JetBlue climbs on trimmed expansion; Lucent gains on results; United Therapeutics prices deal; L-3 slips

By Kenneth Lim

Boston, Oct. 24 - The convertible bond market continued to be quieter than normal on Tuesday, with JetBlue Airways Corp. taking off after guiding for clearer skies ahead.

Lucent Technologies Inc. improved after the company beat estimates for its fiscal fourth quarter and said it does not expect to divest any of its businesses to get approval for its planned merger with France's Alcatel.

In the primary market, United Therapeutics Corp. priced its $210 million offering near the cheap end of price talk amid grumblings that the deal's coupon was too low to attract outright investors.

Elsewhere, L-3 Communications Holdings Inc.'s 3% convertible due 2035 slipped slightly after the company said it was not looking to be bought. The convertible was seen at 101.125 against a stock price of $76.75, about 0.875 points lower outright.

L-3 stock (NYSE: LLL) closed at $76.82, down by 1.11% or 86 cents.

L-3's newly confirmed chief executive, Michael Strianese, who was only an interim chief for the past four months following the death of L-3 co-founder Frank Lanza in June, said late Monday that the company was not actively looking for a buyer. Lanza's death fueled speculation that New York-based L-3, a defense contractor, could be a takeover target.

"Compared with Lockheed Martin, Lockheed Martin has been outperforming L-3, and people were expecting L-3 to kind of catch up with defense budgets going up, but that really hasn't happened, so obviously, L-3 is a much smaller company, so they stand a much greater risk of getting bought," a sellside convertible bond analyst said.

JetBlue climbs on outlook

JetBlue's 3.5% convertible due 2033 gained about a point outright after the company said it will slow its expansion plans.

The convertible traded at 93 versus a stock price of $11.73 on Tuesday. JetBlue stock (Nasdaq: JBLU) rose 4.76% or 53 cents to close at $11.67. JetBlue's 3.75% convertible due 2035 also gained about 2.5 points outright to trade at 98.25 versus a $11.85 stock price.

"The JetBlue converts they were both better," a sellside convertible bond analyst said. "Both up outright as well as dollar-neutral."

Forest Hills, N.Y.-based JetBlue on Tuesday said it lost $500,000 in its third quarter, from a $2.7 million profit in the year-ago period. But the budget airline said it plans to reduce its fleet over the next three years and cut annual expenses by $120 million by 2007. JetBlue also said it has no plans to raise capital through stock offerings for the next three years.

"The company gave a pretty bullish conference call on the state of their business, along with their intention to slow taking on new planes, which is a positive because it will save cash in the near term, and the market took it positively," the sellsider said.

The sellsider added that the company said it hopes to raise its cash balance from around $456 million as at the end of the third quarter to around $600 million by the end of the year.

"That's a sizable jump," the sellsider said.

Lucent higher on results

Lucent's 2.75% convertible due 2025 and its 2.75% convertible due 2023 gained about one point each on an outright basis after the company beat estimates for its fiscal fourth quarter.

The 2.75% due 2025 traded at 101.25 versus a stock price of $2.45, while the 2.75% paper due 2023 changed hands at 100.25 against a $2.45 stock price. Lucent stock (NYSE: LU) closed at $2.49, up by 6.41% or 15 cents.

"Lucents were higher outright with the stock," a sellside convertible bond trader said.

Murray Hill, N.J.-based Lucent on Tuesday reported fiscal fourth-quarter profit of $371 million, or 7 cents per share, almost flat from the $372 million, or 7 cents per share, earned in the year-ago period. The company beat Street estimates of 4 cents per share profits.

Lucent, which is awaiting regulatory approval for its planned merger with Alcatel, also said it does not expect to have to sell any of its businesses to get the green light.

Lucent and Alcatel sell communications equipment.

United Therapeutics prices deal

United Therapeutics' $210 million offering of five-year convertible senior notes priced near the cheap end of talk Tuesday after the market closed amid grumblings about the deal's low coupon.

The deal priced at a coupon of 0.5% and an initial conversion premium of 21%. The notes were offered at par. Price talk guided for a coupon of 0% to 0.5% and an initial conversion premium of 20% to 24%. United Therapeutics stock (Nasdaq: UTHR) closed at $62.17 on Tuesday, up by 9.05% or $5.16.

There is an over-allotment option for a further $40 million.

Deutsche Bank was the bookrunner of the Rule 144A offering.

United Therapeutics, a Silver Spring, Md.-based drug maker, said it will use $112 million of the proceeds to concurrently buy back 1.8 million shares of its common stock at $62.17 apiece as part of its 4 million-share repurchase program. It will also use the proceeds to fund convertible note hedge and warrant transactions, and for general purposes.

"There's no gray market out there," a sellside convertible bond trader said. "People are telling me that the cheap end is fair pricing on this deal."

The low coupon on the deal was large hurdle for the deal, the trader said.

"There's just no protection...this is no better than bat guano...the day comes that the stock goes down 20% on the day, the question is, are they going to stick? No. It's not going to justify for a crossover outright player to return."

Interest in the deal was further dulled by a rally in the stock on Tuesday.

"With the stock already up, the juice is out of it," the trader said.

A sellside convertible bond analyst said the deal modeled just above 1% cheap at the midpoint of price talk.

"It is a low coupon, it is low for this kind of paper," the analyst said. "We'll see how it shakes out. They may have to push the premium a little bit, it'll probably price at the cheap end."

A convertible bond analyst in Connecticut noted that the deal seemed like a tough sell to both outright and hedge investors.

"There's very little downside protection, and you're not flipping any coupon, so it doesn't set up on the hedge well, because if you have any kind of a set up cost then you might be looking at a negative carry."

There was also concern that there does not appear to be many news catalysts expected until a year later that could fuel volatility in the stock, the analyst said.

"You'll have to sit on this for a year with negative carry," the analyst said. "You've really got to buy the story, but if you do, you should just get the equity."

But a convertible bond strategist thought hedge investors might actually be interested if the deal arrived at the cheap end of talk.

"If you're an arb, I think you'd like it at the cheap end, because it's a compelling vol-spread pair," the strategist said.

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