Apex Silver, Fannie Mae, EDO gain; Freeport, Greatbatch dip; HealthSouth to price $300 million

By Rebecca Melvin

Princeton, N.J., Feb. 23 - The convertibles market Thursday was mostly mixed with some nice moves to the upside for Fannie Mae, Apex Silver Mines Ltd. and EDO Corp. But Freeport-McMoRan Copper & Gold Inc. was indicated lower, traders said.

Freeport-McMoRan convertibles were down on news that the New Orleans-based

mining company's Grasberg copper and gold mine in Indonesia - one of the world's largest - remained shut after violence between erupted between local Indonesians and the company's security personnel and police.

Gold prices also dropped Thursday by 1%, but a buyside analyst, who had reviewed the name Thursday, said the stock and convertibles fell primarily due to Freeport's mine shutdown.

Another decliner was Greatbatch Inc., formerly known as Wilson Greatbatch Technologies Inc. The Clarence, N.Y.-based maker of components for medical devices reported a weaker-than-expected fourth quarter. The earnings report reversed course compared to better-than-expected earnings for the previous two quarters.

The Greatbatch 2.25% convertibles due 2013 were indicated down by more than 1.5 points after trading during the session at 86.75.

But EDO Corp., which priced $175 million 20-year convertibles in mid November, gained on better revenue and guidance despite missing earnings estimates.

After the close, Chesapeake Energy Corp., a favorite among convertibles players, reported earnings that were five cents per share better than expected. Its shares gained in after-hours trade.

In the primary arena, HealthSouth Corp. said it plans to price up to $300 million of convertible perpetual preferred stock next week. The Birmingham, Ala., health care service company's deal will not be under Rule 144A, but under Section 4(2), which is treated more like a private placement deal, with greater restrictions on the flow of information, syndicate sources said.

According to a syndicate source, other notable deals of this type in the past include NRG Energy Inc., BearingPoint Inc. and Endeavour International Corp.

Fannie Mae improves dollar neutral

The convertibles of Fannie Mae gained about 0.5 point on a dollar-neutral basis after the release of a long-awaited report that signaled damage to the company related to its $11 billion accounting scandal has been contained and steps are being taken to remedy problems.

The company-ordered report said that Fannie Mae's former finance chief and controller share primary responsibility for the accounting failures at the Washington, D.C.-based mortgage company.

The report was the result of an internal review conducted by former Sen. Warren Rudman and the law firm of Paul, Weiss, Rifkin, Wharton & Garrison, LLP.

Rudman has briefed the Office of Federal Housing Enterprise Oversight, the Securities and Exchange Commission and the Department of Justice on the findings of the report.

"It lifted the overhang of any potential serious accounting issues that could harm the company," a New York-based sellside trader said, by way of explaining the healthy trading of its convertibles.

No major new accounting problems were cited in the report that followed a 17-month investigation. In response to the release of the report, Fannie Mae's president and chief executive Daniel Mudd and Stephen Ashley, the company's chairman of the board, issued statements.

Mudd said that the report was "strong but good medicine." He said, "We will work closely with the Fannie Mae Board of Directors, OFHEO, the U.S. Securities and Exchange Commission and others as we continue to move forward with remedial measures, carry out the terms of our regulatory agreements with OFHEO, make progress toward completing our restatements, cooperate with federal investigators and regulators, and build a better company."

Ashley said, "These findings are disturbing, disappointing and very serious. But big problems brought to light can teach big lessons. The board accepts and embraces the report, its findings, and recommendations, including those regarding the company's structure, functions, financial system, compensation, and policies to ensure adherence to proper accounting practices and new internal controls."

The Fannie Mae 5.375% convertibles due 2053 were said to close out Thursday at 97.75 bid, 98 offered. Fannie Mae shares (NYSE: FNM) closed at $57.14, up $1.23, or 2.20%.

Freeport declines on mine shutdown

The convertibles of Freeport-McMoRan were seen at about 1,150 for the 5.5% preferred shares due 2054, and at about 175 for the 7% convertibles due 2011, according to West Coast-based buyside analyst.

The 7s are highly equity sensitive and the preferreds are also equity sensitive, having a delta of 85%, the analyst said. Shares of the company (NYSE: FCX) closed down $3.41, or 6.3%, to $51.63.

Freeport's huge Grasberg copper and gold mine in Indonesia shut as protests over its operations hit the remote Papua province where the mine is located as well as the nation's capital city, Jakarta.

Illegal miners armed with bows and arrows clashed with security officers, soldiers and police on Wednesday. The violence erupted after security officers and government officials tried to force out the illegal miners, who are not employees of the company but trespass on mine property to try to pan for gold and other mineral resources.

In separate protests in Jakarta, around 50 Papuan students attacked a building housing Freeport offices. The Papuans smashed windows in the lobby of the building and set fire to a travel agency on the ground floor, according to reports.

Despite the suspension in mining operations, concentrate shipments were continuing, Freeport said.

The West Coast analyst said he had no idea how long a shutdown of the mine might continue.

"People are not expecting a big effect," a Connecticut-based convertibles analyst said of the mine shutdown. "I don't think it's a really big risk," he said, suggesting that the national army of that country is known for being able to put an end to unrest.

Apex Silver jumps

A swift and sudden climb in Apex Silver in afternoon trading Thursday could not be explained by several convertibles players. "But I bet there will be news tomorrow," the Connecticut-based convertibles analyst said.

Apex Silver's 2.875% convertibles due 2024 traded up to nearly 91, compared to a level in the low to mid 80s on Wednesday. There is about $180 million principal amount outstanding for the 2.875s, compared to a $200 million issue amount.

The Silver Apex 4% convertibles due 2024 traded up to near par from the mid 90s on Wednesday.

Apex Silver shares (AMEX: SIL) traded up to $21.66, up $1.76, or 8.84%.

EDO gains on guidance

EDO's 4% convertibles jumped about 2.5 points to 105 bid, 106 offered after the New York-based defense company reported earnings that missed estimates, but showed higher revenue and offered positive guidance.

For the quarter ended Dec. 31, net earnings skidded by nearly half to $7.4 million. On a diluted per-share basis, which reflects the new convertible notes, earnings for the latest quarter were 37 cents a share, compared to 68 cents a share a year earlier.

The company said that the decline reflected debt refinancing costs of $4.2 million. It also included about $7.3 million of expenses related to facilities projects, most of which was announced in prior quarters. Excluding these costs and the additional dilution caused by the convertibles, diluted earnings per share would have been 50 cents in the fourth quarter.

Revenue, on the other hand, rose 18.2% to $200 million.

"We strengthened our capital resources with our refinancing and credit facility, completed three acquisitions, and made investments in R&D and new facilities and equipment that will support sustained growth and profitability in the future," said chief executive James Smith.

"Looking ahead, we are confident that 2006 will see strong growth in revenue and earnings. The people and assets needed to do the job are in place, and we expect continued progress in achieving our goals," Smith said.

EDO shares (NYSE: EDO) closed up $2.04, or 7.53%, to $29.14.

HealthSouth plans offering

HealthSouth plans to price up to $300 million of convertible perpetual preferred stock, talked to yield 6.5% to 7% with an initial conversion premium of 20% to 25%, according to a market source.

The preferreds are being offered under Section 4(2) via joint bookrunners JP Morgan, Merrill Lynch and Citigroup.

HealthSouth said the purpose of the preferred stock issuance is to reduce HealthSouth's outstanding indebtedness.

Shares of HealthSouth (HLSH) trade on the Pink Sheets.

Birmingham, Ala.-based HealthSouth is a provider of outpatient surgery, diagnostic imaging and rehabilitative health care services.

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