Alcatel-Lucent up on strong earnings; Gilead, Amgen mixed on hedged basis; Siemens prices

By Rebecca Melvin

New York, Feb. 10 - Alcatel-Lucent SA's convertibles traded actively and were higher by about 2 points outright Friday after the Paris-based telecommunications-equipment maker reported strong earnings and its first annual profit since 2006, market players said.

The distressed convertibles of K-V Pharmaceutical Co. moved the opposite direction after the Bridgeton, Mo.-based specialty pharmaceutical company reported a large quarterly loss and said in a regulatory filing that the expectation of continuing losses casts doubt on the company's ability to continue as a going concern.

For the past week, Gilead Sciences Inc. and Amgen Inc. were among the higher-grade issues that were in focus. Weakness in the underlying common shares caused mixed outcomes for the convertibles of those companies on a dollar-neutral, or hedged, basis.

Two Gilead convertible issues were flat, or unchanged, on the week, but the Gilead 1% convertibles were higher on a dollar-neutral basis by about 0.25 point. Amgen was lower by about 20 cents on a dollar-neutral basis, a New York-based trader said Friday.

There were no new issues in the U.S. convertibles primary market, but Siemens AG priced an outsized $3 billion of bonds with warrants, a convertible-like structure, at par at the cheap end of talk to institutional investors outside of the United States.

Trading in the convertible market was dominated by larger, higher-grade issues at the beginning of the past week, and then more yield and distressed players jumped in toward the end of the week after a few risk-on sessions, market players said.

The week started out slow and remained fairly quiet, however.

Stocks had their worst day for the year so far. The Dow Jones industrial average was down 145 points at its worst level, but a late rally pared those losses, so that the blue chip index closed down just 89 points, or 0.7%, at 12,801.23.

The S&P 500 stock index lost 9.3 points, or 0.7%, to 1,342.64 and the Nasdaq Stock Market shed 23 points or 0.8%, to 2,903.88.

Greece was a major contributor to the negative session. Euro-zone finance ministers didn't approve a second bailout that Greece needs to avert default on its sovereign debt.

Alcatel-Lucent up on earnings

Alcatel Lucent's 2.75% B convertibles of 2025 were active and traded up to as high as 95.75 during the session, before they settled back to around 95 bid, 95. 25 offered, which was up about 2 points on the day.

A late print was reported at 95.375.

Alcatel shares jumped 25 cents, or 13%, to $2.19 in ultra-heavy volume.

The telecommunications equipment maker reported fourth-quarter earnings of $0.19 per share, which was ahead of consensus estimates, on revenue that fell 13% due to weakness in European, North American and Asian markets.

Full-year results were in line with guidance, and investors were cheered that the company managed to turn a profit for the first year since the merger of France's Alcatel SA and Lucent Technologies Inc. of the United States in 2006.

K-V sinks amid losses

K-V Pharmaceutical's 2.5% convertibles due 2033 fell 15 points to 28 on Friday.

K-V shares fell 99 cents, or 38%, to $1.62.

The specialty generic and branded pharmaceutical company had a loss of $37.8 million on revenue of $5.1 million during its fiscal third quarter, according to the company's SEC filing. The loss narrowed compared to a $47.8 million loss on revenue of $3.5 million in the same quarter of 2010.

But the company said in its filing there is substantial doubt about its ability to continue as a going concern due to among other things insufficient revenue from drug sales, particularly sales of Makena, the potential outcome of litigation, and the ability to comply with debt covenants as reasons behind the warning.

Siemens prices on the cheaps

Siemens priced $3 billion of bonds with warrants at par at the cheap end of talk.

The Regulation S deal was sold off of European convertibles desks, and a syndicate source said the investor profile was typical for a convertible bond, or split about evenly among investor groups including hedged and outright players.

Given the size of the deal - representing 30% of 2011's total issuance - buy in from all investor groups was imperative and that is why a lot of the price tension was removed when fixing final terms, the syndicate source said.

It was never a struggle to get the deal done; it just wasn't a blowout, given the deal size and structure, which did discourage some, the syndicate source said.

As per the structure, holders have to pay cash to exercise the warrants and hold the bonds until maturity. It makes it hard to convert early, and while it's not such a big deal at maturity, it's a complication along the way.

The 5.5-year, shorter-term bonds bear a coupon of 1.05%, and the longer, 7.5-year bonds bear a coupon at 1.65%. The warrant exercise price is €104.0018 per share, or a 37.5% premium over the reference price.

Siemens, a Munich-based conglomerate, plans to use proceeds for general corporate purposes and to support financial flexibility, including refinancing. Siemens redeemed €2.2 billion of bonds in the first quarter of this year, and $1.3 billion of bonds mature in the second quarter.

The warrant exercise price is €104.0018 per share. At issuance, holders of one warrant are entitled to receive 1,806.1496 Siemens shares against payment of about €188,000, based on exchange rates.

The warrants have option rights on about 21.7 million Siemens shares.

The Regulation S securities were sold via bookrunners Barclays Capital, Credit Suisse Securities (Europe) Ltd., Deutsche Bank AG, and J.P. Morgan Securities Ltd.

After issuance, the warrants can be detached from the bonds. The bond with warrant units, the bonds detached from warrants and the warrants detached will be listed on the open market segment of the Frankfurt Stock Exchange.

The deal was touted as the largest issue by a European corporate in this market segment in the past 10 years, according to a Siemens release.

Mentioned in this article:

Alcatel-Lucent SA NYSE: ALU

Amgen Inc. Nasdaq: AMGN

Gilead Sciences Inc. Nasdaq: GILD

K-V Pharmaceutical Co. NYSE: KVA

Siemens SA Frankfurt: SIE

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