Hutchinson hovers around par; Schlumberger surges; Ford sags, Oscient tumbles

By Rebecca Melvin

Princeton, N.J., Jan. 20 - A main focus of the convertibles market on Friday was the new issue from Hutchinson Technology Inc., which received a range of reactions from: "I bought more," referring to a secondary market piece added to an initial allocation, to "We were not involved" because the terms were "not terrible, but not great."

There was some flipping of the new issue, traders said, but some players held their piece of the upsized $225 million deal.

A syndicate source put the close of the new 3.25% Hutchinson convertibles at 100 bid, 100.25 offered, with a high tick during the session of 100.625. It also traded some below par, traders said.

Shares of the Hutchinson, Minn.-based disk drive parts supplier (NYSE: HTCH) closed lower by 23 cents, or 0.82%, at $27.79.

Some of the existing Hutchinson 2.25% convertibles due 2010 also traded, down by about 0.5 point to 107, after moving in a point on Thursday following its earnings report.

Still no word was heard on a $300 million convertibles deal from DRS Technologies Inc., "which has been on the calendar forever," according to a syndicate source. But the Parsippany, N.J.-based defense company priced its two tranches of high-yield notes on Friday.

Otherwise the market was "pretty busy," in line with activity of the past couple of days, one New York-based sellside source said. But others lamented that it has been too slow for the last week.

"It's been shockingly slow," a New York-based buyside trader said, referring to new issuance, which now faces an uphill battle for heating up because earnings season is beginning, he said.

"Most companies don't like to do new issues during earnings season because of the uncertainty. But some will announce a new deal right after their earnings report, like Hutchinson did," he said.

A Connecticut-based sellside analyst said the market has been slow not only in terms of new issuance but also in terms of news flow and trades. "Usually my day goes so quickly and it's a question of not being able to get everything done," he said, in contrast to the past week in which he had barely enough to keep him busy.

On Friday much of the market was lower except for energy names. The 1.5% convertibles of Schlumberger Ltd., which are frequently heard in trade, jumped about 10 points as their underlying shares (NYSE: SLB) added 6.4% after the New York-based oil services bellwether posted fourth-quarter profit that doubled from the year-earlier period and beat analysts' expectations handily.

The news sent Schlumberger shares to a record high and Halliburton Corp., a sister oil-services company, was caught in the updraft, with its 3.125% convertibles trading at 205, which was up about 9 points, versus a share price of $71.75. Halliburton shares (NYSE: HAL) closed higher at $75.50, which was up $3.75, or 5.23%, on the day.

Houston-based Diamond Offshore Drilling Inc. saw its convertibles trade higher by about a point, contrary to its underlying shares (NYSE: DO), which ended the day flat to slightly lower. Quicksilver Resources Inc., a Fort Worth, Texas-based oil and gas exploration company, was mentioned recently as an interesting outright name, but its 1.875% convertibles were quiet on Friday after trading at about 163 on Thursday.

Also quiet on Friday were the preferred shares of Albertson's Inc. despite a 1% gain for its underlying shares (NYSE: ABS) after the retail food company confirmed that it had received a new offer for the purchase of the entire company.

The offer is believed to have come from the consortium including Supervalu, Cerberus Capital Management and Kimco Realty, the players with whom a deal fell apart last month.

Standard & Poro's said that Albertson's is still on credit watch negative, where it was placed in September, and that a transaction with the consortium could potentially weaken bondholder protection measures.

Autos were also fairly quiet, but Ford Motor Co.'s convertible preferred shares traded lower in fairly active volume.

Biotechs move mostly lower

Many biotechnology names also remained in their recent funk. Oscient Pharmaceuticals Corp. was a notable loser, with its underlying shares (Nasdaq: OSCI) tumbling 18% after the Waltham, Mass.-based company said that the Food and Drug Administration had accepted its application seeking approval of its drug Factive to treat community-acquired pneumonia but refused its application to treat acute bacterial sinusitis.

Oscient's 3.5% convertibles, which are rarely seen in trade, changed hands at 78 after one source said the bonds had a 2-point wide market of 80 bid, 82 offered, at mid morning. A New York-based sellside firm marked the bonds at 66.97 to close the day.

Shares of Alkermes Inc. dropped 5.58%, and its 2.5% convertibles dropped about 8 points. HSBC downgraded the shares to "neutral" from "overweight," citing their valuation, which has increased by about 35% since Dec. 13.

Indeed, Friday's session left the shares with barely a scratch, a Connecticut-based biotechnology analyst said. "The shares have gone from $18 to above $24, and now it's still above $23," he said.

Meanwhile its 2.50% convertibles changed hands at less than 170, compared to a trade on Thursday at 178. The rise has been so strong that the bonds "aren't really a credit story anymore," the analyst said.

Driving the Cambridge, Mass.-based biotech's run are some potential blockbusters like its Vivitrol drug for alcohol dependence, and delivery systems like an inhalable form of a diabetes drug.

HSBC's downgrade was motivated by a view that the belenfits of Vivitrol are already reflected in the share price.

On the upside was CV Therapeutics Inc., which is a week away from potential FDA approval of its drug Ranexa for chronic stable angina.

"Ranexa is indicated for refractory angina patients (Erica trial), which is a population of just under 1 million in the United States," a West Coast-based buyside biotechnology analyst said.

A second trial, Merlin, is expected to conclude at the end of 2006 and, if approved, that would address all angina patients, which is a population of 6.8 million in the United States, he said.

"Approval is widely expected, but the potential for off-label use (before Merlin trial conclusion and subsequent approval) is unclear," he added.

"The market opportunity is huge; and CVTX looks like a perfect acquisition candidate," he concluded.

CV Therapeutics' 3.25% convertibles due 2013, its latest issue, traded at 112.75, up about a point. Its underlying shares (Nasdaq: CVTX) closed up 65 cents, or 2.7%, at $24.69.

Oscient tumbles after FDA rejection

Oscient Pharmaceuticals saw its shares rise briefly in pre-market activity, but the stock promptly sank after an early announcement that the FDA has refused to accept its supplemental New Drug Application for the five-day treatment of acute bacterial sinusitis (ABS) with Factive.

Oscient said that it will continue a dialogue with the FDA about its ABS claim. In its refusal, the FDA indicated that Factive did not exhibit an acceptable risk versus benefit profile for the ABS indication. In addition, the FDA said that it wasn't feasible to demonstrate an acceptable risk versus benefit profile given the FDA's view of the potential risk of rash in those patients.

The FDA did accept Oscient's supplemental New Drug Application seeking marketing approval for the use of Factive (gemifloxacin mesylate) tablets for the five-day treatment of mild to moderate community-acquired pneumonia.

Oscient shares fell 49 cents, or 18%, to $2.26 on Friday.

Abgenix gains buyers

A buysider on Friday said that Thursday he bought the convertibles of Abenix Inc. after U.S. antitrust authorities said they have approved Amgen Inc.'s plan to buy the Fremont, Calif.-based biotechnology company.

Officials have completed their investigation of the $2.2 billion deal without taking action, the Federal Trade Commission said in a notice.

Amgen announced Dec. 14 that it planned to acquire Abgenix, giving it full control of the cancer drug panitumumab that the two companies are developing.

Schlumberger jumps on earnings

The convertibles of Schlumberger jumped 10 points, helping to lift its entire sector - in addition to a gain in crude oil prices - after the company said fourth-quarter net income doubled to $661 million, or $1.08 a share, from $330 million, or 55 cents a share, in the same period a year ago. Analysts had expected the giant oil-services company to earn 97 cents a share, on average, according to a Thomson First Call poll.

Operating revenue for the provider of oilfield services jumped 31% to $4.02 billion. The company said that looking ahead, it sees similar revenue growth in 2006.

Schlumberger also said that the global offshore rig market will remain constrained until new equipment is mobilized. In addition, Schlumberger said that employee and equipment shortages across the industry are likely to result in cost inflation and project delays.

On Thursday, Schlumberger said its board approved a two-for-one split of the company's common stock. Each stockholder of record at the close of business on March 1 will receive one additional share for every outstanding share held on the record date, with a payment date on April 7.

The board also declared an increased quarterly dividend of 25 cents per share, on a pre-split basis, payable on April 7, to stockholders of record on March 1.

The dividend will be paid only on shares outstanding prior to the above stock split. On the post-split number of shares outstanding, the dividend is equivalent to 12.5 cents per share.

No sign of DRS convertibles

DRS priced an upsized $600 million of high-yield bonds on Friday in two tranches. Bear Stearns & Co. was bookrunner and Wachovia Securities was the joint lead.

Proceeds of the high-yield offerings are to help fund its acquisition of Engineered Support Systems Inc., a St. Louis-based diversified supplier of integrated military electronics, support equipment and technical services.

Fitch Ratings on Friday said that it has initiated the issuer default rating for DRS at B+, its proposed senior secured credit facility at BB+, its senior notes at BB and its proposed and existing senior subordinated notes at B-, with a stable outlook.

The agency said these actions assume that the $2.1 billion acquisition of Engineered Support Systems and associated debt issuances close under the announced terms.

The ratings reflect continued high levels of defense spending, good pro forma free cash flow generation, DRS' proven ability to increase margins at acquired companies, expected growth in homeland security spending and healthy pro forma EBITDA margins, Fitch said in a news release.

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