NuVasive trades flattish as shares jump; Navistar gains as shares slip; EMC paper active

By Rebecca Melvin

New York, Oct. 24 - A good deal of the trading action in the convertible bond market was driven by earnings news Wednesday.

NuVasive Inc.'s convertibles were steady at depressed levels despite a 13% jump in the underlying shares of the San Diego-based medical device maker after it reported third-quarter earnings that essentially hit expectations that were lowered in an Oct. 4 pre-announcement, market sources said.

Navistar International Corp.'s convertibles were higher as credit strengthened, but shares fell after the Lisle, Ill.-based truck and engine maker announced an offering of 10 million shares of common stock, with a 1.5 million share geenshoe, the proceeds of which are earmarked for general corporate purposes.

EMC Corp.'s convertibles traded actively, but ended little changed, after the Hopkinton, Mass.-based data storage and software company missed third-quarter profit and sales estimates and cut its full-year guidance, citing a climate of uncertainty dousing IT customer demand.

Gilead Sciences Inc.'s 1% convertibles due 2014, or the C convertibles, were very active and higher on positive earnings.

The new issue market remained quiet during the session. After the market close, Quantum Corp. launched a $60 million private deal for five-year convertible senior subordinated notes talked to yield 3% to 3.5% with an initial conversion premium of 30% to 35%.

The Rule 144A offering was seen pricing after the market close Thursday via Credit Suisse Securities (USA) LLC.

The San Jose, Calif., provider of storage, backup, recovery and archive services plans to use proceeds to repay a credit agreement and for general corporate purposes.

In the broader markets, equities fell back despite intraday attempts to recover from Tuesday's swoon.

The Federal Reserve Open Market Committee concluded a two-day meeting with a policy statement saying it would continue to purchase $40 billion per month in mortgage backed debt as a means to stimulate the U.S. economy and bolster the job market, and it reiterated expectations to keep interest rate at near zero until the middle of 2015.

Household spending had grown a bit more quickly, but the business investment was softening, the FOMC noted in its policy statement.

The Fed has held rates close to zero since December 2008.

NuVasive trades unchanged

NuVasive's 2.75% convertibles due 2017 were quoted at 84 versus an underlying share price of $14.80 and at 84.375 bid, 84.875 offered versus an underlying share price of $14.30. That was fairly steady despite a 13% jump in the underlying shares.

The stock's $1.62, or 13%, gain to $14.27 represented the biggest move since Oct. 4 when it plunged 33% to $15.19 on a warning and slipped further in the following weeks.

NuVasive's 2.75% convertibles fell that day to 85 from 95.

Investors also remain wary of this name in light of patent litigation underway involving Medtronic Inc.

"I am not sure why NuVasive stock is up. Perhaps it's because the numbers were not as bad as they could have been," a New York-based trader said.

NuVasive reported net income of $2.4 million, or 5 cents per share.

Excluding items, the company earned $10.1 million, or 23 cents a share, which was 2 cents higher than the consensus estimate.

Revenue rose nearly 12% to $148.4 million from $132.9 million in the year-earlier period and was better than the consensus estimate of $146.08 million.

Gross margin was 74.6% compared to 80.4% for the third quarter of 2011.

Looking ahead, full-year revenue was seen coming in between $601 million to $606 million, which was down compared to about $625 million previously.

Full-year earnings were seen at about 88 cents to 90 cents, compared to about 97 cents previously.

Total operating expense for the most recent quarter was $98.1 million, compared to $198.3 million in the third quarter of 2011 and $104.9 million in the second quarter of 2012.

NuVasive, which focuses primarily on minimally disruptive surgical products for the spine, had lowered expectations for third-quarter revenue in early October, saying that sales would be less than expected due to high account churn and aggressive competition.

Navistar adds

Navistar's 3% convertibles due 2014 traded outright at 89 bid, 89.375 offered, which was higher compared to 87.125 bid, 87.625 offered on Tuesday, according to a New York-based trader.

Shares moved down 41 cents, or 2%, to $19.08.

The company said it would sell 10 million common shares in a public offering to raise about $190 million.

"It makes sense that the NAV converts - which are pretty busted at this point - would be doing better in response to the announced equity offering," a New York-based convertibles strategist said.

"They are putting a nice extra equity cushion underneath the bonds. It's always encouraging to see management teams more concerned with a company's survival than taking a shot at maximizing the value of their own stock options."

The company has struggled to right itself following failed efforts to obtain regulatory approval for its diesel engine technology and a switch in July to adopt the engine technology used by rivals.

A New York-based trader said that investing in Navistar convertibles is "very tricky," given that it is still dealing with the regulatory emissions process and "no one really knows" what its third largest shareholder, billionaire investor Carl Icahn, "wants to try to push the company into doing."

It "makes it a bit tricky to figure out what the future holds for this company," the trader said.

Gimme Credit analyst Vicki Bryan said the timing of the secondary stock offering "is terrible," ahead of what it estimates will be an ugly fourth quarter with a potential net loss of $130 million on revenue down 27% versus a $265 million profit last year."

But Bryan went on to say in a note published after the news Wednesday that Navistar has little choice given its cash burn rate.

"...we already have projected it could deplete the cash netted from its most recent secured borrowing by early next year - long before it has righted the ship."

"Bondholders are unsecured," Bryan notes, and "they are already buried under a massive chunk of secured debt that likely has evaporated most if not all of their potential residual claim value to Navistar's beleaguered assets."

Given the company's poor liquidity position and the unlikelihood that it will be able to borrow enough to sustain operations through 2013, filing for bankruptcy might be required to reduce obligations and preserve cash, Bryan said.

EMC little changed

EMC's 1.75% convertibles due December 2013 closed at 155.5, according to a New York-based trader.

"They didn't move," he said at the end of the day.

But intraday they traded as high as 159.562 and as low as 147.75, according to Trace data.

Shares of the Hopkinton, Mass.-based information storage and software company ended lower by 22 cents, or 0.9%, at $24.46 after ultra-heavy trading volume.

The company said third-quarter net income was $626.3 million, or 28 cents per share. Excluding one-time items, it earned 40 cents per share, which was 2 cents below the consensus estimate.

Revenue rose 6% to $5.28 billion, compared with expectations for $5.46 billion.

Looking ahead, EMC said it expects to earn $1.68 per share to $1.70 per share on revenue of $21.6 billion to $21.75 billion. Analysts were expecting earnings of $172 per share on revenue of $22.03 billion.

Mentioned in this article:

EMC Corp. NYSE: EMC

Gilead Sciences Inc. Nasdaq: GILD

Navistar International Corp. NYSE: NAV

NuVasive Inc. Nasdaq: NUVA

Quantum Corp. NYSE: QTM

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