Convertibles softer; General Growth wallows in the teens, Enzon lower; Carrizo down outright

By Rebecca Melvin

New York, Nov. 6 - The convertible bond market was quieter and a little softer Thursday compared to earlier in the week, as dour economic data pulled stock markets lower, traders said.

"Most convertibles are coming in with the stock market a bit today," a New York-based sellside trader said.

The softening, however, comes on the heels of "a pretty serious rally for the last week, so now we're 'settling in' off the lows," a Connecticut-based sellside trader pointed out.

Data revealing further signs of economic weakness hit the markets in general. Retail sales figures for October were lower, and the Labor Department's initial unemployment benefits claims rose by 122,000 in late October to 3.84 million.

In addition, anticipated weaker demand for oil sent crude prices down $4.53, or nearly 7%, to $60.77 per barrel.

The Dow Jones Industrial Average closed down 443.48 points, or 4.9%, at 8,695.79; the S&P 500 fell 47.9 points, or 5%, to 904.88; and the Nasdaq lost 72.94 points, or 4.3%, to 1,608.70.

Hurting the convertibles market in particular was concern that de-leveraging and redemptions will continue possibly through the end of the year, and that is expected to "keep a lid on things," a trader said.

Earnings news prompted some convertibles trades Thursday.

General Growth Properties Inc. convertibles were seen trading in the teens amid a downgrade by UBS to "neutral" from "buy," and after disappointing earnings and a lack of information from the real-estate investment trust about upcoming maturities slammed the stock lower by 50% on Wednesday. On Thursday, the stock recovered by 5%.

Also among REITs, National Retail Properties Inc. saw its 5.125% convertibles trade little changed at 78 versus a stock price of $15.25.

Enzon Pharmaceuticals Inc. was lower in line with its underlying shares, which dropped 10%. On Wednesday, the Bridgewater, N.J.-based biopharmaceutical firm reported sold third-quarter earnings but said it hadn't yet been able to spin off its biotechnology segment as intended.

Carrizo Oil & Gas Inc. dropped 3 to 4 points outright after the Houston-based natural gas and oil company reported disappointing earnings.

Among other names in trade was Sirius XM Radio Inc., which said it is in discussions with several financial institutions regarding a financing to replace its 2.5% convertible notes due 2009.

GGP wallows ahead of maturities

General Growth Properties' 3.98% exchangeable senior notes due 2027 traded at about 17 versus a stock price of $2.36 on Thursday.

In August, the notes were at 74 versus a share price of almost $27.00.

Thursday's $2.36 closing share price was up nearly 5% compared to Wednesday when the Chicago REIT reported third-quarter earnings that missed consensus and the shares plunged nearly 50%.

The REIT also has debt coming due this month and lots of work ahead of it in terms of restoring its balance sheet as it faces the headwinds of a weak retail environment and commercial real estate lending conditions.

The company's secured property loans on Fashion Show for $650 million and Palazzo for $250 million mature Nov. 28. Both carry corporate recourse guarantees.

The REIT was criticized for not supplying more information on how that debt will be funded.

"They're probably clamming up because they are in trouble," a Connecticut-based buysider said.

"Probably something works out; there's enough value in the properties," he said. "The mortgages in question have a recourse guarantee that could tip it into bankruptcy. But I think they can extend and get some sort of combo of asset sales or joint venture arrangements to keep it afloat."

The buysider watches the name but wouldn't be a buyer at this point despite its cheapness.

"By the time they get to 10 cents to the dollar, there are some traders that would buy it. It's almost like a call option on a positive action; and there's not too much at risk as there will likely be some recovery value depending on how it works out," the buysider said.

General Growth reported third-quarter core funds from operations of $206 million, or $0.64 a share, which missed the consensus estimate of $0.76 core FFO for the quarter.

At the forefront of investors' minds is the upcoming maturities. According to a CreditSights report Thursday, "We would not be surprised if GGP is able to eventually roll the mortgages at Fashion Show and Palazzo before they are due given the high quality and potentially broad interest of the assets, but it is near impossible to call with any degrees of certainty given the lack of success the company has had so far in extending the terms as well as the absence of any color from the company on its refinancing discussions."

Market tone soft

Although Thursday's market was kind of quiet and the tone was softer, "it was a far cry from a couple of weeks ago," the Connecticut-based buysider said.

"There's the tail end of earnings season, and the bad economic data to get through; and some combination of post-election euphoria returning to the reality of a pretty significant recession," he said.

"Guidance came in, and the views of 2009 look soft as well. We'll probably have a retest of lows and see the S&P with an 800 handle," he said.

In addition there will be another round of speculation beginning with what president-elect Barack Obama will actually do as president. "What additional costs or regulations are going to be there? Will it weigh or help?" the buysider said.

"With the latest rally you had the cost of funds coming down, Libor easing and additional progress on the TARP, as well as the election lead up taking at least one uncertainty out of the market. But we've removed one uncertainty and are about to put another in its place," he said. Plus the economic picture is developing to the downside, he added.

He predicted it will oscillate going forward, but he was quick to point out the upside compared to September and October. "But before the government's funding measures kicked in, people were talking about the Great Depression. Now we've got over that hurdle, but now with auto sales and retail sales, it looks like pretty tough times at least until the early part of next year and that's going to weigh on valuations," he said.

Enzon trades at 65

Enzon's 4% convertible due 2013 traded at 65 versus a share price of $4.50 and were seen closing lower Thursday at 63.66, compared to 67.69 on Wednesday.

Shares of the Bridgewater, N.J.-based biopharmaceutical company closed down 10% at $4.32.

For the three months ended Sept. 30, Enzon reported a net loss of $2 million, or $0.05 on a diluted per-share basis, as compared to a net income of $87.5 million, or $1.23 on a diluted per-share basis, for the third quarter of 2007.

In 2007, the third-quarter results were impacted by the $88.7 million net gain from the sale of a portion of PEG-INTRON royalty assets.

"The company remains strong and we continue to see growth and stability in our marketed products. Unfortunately the volatile external markets impacted our ability to complete the sale of our specialty business at this time. We continue our process to spin off the biotechnology business and remain open to any new opportunities should they arise," Jeffrey Buchalter, chairman and chief executive officer, said in a release.

The 16% growth in net product sales for the quarter compared to the same period of 2007 was attributable primarily to higher revenues from Oncaspar for the treatment of Acute Lymphoblastic Leukemia, and Adagen for the treatment of a type of Severe Combined Immunodeficiency Disease, according to a company release.

Carrizo earnings 'no surprise'

Carrizo's 4.375% convertibles due 2028 were seen in trade Thursday at 51.5 bid, 52 offered, compared with a previous level of 55.5, according to a West Coast-based sellside trader.

The disappointing earnings were due to a number of things that were no surprise, he said, including lower oil and natural gas prices.

The yield on the convertibles at this level is high at 21.375% for a 4.5-year put, the trader said.

Mentioned in this article:

Carrizo Oil & Gas Inc. Nasdaq: CRZO

Enzon Pharmaceuticals Inc. Nasdaq: ENSZN

General Growth Properties Inc. NYSE: GGP

National Retail Properties Inc. NYSE: NNN

Sirius XM Radio Inc. Nasdaq: SIRI

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