Medtronic holds firm after lowered outlook; Level 3 climbs on ratings upgrade; XM remains active

By Kenneth Lim

Boston, Feb. 21 - Medtronic Inc. fell outright but improved on a dollar-neutral basis on Wednesday after its fiscal third-quarter results and lowered sales outlook disappointed the Street.

Level 3 Communications Inc. gained on the strength of a credit upgrade by Standard & Poor's, although some analysts caution that its convertibles are already trading on a tight spread.

XM Satellite Radio Holdings Inc. continued to trade actively, and swung back and forth to finish mostly flat amid ongoing speculation about whether a planned merger with rival Sirius Satellite Radio Inc. will be approved.

In Europe, Givaudan SA's new three-year mandatorily exchangeable securities priced within talk, where they modeled fair according to Barclays Capital's convertibles research team.

The rest of the convertible market was mostly quiet on Wednesday, and one market participant thought that recent weather may have something to do with the cold market.

"I spoke to quite a few accounts and everyone's saying that it's really quiet," a sellside convertible trader said. "I think that maybe the slowness can be attributed to ski week or school vacation week. Everybody's kind of thinking about going away especially with the snow from last week."

Medtronic gains dollar neutral

Medtronic's 1.5% convertible due 2011 and 1.625% convertible due 2013 fell about 3 points outright on Wednesday but improved slightly on a dollar-neutral basis after the company's quarterly defibrillator sales disappointed investors.

The 1.5% convertible traded at 105.25 against a stock price of $52.35, while the 1.625% convertible traded at 105 versus a $51.81 stock price. Medtronic stock (NYSE: MDT) slid 4.62% or $2.52 to close at $52.02.

"The Medtronics were pretty active in the morning," a buyside convertible trader said. "They're just a little better dollar-neutral. Their ICD [implantable cardiac defibrillators] sales were a little weaker than expected and they lost some market share, but on the whole the results were still good and their credit isn't any worse."

Minneapolis-based Medtronic on Tuesday reported fiscal third-quarter profit of $710 million, or 61 cents per share, up from its year-ago earnings of $670 million, or 55 cents per share. Analysts expected 58 cents per share from the medical devices maker.

But ICD sales fell 2% and Medtronic said it lost some market share to St. Jude Medical Inc. and Boston Scientific Corp., its rivals in that segment.

Medtronic lowered its full-year revenue forecast to between $12.2 billion and $12.4 billion, from its previous guidance for $12.2 billion to $12.6 billion. But it raised its profit forecast range to between $2.34 per share and $2.38 per share, from its earlier estimate of $2.30 per share to $2.38 per share.

A sellside convertible strategist said the results appeared to be fine in general, although Medtronic's ICD sales failed to meet expectations.

"The disappointment was tied to their ICD sales, which is the bulk of their business, so the market I think took that out on the stock," the sellsider said. "The positive that you can take is that the shortfall there was made up by the strengths of their other divisions. I don't think it was as bad as the stock hit implies."

The sellsider said Medtronic continues to have an attractive outright story.

"It's more a matter of when, as opposed to if, the main business rebounds," the sellsider said. "It probably became more attractive with the drop. It was a touch better, a little vol move up on the name."

Level 3 gains on upgrade

Level 3's 2.875% convertible due 2010 and its 5.25% convertible due 2011 added about 3 points outright on Wednesday following a credit rating upgrade.

The 2.875% convertible traded at 116.5 versus a stock price of $6.65, while the 5.25% convertible traded at 179.375 versus a $6.63 stock price. Level 3 stock (Nasdaq: LVLT) closed at $6.67, up by 1.83% or 12 cents.

"We saw good two-way flow on Level 3," a sellsider said. "They had a credit upgrade, although I think the credit already traded tight to begin with, before the rating."

Broomfield, Colo.-based Level 3 is a provider of communications and information services.

Standard & Poor's on Tuesday raised Level 3's corporate credit rating to B- from CCC+ with a stable outlook. The company's senior secured debt rating was raised to CCC+ from CCC-. The credit ratings agency said improved operating trends and opportunistic funding prompted the upgrades.

"Credit quality is also enhanced via improved liquidity resulting from the completion of a number of financing initiatives over the last six months that have lowered interest expense and extended the company's maturity profile," S&P said.

A sellside convertible analyst said the upgrade was not a big surprise.

"Level 3 has been actively restructuring its debt over the past year, and there's no indication that it's going to stop," the analyst said. "So far they've been having some success in terms of taking advantage of market conditions to improve their capital structure, so it's not surprising that their credit is getting upgraded."

"But some of the upside in the credit I would think would already have been priced into the bonds," the analyst added. "They've been moving towards this for some time, and they already disclosed their restructuring plans when they launched their $1 billion deal."

XM flat, remains active

XM Satellite Radio's 1.75% convertible due 2009 was mostly flat on Wednesday although trading prices see-sawed amid uncertainty over whether a planned merger with Sirius will be approved by regulators.

The XM convertible changed hands at 87.5 versus a stock price of $15. XM stock (Nasdaq: XMSR) eased 1.04% or 16 cents to finish at $15.25.

"The XMs were kind of in line," a sellsider said. "They went out a quarter-point to five-eighths maybe, improved a little from the morning when the stock got hit right off the bat."

Washington-based XM and New York-based Sirius, both providers of satellite radio, earlier in the week agreed to merge in an all-stock deal valued at more than $4 billion. The merger still needs approval from regulators to be completed. Debate also emerged Tuesday over whether the merger will trigger the change of control put for the XM convertibles.

"Depending on how you look at it, even in the worst-case scenario, where the deal gets scrapped, the downside is limited to around 84, which is 3 points of downside versus the most rosy scenario, where you can put at par, which would be around 13 points of upside," the sellsider said. "It's a favorable risk-reward profile."

Givaudan seen fair at pricing

In Europe, Givaudan's new 5.375% mandatorily exchangeable securities due 2010 priced within price talk, where they appeared fairly valued, according to Barclays analysts Heather Beattie, Luke Olsen and Haidje Rustau.

The CHF 750 million offering priced with an initial maximum exchange premium of 20%.

The deal was talked at a coupon of 5.125% to 5.625% and an initial maximum exchange premium of 18% to 22%

Givaudan did not say who was running the books for the Regulation S offering.

Givaudan is concurrently offering CHF 300 million to CHF 400 million of its own stock at CHF 1,075 apiece.

Givaudan, a Vernier-based flavor and fragrance producer, will use the proceeds of the deal to finance its planned acquisition of Quest International and for general purposes.

Using a credit spread of 20 basis points over swaps, a volatility of 18.5% at the reference share price of CHF 1,075 and a volatility of 17.5% at the maximum exchange price of CHF 1,290, the exchangeable was worth 99.7 at the rich end of talk and 102 at the cheap end of talk, the Barclays analysts wrote in a report.

"As such, we believe the mandatory looks attractive on best, fair to slightly stretched on mids and expensive on worst," the analysts wrote.

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