alcatel-Lucent's 2.75% B convertibles due 2025 traded at 97.75, which was down 0.625 point on Tuesday, and ended at about 97.5 bid, 97.75 offered, against a 19% stock decline to $1.11 per share.

The B convertibles trade on an outright basis.

The Alcatel preferred shares were also very active and traded down to 61.5 bid, 62 offered from 67.5 bid, 68 offered.

The preferred shares also trade outright.

The B convertibles move, down 0.5 point to 0.75 point outright, was less sharp than the preferreds' move perhaps because that paper is pretty short dated, coming due in less than a year, a New York-based trader said.

"The Alcatel Bs are slightly soft today, in like a point: nothing nuts," a second trader said.

Alcatel-Lucent's A convertibles weren't heard in trade.

Alcatel-Lucent, which is listed on exchanges in both New York and Paris, said that it will likely post an operating loss of €40 million for the second quarter, on revenue of €3.5 billion, after a slower-than-expected business mix improvement.

In addition, it won't achieve its adjusted operating margin guidance for 2012, but it expects the second half performance to be better than the first half, the company stated in a release.

The figures reflect "good sequential growth in sales with all geographies and divisions growing but a slower-than-expected business mix improvement," according to the release.

Alpha Natural weakens

Alpha Natural's 3.25% convertibles due 2015, the old Massey Energy Co. bonds, traded down to 84.5 bid, 85 offered from 85.5 on Monday and 87.5 on Friday.

"A big chunk of those traded," a trader said of the 3.25% convertibles, adding that they were a little bit weaker having had the biggest drop occurring Monday after the BMO downgrade.

The Alpha Natural 3.25% convertibles trade a little more frequently than the Alpha Natural 2.375% convertibles due 2015 as the 3.25s are the bigger issue, but the pricing is similar.

Alpha Natural's 2.375% convertibles traded a little bit Tuesday at 84 and then 83.5. It had been 85.5 on Monday and 87.5 on Friday.

"Both are down another 0.5 point," a New York-based trader said.

Alpha Natural shares pared heavier earlier losses to close down 2 cents at $6.83. That was on top of a 10% drop on Monday.

"I think people are spooked at how fast Patriot Coal went down," the trader said, "even though Alpha Natural isn't plagued by same near-term liquidity issues like Patriot."

The Patriot Coal Corp. convertibles plunged into the single digits after filing for Chapter 11 bankruptcy protection last week, from near par in April. Subsequently, the Patriot convertibles lifted slightly to trade at 13 near the close on Tuesday.

The Patriot 8.25% straight notes have also recovered some ground, having traded at 45 from 33 right after the filing, the trader noted.

"They have come back a lot," he said.

U.S. thermal coal producers have suffered from weak demand and pricing and the whole industry is subject to a new, more stringent regulatory environment under the Obama Administration.

BMO analyst Meredith Bandy said in a note Monday that she estimates the average price of Appalachian thermal coal for 2012 will be $60 per tonne, which is down from $79 per tonne in 2011.

Meanwhile, in research on U.S. thermal coal also published Monday, BMO said, many U.S. coal companies entered 2012 with relatively heavy debt levels following a spate of mergers and acquisitions in 2011.

"Arch Coal and Alpha have the weakest balance sheets of the group on a variety of metrics, including Net Debt to EBITDA, market cap to total liabilities, and interest coverage," according to the research. "Alpha's bonds trade the weakest of the group and the CDS spread is also highest of the group (though only Alpha, Peabody Coal and Teck Resources Ltd. have CDS quotes on Bloomberg)."

Bandy cut her price target on Alpha shares to $5 from $18 on Monday, citing weak demand for Appalachian coal, the company's high debt levels and deteriorating margins.

New Hologic flat to better

Hologic's 2% convertibles due 2042 traded at 94.125 and closed at 94 bid, 94.75 offered, according to a trader.

Hologic's 2% convertibles due 2037 traded at 108.7.

Hologic shares were up slightly, by 13 cents, or 0.7%, at $19.10 on Tuesday.

"The new Hologic are trading better - those still look like the cheapest bond in the cap structure," a trader said.

Hologic and Gen-Probe announced that they have received written notification from Germany's Federal Cartel Office that the proposed acquisition of Gen-Probe by Hologic is cleared to proceed.

As previously announced, on April 30, Hologic agreed to acquire all of the outstanding shares of Gen-Probe for $82.75 per share in cash.

Gen-Probe stockholders are slated to vote on the transaction July 31. The transaction is expected to close around Aug. 1.

Mentioned in this article:

Alcatel-Lucent SA NYSE and Paris: ALU

Alpha Natural Resources Inc. NYSE: ANR

Hologic Inc. Nasdaq: HOLX

Lennar Corp. NYSE: LEN

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