Illumina drops outright, dollar neutral on warning; Clearwire down on Sprint bombshell

By Rebecca Melvin

New York, Oct. 7 - The convertible market firmed across the board toward the end of the past week after a very weak start but was mostly quiet Friday ahead of the upcoming Columbus Day holiday, which will leave credit markets closed on Monday, market sources said.

"Credit is out on Monday for a long weekend and it's quiet today, with people waiting on stuff out of Europe," a New York-based sellside analyst said. He deemed the credit markets on Friday to be a touch weaker to in line with the stock markets.

Illumina Inc.'s convertibles dropped sharply on an outright and dollar-neutral basis along with the San Diego-based developer of genetic research tools' underlying shares after the company warned that its third-quarter results will be worse than expected due to economic uncertainty that hit sales, and pulled its full-year guidance.

The stocks of other genetic analysis tool makers were hurt by Illumina's bleak outlook for DNA testing given the shaky global economies. But the convertibles of sector rival Life Technologies Corp. came down only about 0.625 point dollar neutral, according to a New York-based analyst.

That's because the convertible of the Carlsbad, Calif.-based company is very short dated, and it moved only slightly down off of par to about 99 bid, 100 offered, from about 101 bid, to 102 offered.

"It's just not going to move that much from par," the analyst said.

But Clearwire Corp.'s convertibles moved sharply lower along with the underlying shares of the Kirkland, Wash.-based wireless services provider. The moves were in reaction to news that Clearwire partner Sprint Nextel Corp. plans to shift it customers away from Clearwire's current WiMax wireless technology in favor of a different technology.

United States Steel Corp. was better on a dollar-neutral basis, however, when the underlying shares of the Pittsburgh-based steelmaker were down about 6%.

The U.S. Steel convertibles were called 0.25 point better on a hedged basis by one New York-based trader.

Illumina drops on warning

Illumina's newer 0.25% convertibles due 2016, which priced in March, dropped to about 75.5 bid, 76 offered versus an underlying share price of $27.50, compared to a previous level of 87.5 versus an underlying share price of $40.00.

The bonds were down about 5 points to 6 points on a dollar-neutral basis, and the drop was so sharp because "it was more of a credit event than a volatility event," a New York-based sellside analyst said.

Illumina's older 0.625% convertibles due 2014, of which there is only about $50 million outstanding, didn't really trade and were seen little changed at about 130. The deep in the money price is for a very short-dated piece of paper, the analyst said.

Illumina's shares skidded down $12.65, or 32%, to $27.25 on its earnings warning, announcing late Thursday that it has generated about $235 million in revenue in the just concluded quarter, which is well below analysts' estimates of $278 million. Illumina also withdrew its forecast for the rest of the year.

The company cited "continued uncertainty surrounding the levels of research funding in the U.S. and Europe."

The company had net income of about $125 million, or 87 cents a share, on almost $903 million in revenue last year.

The approximately $4 billion market cap company isn't one that is thought to be in any kind of distressed situation, but "when you pull guidance, and the government funding and academic institutions that purchase your equipment are cutting back, there's a lot of concern," the analyst said.

His firm's company valued the Illumina bonds with a 550 basis points credit spread and a 35% volatility; but the implied credit spread was higher after the news at about 620 bps over.

"They were rich before and are now trading at a discount," the analyst said. "It's all technical."

"The convertibles market has seen a lot of this kind of thing this year," he said, referring to other companies that saw a sudden drop on unanticipated news, including Human Genome Sciences Inc. and Dendreon Corp.

"It's going to trade like a credit - a lot like HGSI and Dendreon," he said.

The newer Illumina was trading just above its bond floor. Based on a 550 bps credit spread, that bond floor is 75.25, the analyst said.

Illumina is scheduled to report third-quarter results on Oct. 25.

In its release Thursday, the company said that the latest estimate remains subject to review, and that the main factors negatively affecting its revenue compared to forecast were continued uncertainty surrounding funding, which resulted in purchasing delays for instruments and consumables, particularly among large volume centers, and also the launch of V3 sequencing kits in the second quarter, creating excess capacity that customers weren't able to fully use.

The company said that it saw an "unprecedented slowdown in purchasing due to the uncertainties in research funding and a temporary excess of sequencing capacity in the market."

Although it believes that revenue in the fourth quarter will be higher than in the third quarter, it suspended its full-year guidance provided on July 26.

Clearwire plunges

Clearwire's 8.25% exchangeable notes due 2040 plunged more than 10 points to 30 versus an underlying share price of $1.60, from about 43 versus a share price of $2.10 on Thursday.

Like Illumina, Clearwire's share price plunged, with the stocks ending down 66 cents, or 32%, to $1.39 on Friday.

Clearwire was "getting smoked," a Connecticut-based trader said.

The Clearwire situation was already pretty distressed prior to the news, and was seen only more so on Friday. "You can't even borrow the stock. People are looking at it in terms of recovery value," a New York-based analyst said.

But one sellsider described the day's slide in terms of points, saying the Clearwire convertibles' points of premium over parity contracted by about 6 points to 7 points from 13 points previously.

Clearwire's WiMax network for high-speed services will be used through 2012 and then Sprint will be shifting to another high-speed wireless technology called long-term evolution, or LTE.

Clearwire has said that it would like to invest in LTE technology but that it needs about $600 million for LTE plus $350 million in working capital.

Mentioned in this article:

Clearwire Corp. Nasdaq: CLWR

Illumina Inc. Nasdaq: ILMN

Life Technologies Corp. Nasdaq: LIFE

United States Steel Corp. NYSE: X

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