Convertibles thinly traded amid weaker tone; Suntech, Level 3 lower; Encysive surges

By Rebecca Melvin

New York, Feb. 20 - The convertibles market was thinly traded amid a surprisingly weak tone Wednesday, as a lack of buyers left many issues feeling heavier than when they started out the session, market participants said.

"It was surprisingly weak today; I would have expected some of the investment-grade issues to perform well, but they just didn't," a New York-based sellside source said.

"It was different from yesterday when credit was weak, convertibles didn't really react; and when credit came back today, convertibles remained heavy," the sellsider said.

Company specific news spurred some trades. The convertibles of Suntech Power Holdings Co. Ltd. dropped about a point on a dollar-neutral basis after the solar power company reported earnings and said high prices for a key component of its products will temper several upcoming quarters of profits.

The news knocked its stock down 12%. Another solar power play, Evergreen Solar Inc., saw its convertibles move lower; but no trades were reported in the name.

Meanwhile the convertibles of Level 3 Communications Inc. were languid amid a big drop in its shares, and Ford Motor Co., Invitrogen Corp. and Washington Mutual Inc. all closed flat to lower on the day.

Bucking the overall trend was Encysive Pharmaceuticals Inc., which saw its convertibles spiral on news that Pfizer Inc. plans to buy the company with the intention of helping its signature drug Thelin through a new, phase 3 drug trial.

In the primary arena, a new issue of $425 million convertibles that the Nasdaq Stock Market Inc. expected to price after the close did not generate a lot of enthusiasm. There was no gray market reported during the session Wednesday.

"You would think that pricing on new issues would be more friendly to the purchaser; but they're not that much more attractive. I guess there is a consensus that equity prices will go lower," a Connecticut-based sellside trader said. "At some point, you'd expect some improvement, but we're still seeing 2% to 3% coupons and premiums up to 35% to 40%."

Suntech profit picture dims

Suntech's 0.25% convertibles fell Wednesday to a close of 114.66, down nearly 9 points outright, but down only about a point on a dollar-neutral basis, according to a New York sellsider.

The China-based maker of photovoltaic cells and modules reported fourth-quarter earnings that showed very high costs related to polysilicon prices, and earnings and revenue fell short of expectations.

Suntech shares (NYSE: STP) slumped $5.65, or 12.3%, to $40.24.

The 4.375% convertibles of Marlboro, Mass.-based Evergreen Solar were seen closing lower by about 3 points at 143.419 versus a stock price of $10.17, compared with a close of 146.84, versus a stock price of $10.30 on Tuesday. Evergreen Solar shares (Nasdaq: ESLR) were down 1.26% on the day.

Encysive gains on takeover news

Encysive's 2.5% convertible senior notes due March 16, 2012 surged Wednesday in expectation of the change-of-control put at par after Pfizer said it agreed to buy the Houston-based biopharmaceutical company and acquire the rights to its top drug, Thelin, which has been approved in Europe but not by the Food and Drug Administration.

The FDA asked for additional trials in the middle of last year. In response to that setback, the company announced a new chief executive and said it would cut its work force to focus on "its most promising assets."

Pfizer will buy the company for about $195 million to strengthen its high blood pressure and pulmonary product portfolio. The agreement values Encysive at $2.35 a share, more than twice Encysive's Tuesday closing price of $1.08.

"It's a tiny little issue, but that's very significant," a Connecticut-based sellsider said, adding that the question now is whether to sell or hold out for the full par price which will take several months to materialize.

The 2.5% notes closed at 95.095 on Wednesday compared to 50.60 on Tuesday. Encysive shares (Nasdaq: ENCY) more than doubled to $2.27.

Level 3 convertibles listless

The convertibles of Level 3 did not react in kind to a 7% slide in its underlying shares (Nasdaq: LVLT). But the convertibles were weak nevertheless, probably in sympathy with Switch & Data Facilities Co. Inc., a player in the collocation space, which reported mixed numbers Tuesday, and only reiterated guidance, according to a New York-based sellside convertibles analyst.

Level 3 is a Broomfield, Colo.-based telecommunications firm.

"Level 3 stock has been very active in trade, hitting new 52-wk low," the sellsider said Wednesday. In addition to moving in sympathy with Switch and Data Facilities, "people continue to be concerned about LVLT's liquidity situation and refinance risk, so the credit just keeps on marching wider. There has also been recent concern over provisioning, which caused the company to lower 2007 and 2008 guidance when they reported September [quarterly] numbers," the sellsider said.

Level 3s 6% convertible subordinated notes due 2010 ended the day at 87.9 versus a share price of $2.25, compared with a price of 88 versus a share price of $2.43 on Tuesday.

Nasdaq to price $425 million

Nasdaq planned to price $425 million of 5.5-year convertible bonds after the close Wednesday, according to a market source.

Syndication sources said a pricing call, which began Wednesday afternoon, was ongoing at press time.

JPMorgan and Banc of America Securities LLC were bookrunners.

The senior notes were talked at a coupon of 2.5% to 3%, with an initial conversion premium of 35% to 40%. There is a greenshoe of $25 million.

The bonds are non-callable, and there are no investor puts.

Proceeds of the deal will be used to fund its combination with OMX AB, investment in the Dubai International Financial Exchange and proposed acquisitions of the Philadelphia Stock Exchange Inc. and the Boston Stock Exchange, as well as pay certain debt of OMX and PHLX.

Nasdaq is a New York-based provider of securities listing, trading and information products and services.

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