Convertibles market reverses course after strong start; Cypress pulled down; Amgen, biotechs weaker

By Rebecca Melvin

Princeton, N.J., Oct. 20 - The convertibles market reversed course on Thursday along with the major stock markets, as concerns about earnings and economic growth reared up and smothered an early rally.

Cypress Semiconductor Corp., which reported earnings and was trading up more than 0.50 point early in the day, came in toward the end of the session as a wave of sellers beset the market, traders said.

Convertibles in the biotechnology sector were notably weaker during the session, as were many energy names, traders said.

Among biotechs, Amgen Inc. was down as its stock sagged after a disappointing revenue number in its earnings report.

But the credit pushed out in some names on no real reasons, traders said. For example, Nektar Therapeutics Inc., which has been of late a darling of the convertibles market, saw its new 3.5% convertibles continue a recent slide of about five points in the last week.

Selling also pulled down the convertibles of MGI Pharma Inc., Chiron Corp. and Amylin Pharmaceuticals Inc. Apria Healthcare Group Inc., a home healthcare company, was also down.

Some sources said that the disappointing earnings report of Amgen, an industry leader, weighed down the biotech sector. But others said that sentiment had shifted subtly since Human Genome Sciences Inc. announced earlier this month that its experimental lupus drug failed to meet targets in a mid-stage study.

JetBlue Airways Corp., which reported earnings, bumped around, but the bonds were solidly lower at the end of the day.

Two new deals

In the primary market, convertibles players eyed two one-day deals, including EnPro Industries Inc.'s $150 million of 10-year convertibles and PMC-Sierra Inc.'s $215 million of 20-year of convertibles.

No gray market was seen in either deal, but of the two, PMC-Sierra appeared to gain the most favor, with one Connecticut-based buyside source putting his vote behind the 20-year paper with puts in years seven, 10 and 15.

PMC-Sierra launched its convertible deal ahead of the bell and it was seen pricing late Thursday. The convertibles were talked to yield 2.0% to 2.5%, with an initial conversion premium of between 25% to 30%.

Merrill Lynch was bookrunner for the Rule 144A deal. The offering has a greenshoe of $35 million and hard call protection for seven years.

PMC-Sierra was seen 2.4% cheap at the middle of price talk using a credit spread of 425 basis points over Libor and 38% volatility to model it out, according to a New York-based sellside analyst.

Another source said PMC looked fairly valued at about 102 using a credit spread of 450 bps over Libor and 35% volatility.

Meanwhile, EnPro, which launched its deal late Wednesday, was talked at a yield of 2.875% to 3.375% and a conversion premium of 27.5% to 32.5%.

The deal was seen 3.8% cheap at the midpoint of talk using a credit spread of 325 bps over Libor and a volatility of 30%, according to one source.

A second source said the paper looked good at about 101 using a credit spread of 350 bps over Libor and 28% volatility.

The underlying shares of both companies got clobbered in the market on Thursday, eliciting some speculation about whether the deals would get done as planned.

Charlotte, N.C.-based EnPro, which makes sealing products, metal polymer bearings, compressor systems and other engineered products, saw its shares close down $4.16, or 13.8%, to $25.99.

Santa Clara, Calif.-based communications-chip maker PMC-Sierra saw its shares close down $1.03, or 12.99%, at $6.90 after reporting third-quarter results late Wednesday that showed profit declined and sales missed analysts' consensus estimate. Global Equity also downgraded the stock to "neutral" from "overweight" on predictions for slower revenue in coming periods.

Amgen makes heavy drop

The 0% convertibles of Amgen traded lower as its shares lost 5% on its somewhat disappointing revenue figures.

"Amgen had its big run last quarter," said a trader at a sellside desk. "Now it's payback time."

But one buyside market source noted that on Thursday "a lot of short covering is taking place, yet the price will not go up. Given the amount of short covering the price should have popped."

Believers in Amgen, however, are showing patience.

"The pipeline is there," one buyside analyst said. "Delivery takes time, so if you're not a long-term investor then Amgen can be very painful."

Panitumumab is one of Amgen's new drugs that is being closely watched by Wall Street.

In its earnings report, Amgen said that panitumumab's interim results from two ongoing trials support its ability to provoke tumor shrinkage when administered as a single agent every other week in patients with colorectal cancer who had failed prior intensive chemotherapy.

The 0s traded at 77.75, compared to trades at 78.4 and 78.5 on Wednesday. Amgen shares closed down $3.99, or 5%, at $74.10.

Downgrade weighs on Apria

The Apria Healthcare 3.375% convertibles were lower after Banc of America Securities downgraded the company's stock to "sell" from "buy."

The drastic rating change was made because Banc of America analyst Gary Taylor suggested that it appears unlikely that home healthcare provider Apria, having put itself up for sale, will find a suitor.

Apria's 3.375s traded at 95.5 versus a stock price of $22.5. Later the 3.375s traded a point higher at 96.5. The shares actually closed off its lows, at $23.03, or down $1.07, 4.4%.

JetBlue bumps but ends lower

The convertibles of JetBlue bumped around but ended lower after the low-cost carrier reported earnings that left investors "not thrilled," and later S&P cut its debt ratings of JetBlue deeper into junk.

The Forest Hills, N.Y.-based carrier reported earnings of $2.7 million, or two cents per share, down from $8.1 million, or seven cents per share, in the same quarter last year. It attributed 67% drop to higher fuel costs and the effects of Hurricane Katrina.

The airline also said that it expected to report a loss for the fourth quarter and full year, and said it would cut fourth quarter capacity growth.

Citing reduced earnings, S&P cut JetBlue's corporate credit rating to B+ from BB-. The rating agency also cut the airline's senior unsecured debt rating to B- from B.

JetBlue's 3.5% convertible, which has a lower 10% delta, traded at 88.25 versus a share price of $18.50. The 3.75% convertibles were at 95.25 versus a share price of $18.50.

On Tuesday the 3.5s were at 87 and the 3.75s were at 98.50, and a few days prior to that the 3.75s had been over par at 100.75.

JetBlue shares closed down $1.49, or 7.6%, at $18.05.

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