Financials weaken; Micron, ON Semi softer ahead of Intel earnings; Kinetic Concepts on tap

By Rebecca Melvin

New York, April 15 - The convertible bond market was quiet on Tuesday, market participants said, with financials mixed to lower as players eyed potential jumping-in points, and a pair of semiconductor names traded flat to lower ahead of Intel Corp.'s earnings expected after the close.

"Financials were weaker, with people focused on the benchmarks," a Boston-based buyside trader said, referring to Bank of America Corp., Citigroup Inc., Lehman Brothers Holding Inc. and now Wachovia Corp.

Another source said the financials picture was mixed, mentioning National City Corp. as enjoying a bounce. However, volume overall was light, they agreed.

In the technology sector, sources mentioned both Micron Technology Inc. and ON Semiconductor Corp. as softer in trade.

After the close, chip giant Intel Corp. reported its first-quarter profit dropped slightly to $1.44 billion, but revenue was higher. Intel shares jumped 7.5% on the news in initial after-hours trade. But Intel's 2.95% convertible notes due 2035 were not mentioned in trade Tuesday. They were last seen at about 98.25 bid, 98.75 offered.

Market sources depicted Tuesday as quiet as stocks zig-zagged to a higher close.

Merger news failed to generate convertibles trading. Delta Air Lines Inc. and Northwest Airlines Corp. do not have convertible bonds outstanding any longer since "they all went away after they both filed Chapter 11 two years ago," a New York-based source said.

But no activity was seen either in AMR Corp., parent of American Airlines, or UAL Corp., parent of United Airlines; although airline stocks fell as oil prices spiked.

In the primary arena, Kinetic Concepts Inc. was expected to price after the close $600 million of seven-year convertible senior notes talked to yield 2.75% to 3.25% with an initial conversion premium of 25% to 35%.

Financials mostly weaker

Bank of America's 7.25% perpetual convertible preferred stock has drifted generally lower over the last three weeks, along with their underlying shares.

On Tuesday they were offered at $1,023.75 versus a stock price of $35.60. But bids were scarce. That level compared to Friday when the preferred shares were $1,050 versus a share price of $37.30, and three weeks ago on March 24, when the preferred shares were $1,121.5 versus a share price of $43.125.

A buyside analyst was uncertain of the cause of the recent weakening trend but said "[I] suspect the earnings estimates are too high, and they will have to write off assets in the quarter."

The Charlotte, N.C.-based financial holding company has an earnings call scheduled April 21. Its shares (NYSE: BAC) ended flat at $35.58 on Tuesday.

Lehman Brothers' 7.25% perpetual convertible preferred stock, also with a $1,000 par, were seen closing at $1,112.46 versus a closing share price of $29.67, compared with a Monday close of $1.114 versus a share price of $39.67.

Shares of the New York-based investment bank retraced an early loss Tuesday to end the day up 29 cents, or 0.74%.

Wachovia's 7.75% perpetual convertible preferreds that priced on Monday were steady on Tuesday, closing at about $1,050, the same level as on Monday, as its shares sagged to a lower close at $25.42.

The Charlotte, N.C.-based bank announced earnings Monday that swung to a net loss, missing estimates, as revenue fell 4.5% to $7.9 billion. The commercial bank also lowered its quarterly dividend to 37.5 cents a share.

Its shares (NYSE: WB) closed down 13 cents, or 0.5%.

But Washington Mutual Inc., which reported earnings Tuesday afternoon, was seen edging up to about 800 from the 799 level on a 3% gain in its underlying shares.

Shares of the Seattle-based savings and loan (NYSE: WM) closed up 31 cents, or 3%, at $10.66.

As expected, the bank lost more than $1.1 billion, or $1.40 per share, in the first quarter, compared to a profit of $783 million, or 86 cents, in the first quarter of 2007. It said it needed to set aside $3.5 billion to cover bad loans in its $250 billion loan portfolio during the quarter.

Micron loses 0.5 point

Micron's convertibles came in about 0.5 point, with the 1.875% convertibles due 2014 trading at 75.125 versus a share price of $6.60 on Tuesday. That compares to 78 versus a share price of $7.00 on Thursday.

"It came in probably half a point," a West Coast sellside analyst said, adding that because it's rather long-dated, six-year year paper, it tends to react immediately to any softening in the market. "The bids disappear," he said.

Shares of the Boise, Idaho-based semiconductor company (NYSE: MU) closed up 3 cents, or nearly 0.5%, at $6.76 on Tuesday.

Meanwhile ON Semiconductors' convertibles eased just slightly, with one source characterizing the paper as "holding up," with the 2.625% convertibles due 2026 trading at 89 versus a share price of $6.45 on Tuesday, compared to 89.128 on Monday.

Shares of the Phoenix-based semiconductor company closed up 4 cents, or 0.62%, at $6.53, erasing an earlier loss.

Kinetic looks 1%-2% cheap

San Antonio-based Kinetic Concepts, which designs and makes advanced wound care and therapeutic support products, planned to price $600 million of convertibles after the close.

There was no gray market seen in the issue on Tuesday, and it was indicated to price at the midpoint of price talk, with a coupon of 3% and an initial conversion premium of 30%, according to a Boston-based sellsider.

Using a credit spread of 475 basis points over Libor and a volatility of 31%, one New York-based sellside analyst saw the issue 2% cheap.

A second source put the issue 1% cheap, using 600 bps over Treasuries and a volatility of 32%. "Our spread was pretty conservative. One could argue 575 basis points, which would make is a little cheaper," the second sellside analyst said.

There is a $90 million over-allotment option on the Rule 144A deal, which is being sold by bookrunners J.P. Morgan Securities Inc. and Banc of America Securities LLC.

The medical technology company said it planned to enter into convertible note hedge transactions and warrant transactions with initial purchasers.

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