Human Genome, ADC drop outright; Mercury Interactive steady, shares lower; Freeport-McMoRan down

By Rebecca Melvin

Princeton, N.J., Oct. 5 - A raft of negative company-specific news spurred activity Wednesday in the convertibles market, which had been relatively quiet in the previous few sessions, traders said.

The convertibles of Human Genome Sciences Inc. and ADC Telecommunications Inc. dropped outright on announcements, but both were seen initially positive for convertible arbitrage players on a hedged basis.

The convertibles of those companies became buying opportunities later in the session, with one Connecticut-based buysider saying the moves Wednesday prompted him to re-establish positions in both names.

Human Genome convertibles tumbled by about 20 points, following their underlying shares lower, after the Rockville, Md.-based biotechnology company announced that its lupus-fighting drug under development didn't meet efficacy endpoints in a mid-stage trial. On a hedged basis, its convertibles were up 1 point to 1.25 points at the middle of the session, but later were seen essentially unchanged.

ADC Telecommunications' convertibles dropped outright after the Eden Prairie, Minn.-based telecommunications-equipment maker lowered its fourth-quarter forecast, saying customer inventory buildups reduced its sales.

Meanwhile, Mercury Interactive Corp. unloaded a double whammy of bad news including lower guidance for the fourth quarter and news that the company is now under a formal probe by the Securities and Exchange Commission.

But the convertibles of the software company held up close to par because the paper is likely to be put back to the company within the month due to a technical default, traders said.

Energy, mining and metals names were also lower as prices of energy, other than that of natural gas, eased, and inflation and interest rate concerns continued to weigh on various sectors.

Freeport-McMoRan Copper & Gold Inc. convertibles were lower despite higher copper prices and gold prices at 17-year highs.

In the automotive sector, parts-supplier Lear Corp. was lower after Citigroup Smith Barney downgraded the company to "sell" from "hold" and cut its stock price target to $28. Citigroup said Lear is likely to face higher resin prices and potential near-term shortages of polyurethane foam for seats, raising costs in the near term.

Human Genome data disappoints

The convertibles of Human Genome tumbled along with its common stock after the company announced that the results of a phase 2 clinical trial of LymphoStat-B didn't meet primary efficacy endpoints by reducing signs and symptoms of systemic lupus erythematosus at week 24 or by extending the time to a first flare up to over 52 weeks.

Nevertheless, the company said the drug was safe, well tolerated and showed signs of clinical effect in lupus patients.

Both Human Genome's new and old 2.25% convertibles tumbled 20 points, with the new 2.25% issue due 2012 seen trading at 81 bid, 82 offered at a stock price of $9.50 and the old 2.25% due 2011 at 86 bid, 87 offered at a stock price of $9.50.

Two other Human Genome convertibles, the 5% and the 3.75%, didn't trade significantly, traders said. The 5s don't have a lot outstanding, one trader said.

But on swap, the 2.25s were seen up 1 point to 1.25 points, at around midday, and toward the end of the session they were seen by some unchanged on swap.

"I saw a buying opportunity," said a Connecticut-based buyside source, who said he jumped in late in the session after taking another look at both HGSI and ACT.

"I figure there's a long way to go. Glaxo is still involved. We don't think it's a zero shot or anything. And volatility will pick up a lot," he said of Human Genome.

Human Genome shares closed down $4.10, or 29.35%, at $9.8699.

Lower guidance sinks ADC

The two convertible bond issues of ADC, one a 1% fixed-rate convertible and the other a floating-rate convertible, were lower, as their underlying shares sank, after the company lowered its forecast for fourth-quarter sales to $290 million to $300 million from a range of $315 million to $325 million.

It said its earnings from continuing operations are now expected to be 15 cents to 19 cents a share, down from an earlier estimate of 24 cents to 28 cents a share.

To offset the weakness, the company said it plans to cut 400 jobs in a plant in Mexico during the fourth quarter, though the company said more jobs may be added in 2006 if growth resumes as expected.

ADC also warned after its third-quarter results that expansion into new markets as well as changing seasonal patterns in how customers spend money may make it harder for the company to predict fourth-quarter sales, which are typically stronger than in the third quarter.

The ADC 1% convertibles due 1008 were seen trading down about 8 points to 93 bid, 93.5 offered.

Mercury Interactive steady

The 0% convertibles of Mercury Interactive remained steady or increased to about 99 after the company pre-announced late Tuesday that its third-quarter revenue will fall short of earlier estimates because of customer delays and its transition in Europe.

"It would have been a homerun for anyone hedged," a New York-based sellside convertibles trader said, referring to the bonds holding steady as the underlying shares sank.

The company also said a previously disclosed Securities and Exchange Commission probe into its stock-based compensation has become a formal investigation.

In addition the Mountain View, Calif.-based company said that it didn't expect to be able to file restated results before November, thereby missing a 60-day deadline within which it was to have "cured" a technical default from bondholders on two convertibles issues.

Bondholders issued the notices of default on its $500 million of 0% coupon convertible due 2008 and its $300 million of 4.75% convertibles due in 2007.

"The last day will be the 26th; then holders can notify the company that they want to put the bonds back at par," the trader said.

"The bonds should be down at 90, but they're at 99 because they can be put back and that's a decent yield to put of 26%," he said.

Freeport-McMoRan slips

The convertibles of Freeport-McMoRan were lower after the copper and gold producer was downgraded by Friedman Billings to "market perform" from "outperform."

Higher copper prices on Wednesday and gold prices that held steady at 17-year highs didn't support the New Orleans-based company, which temporarily has headquarters in Baton Rouge, La.

Investor fears of inflation and a slowdown in economic activity has cast a pall over the entire metals sector, a West Coast-based buyside analyst said.

Copper prices are expected to remain high because no investment is being made to expand capacity, the analyst said, referring to the company's move last week to cut $302 million from its debt in the third quarter through repurchases and conversions to stock. In addition, demand is seen remaining strong especially in China, he said.

Freeport-McMoRan's 7% convertibles due 2011 traded at 156, compared with a level Tuesday of 160 bid, 161 offered, according to one New York-based sellside shop.

"The 7% paper has a delta of close to 90 and is way in the money," the analyst said.

The Freeport-McMoRan 5.5% due 2054 was seen as the "more balanced" issue, trading closer to par, which it $1,000, the analyst said. It has a delta of 70 and was recently seen trading at 1,050, compared to a level Tuesday of 1,067.

Freeport-McMoRan shares closed down $1.91, or 4.1%, at $45.08.

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