Medtronic falls on report; Level 3 exchanges boost notes; AMR gains as oil slips; more buybacks possible

By Kenneth Lim

Boston, Oct. 16 - The mood improved slightly in the convertible markets Thursday as equities enjoyed an afternoon surge, and observers said the pricing environment looked better.

Medtronic, Inc. was lower with the stock after a study presented negative results on the medical device maker's stents.

Level 3 Communications, Inc. also improved slightly as investors found comfort in the company's recent moves to exchange its convertibles.

AMR Corp. climbed with its stock, which got a boost as oil prices took a plunge.

Despite the recent wild swings in the markets, the overall market was seen better on Thursday with sentiment turning optimistic, market sources said.

"I noticed that in the last couple of days, the pricing I thought was better," a sellside convertible trader said. "I don't think that the volatility in the market is affecting the pricing as much as it had been. It was affecting us in a negative fashion, but I think that's behind us now."

The credit markets, which have been frozen by uncertainty, are beginning to thaw, and that will improve liquidity, even if the markets do not necessarily improve, the trader said. The bigger names are beginning to see improved liquidity, and the markets in general are getting better, the trader added.

"Even if we still have some pricing issues later on, in the next month, month and a half, when people find out how much is going to be taken out of the funds. But that's not a credit thing, that's a supply and demand issue, and that's something we can handle."

Medtronic slips on report

Medtronic's 1.5% convertible due 2011 and its 1.625% convertible due 2013 eased about 3 points outright as the underlying stock took a hit following release of a negative study.

The 1.5% convertible traded at 87 against a stock price of $38.50, while the 1.625% convertible changed hands at 82 versus the same price. Medtronic common stock (NYSE: MDT) closed at $40.01, down by 2.03% or $0.83.

Medtronic is a Minneapolis-based medical device maker.

"There was the negative announcement about the stents, it was down early but the stock bounced back with the afternoon," a sellside convertible desk analyst said.

A study sponsored by rival stent maker Johnson & Johnson showed that Medtronic's new stent was linked to more heart attacks and blood clots than one made by Johnson & Johnson, although death rates were similar.

The general feeling in the market was that some of the early drop in Medtronic's share price may have been an overdone knee-jerk reflex, a sellside analyst said.

"I think there are some people who don't think that the study was that conclusive, there's still a lot of variables that weren't looked at, so yes, it's negative, but I don't think it's a Medtronic killer yet," the analyst said. "The stock's bounced back up, so it looks like the market could be thinking the same thing."

Level 3 up on exchanges

Level 3's convertibles also strengthened Thursday as investors were optimistic about the company's recent moves to exchange some of its outstanding convertible debt for equity.

Level 3's 2.875% convertible due 2010 was seen at 51.5 against a stock price of $1.30 on Thursday, while its 6% convertible due 2009 was trading at 89 versus the same stock price. Level 3 common stock (Nasdaq: LVLT) slipped 4.96% or $0.08 to close at $1.34 on Thursday.

Level 3 is a Broomfield, Colo.-based internet backbone solutions provider.

The company earlier in the week issued stock to exchange about $108.21 million of its various convertibles.

"This is a great time for us to be proactive and opportunistic in terms of refinancing our debt," Level 3 public relations manager Debra Havins told Prospect News.

She declined to be specific about whether Level 3 will be looking to take out more of its outstanding convertibles, but said that "we're continuing to look at this and we will continue to evaluate opportunities as they arise."

Buybacks, exchanges on the rise

More companies could be taking advantage of low convertible prices to buy back or exchange their notes, a convertible trader said.

"I've been telling customers that this is going to be a primary play in this market for the longest time," the trader said. "Anybody that's making money that has paper due that can buy it back, will buy it back."

Besides the convertibles being cheap, issuers are also finding it easier now to take out the notes using equity instead of cash.

"Companies have gone out of their way to avoid any dilution of their stock, but with the whole world delevering, it used to be that they had to explain 'Why are you issuing more stock?'" but now you have to explain 'Why are you using cash?'"

The trader noted that irony that many issuers had issued convertibles to avoid diluting their stock. By exchanging stock for the convertibles, some of those issuers are now willingly diluting their stock.

"You got to realize, they came up with all these structures to avoid dilution on their books," the trader said.

Whether issuers take out their convertibles using stock or cash - and some will use both, the trader said - the trend is deemed to be good for holders.

"What's good for holders?" the trader said. "Having an out. Period. End of story. If it's bought back by the company they pay better anyway. I definitely want to see my guys get involved. This is the most natural delevering we're going to get."

AMR gains with stock

AMR's 4.5% convertible due 2024 gained almost 2 points outright on Thursday as its stock climbed on a drop in oil prices.

The convertible was seen at 89 against a stock price of $10.75 as AMR common stock (NYSE: AMR) jumped 23.01% or $2.02 to close at $10.80.

AMR is a Fort Worth, Texas-based airline holding company that owns American Airlines.

The company, which reported a third-quarter net profit of $45 million on Wednesday, cited high fuel costs as a reason for its $360 million operating loss.

But the common stock got a boost Thursday as oil prices dropped below $70 a barrel for the first time in more than a year.

"The stock was up pretty good," a convertible analyst said. "The stock was down earlier, but it turned around later in the day."

Mentioned in this article:

Medtronic, Inc. NYSE: MDT

Level 3 Communications, Inc. Nasdaq: LVLT

AMR Corp. NYSE: AMR

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