Pinnacle Airlines ends at 101.625; Alkermes drops on earnings, deal; FEI up on earnings; Alamosa gains

By Ronda Fears

Nashville, Feb. 3 - Noise of redemptions by the hedge fund community, perhaps even some weighty sell-offs, continued to riddle the convertible market, but traders on both sides of the fence say they are not overly concerned. Some fund managers, outright and hedged alike, welcome any retrenchment.

"The redemptions are for real this time. It's not like the entire market is for sale or anything like that, there's just not any bids, either. Really, there is not a lot of flow, at least not today," said a sellside trader. "We're doing the paper shuffle, trading around stuff, but nothing serious."

Veterans in the convertible market are rather indifferent as they see convertibles looking more attractive in a bearish stock market, as an alternative to stocks. Also, that would tend to boost convertible bond yields though the busted section of the convertible universe will inevitably backtrack to more elevated levels. But, fund managers say the situation should actually boost returns for both outright and arbitrage strategies.

As for anything like a total exodus of convert arbs from the market, most say that will never happen. Probably more likely, one manager said, is that the stubbornly low volatility levels are forcing the capitulation of the vol trade.

Meanwhile, earnings are influencing lots of issues and players are reaching for yield. Many also are looking for opportunities related to merger activity.

"Nothing very exciting is going on. No new issues. As you probably know, converts have been coming off on swap and I believe it is being driven by sales from hedge funds," said a convertible fund manager out West. "Most [of the trading] is earnings related. Things are all over the place."

Pinnacle advances, prices wide

The new issue calendar has indeed been slim in convertibles but that has made for a nice reception to many deals of late. In fact, the books were filled early for the Pinnacle Airlines Corp. convertible, so pricing was advanced by a day and it was lifted from par in the immediate aftermarket though off from gray market levels.

Pinnacle, a Memphis-based feeder to Northwest Airlines Corp., printed the $110 million of 20-year convertible notes with a 3.25% coupon and 21.5% initial conversion premium - at the wide end of yield talk for a 2.75% to 3.25% coupon and at the cheaper end of premium guidance of 20% to 25%.

Sole bookrunner Merrill Lynch & Co. took the issue out Thursday at 101.625 bid, 102.125 offered; it had been seen at 103.5 in the when-issued market late Wednesday. Pinnacle shares ended Thursday off another 16 cents, or 1.47%, at $10.72.

Pinnacle Airlines said it would use proceeds to purchase the $120 million note payable to Northwest at a 15.3% discount to par. Also, Pinnacle said it would use proceeds and cash on hand to repay $5 million under its revolving credit agreement with Northwest.

Northwest's converts were described as steady, with the 6.625s in the 80.5 bid area and 7.625s around 70.75 bid, while other airline paper was mixed but mostly lower on the day.

Alkermes 2.5s drop 1.5 points

Alkermes Inc. dropped sharply on Thursday, a sellside trader said, ahead of the small pharmaceutical company's earnings report, but he said there may be more of a pullback on news the company pledged revenues from its single commercial product to buyers of a 7% junk bond.

"This isn't going to sit well," the trader said, referring to the note transaction. Another pressure point for Alkermes, he said, was the company's narrowed guidance for fiscal 2005, which ends March 31.

Alkermes said it sold the $170 million of 13-year 7% notes at a discount, with $145 million in proceeds, and pledged revenues from its Risperdal Consta product to service that obligation. The company said it will use proceeds to pursue commercialization of its next product, Vivitrex, as well as for working capital.

James Frates, chief financial officer of Alkermes, said the company, with more than $200 million in cash, growing revenues from Risperdal Consta, and a robust pipeline of product candidates, has a strong financial future. Not all of the Risperdal Consta revenues will stream directly to the 7% noteholders, but those revenues will be first used to service those interest payments.

For the quarter ending Dec. 31, Alkermes reported that Risperdal Consta revenues soared 67% to $16.6 million from $9.9 million in the previous quarter. The net loss on a GAAP basis for the quarter was $9 million, or 10 cents a share, compared to a net loss of $20.9 million, or 23 cents a share, for the same period in 2003.

Alkermes also, however, reduced its forecast for total revenues in fiscal 2005 to a range of $72 million to $80 million from earlier expectations of $85 million to $115 million.

FEI up on earnings, prospects

FEI Co., a nanotechnology chip story, spiked Thursday following its earnings, which showed a sharp gain in bookings. But a buyside trader said that besides the company's prospects in terms of future business booked, there is a feeling that the company might be in a position to make a small acquisition that could boost results.

The FEI's 5.5% convertible due 2008 were pegged at about par, up about 1 to 2 points on the day. FEI shares ended Thursday up $2.60, or 12.71%, at $23.05.

"I believe that FEIC is a growth story. The results bear that out, but they also look to be in a position of making a small acquisition. Cash and investments [at Dec. 31] were $341.9 million and the converts come to $295 million," the trader said, mentioning MFIC Corp. as a potential target.

"MFIC has been marketing its [products] to Big Pharma and biotech companies. MFIC is already profitable, has significantly improved finances, a very thin float and a tiny microcap especially relative to other nanotech companies in the universe."

Newton, Mass.-based MFIC specializes in manufacturing and marketing a line of Microfluidizer high shear fluid materials processing systems used in numerous applications in the coatings, pharmaceutical, biotech, food and cosmetics industries.

Hillsboro, Ore.-based FEI services and manufactures semiconductor products for items such as microscopes, stylus nanoprofilometers and secondary ion mass spectrometers.

After the market close Wednesday, FEI reported net earnings and sales gained sharply in 2004, even after reporting EPS dilution of 16% from the contingent conversion convertibles. Results also beat analysts' expectations. Also, the company said bookings in fourth quarter totaled $143.8 million, resulting in a book-to-bill ratio of 0.99 and a backlog of $160 million at Dec. 31.

The company said it expects a typical seasonal decline in bookings and revenue from fourth quarter to first quarter, and projects earnings of 9 cents to 13 cents a share on sales of $120 million to $130 million.

Alamosa lifted by 2 points

Alamosa Holdings Inc.'s convertible found buyers Thursday as a credit upgrade from Standard & Poor's was seen as a vote of confidence on its planned merger with AirGate PCS Inc. One dealer said the combined company might have some appeal as a takeover candidate, as well.

The Alamosa 7.5% convertible preferred - issued in late 2003 as part of a multi-bond exchange - gained 2 points, he said, while Alamosa shares rose 31 cents on the day, or 2.46%, to $1.292. AirGate shares climbed $1.17, or 3.25%, to close Thursday at $37.22.

S&P also upgraded AirGate's ratings, so now both it and Alamosa have corporate credit ratings of B-, upped from CCC+. Both companies' senior secured debt ratings were raised to B- from CCC+ and secured subordinated debt to CCC from CCC-.

Both are wireless affiliates of Sprint Corp., and the outlook on both is stable.

"The consolidation in wireless has further to go," the trader said. "I think Alamosa and AirGate combined may look attractive as a means to extend reach into the South and Southwest."

Alamosa is based in Lubbock, Texas; AirGate is based in Atlanta. S&P said the upgrade on Alamosa was based on positive operating that are boosting credit measures and said AirGate is propped up by the pending acquisition by a financially and operationally stronger Alamosa.

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