Regeneron, Equinix jump outright, expand on hedge; Powerwave drops sharply; AMD trades above 103

By Rebecca Melvin

New York, April 26 - Earnings that beat expectations prompted eye-catching moves in a few convertible names on Thursday.

Regeneron Pharmaceuticals Inc.'s convertibles traded up outright and expanded about 0.375 point on a dollar-neutral, or hedged, basis after the Tarrytown, N.Y.-based biopharmaceutical company reported better-than-expected results on super sales of its Eylea injected eye drug.

Two Equinix Inc. convertibles shot up strongly outright and on a dollar-neutral basis the company's 3% convertible was about a point better as the underlying shares jumped nearly $20, or 13%, to $169.38.

The Equinix moves were sparked by the data center services company's better-than-expected results from increased demand for telecom and cloud computing services, and its forecast for strong revenue in the second quarter.

Xilinx Inc.'s two convertible bond issues were also active in trade and higher by 6 to 7 points outright on a 7% gain in the underlying shares of the San Jose, Calif.-based chip maker, which posted lower earnings but a better outlook.

These gains were described as "pockets of strength" by one New York-based analyst, who thought the convertibles market overall was mixed.

Powerwave Technologies Inc.'s distressed convertibles dropped hard to 27.25 to 28 from 33 bid, 35 offered after the Santa Ana, Calif.-based wireless networks solutions company announced that it is selling select assets of its operations in China to a Chinese company.

Also among distressed names, AMR Corp.'s 6.25% convertibles jumped 3 points to 53.

The strength in AMR was thought to be driven by US Airways Group Inc.'s positive earnings. US Airways is a potential merger partner for AMR's bankrupt American Airlines. Also on Thursday was word that one of AMR's advisors said the company could consider a merger in bankruptcy, a New York-based convertibles analyst said.

Meanwhile, Advanced Micro Devices Inc.'s 6% convertibles due 2014 were also active in trade, changing hands above 103, which was about flat on the day, But a convertibles strategist suggested holders might want to take advantage of the current bond price above par to sell.

U.S. equities were higher for a third straight day. On Friday, disappointing GDP data could derail the equities' run if it misses estimates, an analyst said. But he thought this week's latest reading on the economy from the Federal Reserve Open Market Committee and Fed chairman Ben Bernanke's comments that implied quantitative easing is not off the table carry greater weight for the markets, than GDP.

"GDP is a backward-looking reading, and not the biggest mystery in the world," the analyst said.

Regeneron expands 0.375 point

Regeneron's 1.875% convertibles due 2016 was seen at 176.5 at the market close Thursday, versus the closing stock price of $138.60, which was up from 165 versus the previous close of $127.11.

Regeneron shares gained $11.49, or 9%.

The move was seen as a 0.375 point expansion on a dollar-neutral basis, said a New York-based trader, adding it "now looks like a decent breakeven."

Breakeven is determined by points of premium divided by the coupon.

A second source said the he didn't think the bonds break even at this level.

The company, which makes an eye drug to treat age-related macular degeneration, reported net income of $411.7 million, or $0.11 per share, compared to a loss of $43 million in the year-earlier period.

Revenue for the first quarter was almost $232 million,

Furthermore, the company expects Eylea sales will be as much as $550 million for 2012.

In January, the company raised its outlook on Eylea net sales to $250 million to $300 million in the United States in 2012, which was nearly double its previous forecast of $140 million to $160 million.

Eylea received U.S. regulatory approval to treat wet age-related macular degeneration, a common cause of blindness, in November.

Regeneron shares are up by more than 160% since early December, when the close on Dec. 8 was $51.39.

"People have been worried about takeout risk, but if I didn't know better I'd think the big-cap pharmas would be too embarrassed to pay over $150 for a company they could have had for a third of that last year," a New York-based convertibles strategist said. "But crazier things have happened."

And there are candidates in the same field that might want to consolidate their position in the market, including Roche SA, which makes the other main drug to treat the common form of blindness and Sanofi-Aventis, which currently partners with Regeneron and has a partnership on a different line of antibodies, an analyst said.

"Roche owns the rest of the market that Regeneron competes in. It's not out of the question to see [a takeout], but it's possible that it may be beyond reach now," the analyst said.

Regeneron's market cap is currently $12.8 billion.

Equinix expands on hedge

Equinix 3% convertibles due 2014 traded at 160 on Thursday, which was up 15 points outright, and better by about a point on a dollar-neutral basis.

Shares of the Redwood City, Calif.-based data center service provider surged $19.81, or 13%, to $169.28.

The 3% bond has what is referred to as a "hyper" structure, and is held on a high 110% delta.

Equinix's 4.75% convertibles due 2016 traded up by nearly 16 points to 209. This issue also has a "hyper" structure.

"It looks like the bonds are up about 18.5 points today, and the stock was up about 23 points, which is about right with the bonds trading on a 110% hedge ratio," a convertibles strategist said.

"This is one of the dreaded 'hyper' converts, where the ratio increases when the stock goes above the conversion price," the strategist said.

He said the structure was dreaded "because the extra optionality comes at a price up front: it makes them be issued with very high premiums, so they look ugly to the naked eye."

The company reported net income for the first quarter of $34.5 million, or 71 cents per share, up from $25.1 million, or 53 cents a share, a year earlier. Revenue rose 25% to $452.2 million, which was higher compared to $445 million expected by analysts.

The company expects revenue of $466 million to $468 million for the second quarter, compared to what analysts were expecting which was $463.3 million.

In the last year, Equinix shares have risen 61%.

Powerwave drops

Powerwave's 3.875% convertibles due 2027 traded down to 27.25 to 28 on Thursday, which was lower from 33 bid, 35 offered previously

Powerwave shares ended higher by 3 cents, or 3.1%, at $1.01.

The Santa Ana, Calif.-based wireless networks solutions company announced after the market close on Wednesday that it had entered into a definitive agreement under which Shenzhen Tatfook Technology Co. Ltd. will acquire selected assets of Powerwave's China manufacturing facility and will provide Powerwave with a long-term manufacturing and supply agreement. Tatfook will purchase certain assets for $12.5 million. The transaction is expected to close in the current quarter.

AMD trades above 103

Advanced Micro's 6% convertibles due 2015 traded above 103 at 103.325, according to Trace data, on Thursday, which was little changed with where they had been.

Shares of the Sunnyvale, Calif.-based semiconductor company ended up 6 cents, or 0.8%, to $7.45.

Late Wednesday, Standard & Poor's upgraded its corporate credit and senior unsecured ratings on the chipmaker after it said it would pay down debt and demonstrated adequate cash flows to pay for upcoming commitments.

S&P raised the ratings by one notch to BB- from B+.

"These bonds were issued at 100 five years ago with the stock about twice where it is now. So you could have clipped five years of 6% coupons and had a few points of capital gain, or lost half your money [with the shares]," a convertibles source said.

Since 2007 when the convertibles were issued, the convertibles have done much better than the stock, the source said.

Mentioned in this article

Advanced Micro Devices Inc. NYSE: AMD

AMR Corp. Pink Sheets: AAMRQ

Equinix Inc. Nasdaq: EQIX

Powerwave Technologies Inc. Nasdaq: PWAV

Regeneron Pharmaceuticals Inc. Nasdaq: REGN

Xilinx Inc. Nasdaq: XLNX

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.