Convertibles market remains mixed; Intel weaker; Connetics, Ford better

By Rebecca Melvin

Princeton, N.J., Jan. 11 - The convertibles market remained mixed on Wednesday, having veered off its week-old upward course on Tuesday. Intel Corp.'s 2.95% convertibles were called weaker, but some low-grade names like Connetics Corp. were better, according to market sources.

Until Tuesday, the convertibles market had been buoyed by the equities markets, which have mostly rallied since trading resumed at the beginning of the year.

But there was renewed interest Wednesday in shorter-dated paper from the likes of such issuers as Nortel Networks Corp., Mercury Interactive Corp. and Bisys Group Inc., according to a New York-based sellside trader. "Interest in these issues ebbs and flows, but we're seen renewed interest in the last two days."

Mountain View, Calif.-based Mercury Interactive, which is having to restate financials and has a deadline of March 31 to avert technical default on its convertibles, pulled back its guidance for 2005 revenue growth Wednesday, saying it now sees an increase of 22% to 24% compared to an earlier range of 23% to 27%.

The business software maker's release didn't include details on when the restatements may materialize. Nevertheless, its stock and convertibles rose following the lower guidance, with the 6% convertibles trading higher by about 0.5 point at 101.5.

Nortel Networks' 4.25% convertibles was better bid and traded at 94.50.

Ford Motor Co. and Ford Motor Credit were downgraded two notches by Moody's Investors Service but the convertible preferred shares gained in active trading. General Motor Corp.'s $25 convertible bonds remained mixed for a second consecutive day.

Encysive Pharmaceuticals Inc., another low grade name, was also mentioned as better on Wednesday on no particular news.

The Bellaire, Texas-based biotech's 2.5% convertibles due 2012 traded at 86.875 bid, 87.5 offered, compared to a market of 87.63 bid, 88.25 offered on Tuesday. But Encysive shares (Nasdaq: ENCY) were lower in active trade, down 16 cents, or 1.75%, at $9.

The shares haven't yet recovered from a tumble Dec. 12 when Encysive competitor Myogen Inc. announced good news for its experimental drug for vascular disease, ambrisentan, which met the primary goal in a late-stage study.

Looking at the primary market, sources were perplexed that, other than the expected NRG Energy Corp. mandatory issue, no other new issues have been seen in the market in the last two weeks.

"It's odd," said one Connecticut-based buyside trader.

A buyside analyst on the West Coast said, "I'm not worried. These things come in waves. It's random."

A New York-based sellsider said, "I didn't expect there to be as many issues as there were in mid December, but I thought there'd be more than this."

In December, convertible new issuance exploded with 18 new deals totaling $8.22 billion in proceeds.

Treasuries weigh on Intel

The 2.95% convertibles of Intel were flat to lower on Tuesday, even as news that Apple Computer Inc. would use Intel microprocessors sent Apple shares to an all-time high on Wednesday.

"They were a little heavy, based on Treasuries selling off," a New York-based sellside trader said of the Intel convertibles. "They're 30-year bonds so obviously they're interest-rate sensitive."

U.S. Treasuries fell after a drop in demand at the government's auction of $13 billion of five-year notes.

The trader didn't see the pricing of the Intel convertibles as an indicator of valuation cheapening but simply a move that was tracking rates.

He said the 2.95s closed at 100.875 bid, 101.125 offered. Intel shares (Nasdaq: INTC) were essentially flat, rising two cents, or 0.08%, to $26.14.

Connetics adds after acquisition news

Connetics' convertibles were stronger after the dermatology specialty drug company announced an acquisition and despite a downgrade on its shares Wednesday.

The 2% convertibles due 2015 traded at 81.5, compared to a market at 80.75 bid, 81.25 offered on Tuesday. But the company's shares (Nasdaq: CNCT) fell 48 cents, or 3.1%, to $15.10.

Palo Alto, Calif.-based Connetics said it will acquire the sales organization of PediaMed Pharmaceuticals Inc. for $12.5 million in cash.

The acquisition won't be accretive to earnings until 2007, however, and its equity was downgraded to hold from buy by Lazard Capital.

Nevertheless, the credit is doing better recently, and has tightened about 100 basis points since the beginning of the year, a trader said.

Ford trades higher despite downgrade

The convertible preferred shares of Ford Motor traded actively, mostly to the upside, and closed higher at 31.74, up 0.35 point, or 1.2%, while its underlying shares (NYSE: F) added 16 cents, or 1.8%, to $8.93. Its shares are nearly 15% higher since the beginning of the year.

The move up came despite a downgrade by Moody's, which, following a review period that began Nov. 22, lowered the corporate family and long-term ratings to Ba3 from Ba1 and lowered Ford Motor Credit Co.'s long-term rating to Ba2 from Baa3 and short-term rating to Not Prime from Prime-3. Ford's SGL-1 speculative grade liquidity rating was affirmed.

The outlook is negative, said Moody's, which said its move was based on views that Ford's financial and competitive position continue to face considerable pressure through 2007 despite potential longer-term benefits from its pending restructuring initiatives.

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