Virgin Media edges lower in debut; WaMu eases; Frontier Airlines sinks; but PDL BioPharma adds

By Rebecca Melvin

New York, April 11 - The convertible bond market ended the week on a downbeat Friday, following stocks lower after General Electric Co. posted disappointing earnings that missed estimates, market players said.

GE doesn't have convertible bonds, but the bellwether U.S. business - which made about 46% of its profit or 34% of its revenue from financial services in 2007 - may foreshadow further disappointments this earnings season.

The overall convertibles trading week had its ups and downs, starting with a jump Monday in Washington Mutual Inc.'s convertible preferred shares on news of a large capital infusion, and rising Thursday amid a jump in the biotech sector; but enduring intervening periods of softness as investors weigh the prospects of the U.S. economy and financial system.

On Friday, the Washington Mutual convertibles were off Monday's and Tuesday's high levels but up from a week ago.

Virgin Media Inc.'s large new issue of 6.5% convertibles did not do well in its debut Friday, falling below par in early trading to 98.75 bid, 99.125 offered versus a stock price of $12.37 at around midsession.

A last-minute pricing change, which pushed the initial conversion premium of the Virgin notes beyond the rich end of talk, was blamed for the poor showing.

"They could have done it on the cheaps, and then everybody would have been happy," a New York-based hedge fund trader said.

The new Virgin notes were a central feature of the trading day, in which volume was light, traders said. But a few other names were mentioned, including the convertibles of Frontier Airlines Holdings Inc., which sank as their underlying shares plummeted 64% on news that the Denver-based airline filed for Chapter 11 bankruptcy protection.

Bucking the trend Friday was PDL BioPharma Inc., which added a little over a point dollar neutral after the Redwood City, Calif.-based company said it would spin off its biotechnology assets and declare a special dividend.

Virgin slips below par on debut

Virgin Media's $1 billion of eight-year convertible senior notes, to yield 6.5%, with an initial conversion premium of 55.38%, priced at the rich end of talk for the coupon, which was 6.5% to 7%, and beyond the rich end of talk for the initial conversion premium, which was 47.5% to 52.5%.

The new Virgin 6.5% convertibles ended at about 99 versus a closing stock price of $12.38.

A buysider complained that a change in bond issue pricing was made because of a drop in the underlying shares on Thursday. "The company viewed the level as artificially low," he said, adding that although the bonds were less appealing he bought them and owned them.

Virgin shares dropped 11.6% on Thursday after Jefferies & Co. cut its rating to "hold" from "buy" and lowered the price target to $16, citing competitive pressures and a weakening U.K. economy.

A syndicate source wouldn't comment on pricing details. But other sources concurred that the new issue's high initial conversion premium made the convertibles less appealing.

"Between 47% and 57%, there is a big difference, especially with it being a dicey credit," the buysider said, putting the credit spread on the company at 800 basis points over Libor or a little wider.

Goldman Sachs and Deutsche Bank were joint bookrunners of the Rule 144A deal.

The notes are non-callable. There is standard takeover and dividend protection, and contingent conversion, subject to a 120% hurdle, as well as net-share settlement.

Virgin Media intends to use proceeds to prepay a portion of its outstanding A and B loans under its senior credit facilities.

New York-based Virgin is a U.K. cable and mobile phone company. Its shares (Nasdaq: VMED) closed Friday at $12.38, up a penny from a day earlier.

WaMu weakens with other financials

Market players scoured GE's earnings report Friday for omens of what to expect in the financial sector. A number of financial companies are on deck to report first-quarter earnings next week, including Wells Fargo & Co. and Citigroup Inc., which both have convertible paper.

GE, based in Fairfield, Conn., posted an unexpected 6% drop in profit, and chairman and chief executive Jeff Immelt cited an "extraordinary disruption" in the company's ability to complete asset deals late in the quarter as a primary factor in its shortfall. The credit markets experienced severe difficulties in March.

Washington Mutual's 7.75% cumulative perpetual convertible preferreds, which have a par of $1,000, traded early Friday at $825 versus a stock price of $12.125, compared to $855 versus a similar stock price of $12.50 on Monday.

The underlying shares (NYSE: WM) closed much lower on Friday at $10.95, down $0.47, or 4.1%.

A client note from Goldman Sachs Friday cut the share price target of WaMu to $10 from $12 and suggested that clients sell short the stock. Goldman said the Seattle-based bank's mortgage portfolio includes $17 billion to $23 billion of embedded losses in current book business, of which only $3 billion has been absorbed so far.

Later in the day, the bank itself said that it expects to take a $140 million to $180 million pre-tax charge to scale back its mortgage operations. The reduced operations will include job cuts of about 2,600 to 3,000.

PDL BioPharma adds on spinoff

The PDL BioPharma 2% convertibles due 2012 traded at 83.169 versus a share price of $13.20 on Friday, compared to a sale of 80.25 versus a stock price of $11.625 on Thursday.

After the close of markets Thursday, the company declared a special cash dividend of $500 million and said it plans to spin off its biotechnology operations into a separate publicly traded company.

The convertibles, which started to move in trade Thursday, strengthened from a credit perspective.

There are two adjustments to be taken into account when considering the 2% convertibles due 2012, a Connecticut-based sellside trader said, noting that the notes are callable in 2010.

"One adjustment is the dividend and the second adjustment is related to the spinoff," he said. "The new plan lays out five points on a 30% delta as you have to pay out the dividend if you short the stock."

"But then the assumption is that there will be an improvement afterwards, but I just don't know if you're going to get that back," the trader said.

The 2s improved a little bit better than a point dollar neutral on Friday, the trader said.

"It improved but you're soon paying out five points," he said.

Another source, a New York-based sellside desk analyst, pointed out that while the debt improved from a credit standpoint, its volatility value was substantially reduced due to the spinoff.

A second PDL convertible issue of 2.75% notes is putable in 2010 and traded Friday at 92.50 versus a share price of $13.

Following this trade, the stock improved another 5%. Shares (Nasdaq:PDLI) closed up $1.98, or 16.91%, $13.69.

Frontier collapses

Frontier Airlines' 5% convertible debentures due Dec. 15, 2025 traded at 30 on Friday after the struggling airline sought protection from creditors under bankruptcy protection.

"We saw those trade today. We never see them trade, but after news like this, you usually see them trade," a sellsider said of the debentures. The 5% convertibles were initially issued in December 2005.

Shares of the low-cost airline (Nasdaq: FRNT) tumbled $1.09, or 69%, to $0.48.

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