Intel, Ford, Barnes fall on earnings weakness; New River quiet on debut; Essex plans $130 million deal

By Kenneth Lim

Boston, July 20 - Earnings-related news fueled a busy session for the convertible bond market on Thursday, with disappointing results from large cap names Intel Corp. and Ford Motor Co. sparking the activity.

Intel was lower outright after its second-quarter profit dropped more than half and the company warned that it may not meet its earlier guidance.

Ford also eased outright, but was flat to modestly better dollar-neutral after it reported a surprise second-quarter loss that raised concerns about the effectiveness of its turnaround efforts.

Barnes Group Inc.'s 3.75% convertible due 2025 also dropped after its reaffirmed guidance fell short of estimates, but market observers were surprised at the extent of the retreat.

New River Pharmaceuticals Inc.'s newly priced 3.5% convertible subordinated note due 2013 did not see any significant action on its debut as the poor stock borrow prompted speculation that the deal was placed with a limited number of investors.

Meanwhile, a planned $130 million overnight deal by Essex Property Trust was announced after the market closed. Essex's proposed convertible preferred shares are talked at a dividend between 4.375% and 4.875% and an initial conversion premium between 18% and 22%, market sources said.

Also seen on Thursday was Openwave Systems Inc.'s 2.75% convertible due 2008, which slipped outright but improved on a dollar-neutral basis after the company's first-quarter forecast missed Street estimates.

The convertible was marked at 93.5 against a stock price of $6.20. Openwave stock (Nasdaq: OPWV) fell 15.87% or $1.15 to close at $6.09.

"They opened up nicely," a convertible bond trader said. "The equity coverage says it's basically a deteriorating business, but there's still a lot of cash on the balance sheet, which is what you want to see for a convert."

Redwood City, Calif.-based Openwave, a telecommunications software solutions provider, said late Wednesday that it expects first-quarter 2007 revenue to be flat to slightly below the $90 million to $92 million it has guided for fourth-quarter 2006. Analysts were expecting sales of around $99.6 million for the first quarter.

MGI Pharma Inc.'s 1.682% convertible due 2024 declined about five points outright but gained on a hedged basis after the company swung to a second-quarter loss and lowered its sales forecast for the drug Aloxi. The convertible traded at 62.75 versus a stock price of $14.50 on Thursday. MGI stock (Nasdaq: MOGN) lost 32.15% or $6.89 to close at $14.54, a 52-week low.

"The stock was down big, crushed on earnings and guidance and a bunch of downgrades across the Street, but the bonds were actually better dollar-neutral on volatility," a sellsider said.

MGI, a Bloomington, Minn.-based drug maker, reported a second-quarter loss of $19.4 million, or 25 cents per share, from a year-ago profit of $12.7 million, or 17 cents per share. The company also cut its sales guidance for Aloxi, which is used to treat chemotherapy-related nausea, to between $330 million and $350 million for the year, from $370 million to $385 million previously.

Intel trips on earnings

Intel's 2.95% convertible due 2035 fell about 2.5 points outright on Thursday after the chip maker said its second-quarter profit fell by more than half and warned that it may not meet earlier forecasts.

The convertible was marked at 80.875 against a stock price of $17.10 late Thursday. Intel stock (Nasdaq: INTC) fell 7.5% or $1.386 to close at $17.104.

"It was pretty active today, lost a couple of points outright," a convertible bond trader said.

Intel said late Wednesday that net income for its fiscal second quarter ended July 1 fell about 57% to $885 million, or 15 cents a share, which exceeded Street expectations of around 13 cents per share. But the Santa Clara, Calif.-based chip maker said it may not meet its earlier full-year sales forecast of $37.6 billion. It said sales for the current quarter would be between $8.3 billion and $8.9 billion, less than analysts' estimates of around $9 billion.

"They beat estimates [for the second quarter], but everybody's looking at guidance for the rest of the year, and they guided way down and that's disappointing," a sellside convertible analyst said.

Intel's poor outlook has cast a shadow over the entire semiconductor chip sector, the analyst noted.

"A lot of chip equipment names are weak, and are going to continue to be weak," the analyst said.

In terms of credit, Intel continues to be a solid company, and the poor earnings and forecast are unlikely to affect most convertible holders except some cases at the margins, the analyst said. But the Intel convertible on the most part is attractive only to outright convertible buyers who see upside in the stock.

"It trades way above its investment value," the analyst said. "It doesn't give you as much downside protection as it might."

Ford stalls after loss

Ford's 6.5% convertible preferred slipped outright but was unchanged to slightly better dollar-neutral on Thursday after the auto maker swung into a loss in its second quarter.

The preferred closed at 26.77 on Thursday, down by 0.67% or 0.18 point, versus the common's last price of $6.19. Ford stock (NYSE: F) declined 2.21% or 14 cents on Thursday.

"It basically got flat to slightly better on a dollar neutral basis," a buyside convertible bond trader said. "It didn't react negatively to the earnings."

Ford surprised the market Thursday after it said it lost $123 million, or 7 cents per share, in the second quarter, compared to a $946 million, or 47 cents per share, profit in the year-ago period. The company also said it expects production to drop 8% year-on-year in the third quarter.

Analysts were critical of the loss and the slow pace of Ford's cost-cutting measures. The company has been cutting jobs and shutting plants, and recently halved its dividend payout. Dearborn, Mich.-based Ford is expected to announce new turnaround plans in the next two months.

"The key question is how Ford's solution has changed in response to a more difficult environment," Morgan Stanley equity analyst Jonathan Steinmetz wrote in a research note. "That is not clear yet."

Barnes dives after miss

Barnes Group's 3.75% convertible due 2025 fell by as many as 7 points outright after the Bristol, Conn.-based diversified manufacturer's second-quarter earnings missed estimates, but market observers were surprised at the depth of the fall.

The convertible was marked at 100.375 bid, 100.625 offered against a stock price of $15.90 on Thursday, about 6 points under the previous day. Barnes stock (NYSE: B) lost 17.87% or $3.34 to close at $15.35.

"An interesting name that I was looking at was Barnes," a sellside convertible bond trader said. "The stock hit a 52-week low, the bonds are looking more interesting now. They reported earnings, missed by 3 cents."

Barnes on Thursday said it earned $18 million, or 34 cents per share, in its second quarter, from $17.6 million, or 36 cents per share, in the year-ago period. The company reaffirmed its guidance for 2006, forecasting earnings per share of $1.28 to $1.33. Street estimates were for a full-year earnings per share of abot $1.34.

"We did see a lot of activity in it today," a convertible bond analyst aid. "It's not a name we hear everyday. They reiterated guidance, but it was guidance below where the Street was...but it seems odd that it fell so much," the analyst said.

New River makes quiet debut

New River Pharmaceuticals' newly priced 3.5% convertible subordinated note due 2013 did not see any significant volume on its first day of trading on Thursday as onlookers speculated that the deal likely fell into a limited number of hands.

"It's very quiet," a buyside convertible bond trader said. "It's the quietest new deal I've seen in my memory."

The $125 million deal priced late Wednesday at the mid-point of talk, with an initial conversion premium of 25%. The convertibles were offered at par, and price talk guided for a coupon of 3.25% to 3.75% and an initial conversion premium of 22.5% to 27.5%.

New River stock (Nasdaq: NRPH) closed at $25.75 on Wednesday, down by 6.4% or $1.76.

There is a greenshoe option for a further $18.75 million.

Merrill Lynch was the bookrunner of the Rule 144A offering.

New River is a Radford, Va.-based specialty drug maker. The proceeds of the deal will be used to buy back $51 million worth of New River stock, of which $41 million was used for a borrow facility. Some of the proceeds will also be used to fund convertible note hedge transactions, and any remaining monies will be used as working capital to develop New River's attention deficit hyperactivity disorder drug NRP104.

"It probably got placed in a few outright hands and even fewer swap hands, based on the structure of what they did for a stock that's basically unborrowable," a sellside convertible bond trader said. "My guess is it got placed in very few swap hands...Going forward it probably won't trade too much, guys who got it will probably just hold it till maturity."

Essex plans $130 million deal

Essex Property Trust plans to price $130 million of convertible preferred shares on Wednesday before the market opens, with talk for a dividend between 4.375% and 4.875% and an initial conversion premium between 18% and 22%, market sources said.

The 5.2 million preferreds are offered at $25 apiece. There is a greenshoe option for a further 780,000 preferred shares worth $19.5 million.

Banc of America Securities is the bookrunner of the overnight registered deal.

Essex, a Palo Alto, Calif.-based real estate investment trust, has a portfolio of residential properties on the West Coast. It will use the proceeds of the deal to pay down its outstanding debt that currently bear a blended interest rate of 5.76%, to fund its development pipeline and for general purposes.

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