Liquidity better, but pricing still pressured; AMD, Evergreen lower after earnings, but Huntington higher

By Rebecca Melvin

New York, Oct. 17 - Convertibles players on Friday weren't in complete agreement about the market; but perhaps that was a positive sign since last week things were incontrovertibly bad.

Some pointed out that credit markets continued to deteriorate despite the week's intermittent stock rallies, while others focused on the fact that liquidity was on the rise and some convertible issues had strengthened.

Options expiration was said to be the focus of the day, with one trader predicting that volatility will quiet down as the pressure abates on hedge funds to shrink asset size.

Some expect more cash will need to be raised, but anticipate that it will set up a supply and demand dynamic that can correct rather quickly compared to credit issues.

Stock markets gyrated with sickening velocity though the week, ending on the upside, however. Meanwhile corporate bond spreads were at all-time wides, and economic data continued to highlight signs of recession.

Nevertheless there was evidence of thawing of financial markets, with modest improvements in key inter-bank lending rates and new issuance in the investment-grade straight bond market.

Friday's convertibles market quieted ahead of the weekend, but in general it seemed like liquidity had improved during the week, even as pricing remained under pressure.

Advanced Micro Devices Inc. weakened despite posting third-quarter results that beat estimates after the close Thursday.

Evergreen Solar Inc. was also lower Friday after reporting earnings late Thursday.

Nortel Networks Inc. was in action to the downside, but Advanced Medical Optics Inc., which saw its shares close up 12%, was higher.

Huntington Bancshares Inc. also reported earnings, but its convertible preferreds weren't heard in trade, although they were indicated higher.

Looking ahead, Nabors Industries Ltd., which has been under pressure, and SanDisk Corp. report earnings on Monday. While a bevy of financials report on Tuesday, including Fifth Third Bancorp., KeyCorp, Webster Financial Corp. and National City Corp.

AMD weakens on loss that beat estimates

Advanced Micro's 6% due 2015 traded early at 37, which was down from 40 earlier this week, even as its shares shot up 10% to $4.52.

Later the 6% convertibles were seen closing at 37.55 against a share price of $4.31, which was up only nine cents, or 2% by the end of the day.

Advanced 5.75% convertible due 2012 closed at 45.5 versus the $4.21 share price, compared to a recent trade at 50.5 versus $4.45.

Last week the Advanced Micro 5.75s jumped to 55 versus $4.59 after the Sunnyvale, Calif.-based chipmaker announced that it was spinning off its fabricating plants into a $5.7 billion joint venture with Abu Dhabi's state venture capital firm.

A day later, the convertibles retraced those gains, trading at 47 versus $4.05.

A Connecticut-based sellside trader said there has been little demand for the semiconductor company's convertibles recently despite the credit positive news last week.

Another trader said there was probably some technically-driven selling going on Friday that pushed the convertibles lower since the company posted a smaller-than-expected loss.

Advanced Micro said its net loss for the third quarter was $67 million, or 11 cents per share, compared to a loss of $395 million, or 71 cents a share, in the year-earlier period.

Excluding one-time items, Advanced Micro posted an eight cents per share loss, which was better than the loss of 39 cents that analysts had been expecting.

Revenue rose to $1.78 billion, and excluding licenses, it was $1.585 billion, which was better than the $1.48 billion analysts estimated.

Graphics chips boosted performance as did its quad-core 45 nanometer processors, the company said. The company expects a flat fourth quarter.

Evergreen Solar slips outright

Evergreen Solar's 4% convertibles due 2013 closed down at 40.5 versus a share price of $3.51, compared to 42.5 versus a closing share price of $3.87 on Thursday.

Shares of the Massachusetts-based solar company closed down 9% after reporting a worse-than-expected loss

The company lost $23.9 million, or 18 cents a share, compared to a loss of $4.7 million, or four cents a share, in the year-earlier quarter. The most recent quarter's result missed the analysts' consensus loss estimate of 10 cents per share.

Evergreen was also downgraded to "hold" from "buy" by Wedbush Morgan. But a Piper Jaffray analyst wrote in a research note that Evergreen should be able to remain competitive and achieve significant earnings power by ramping up capacity in 2009. Still he noted risks for its business in Europe related to project delays in Germany and reduced European government incentives to develop solar power.

Nortel lower, but Advanced Medical higher

Nortel Networks 2.125% convertibles due 2014 traded at an "ugly" 34, one trader reported Friday. But the issue was seen closing a bit above that level at 38.875 versus a share price of $1.58, compared to 44.625, versus a share price of $1.60 on Thursday.

Shares of the Canada-based telecommunications equipment company were volatile in thin trade and closed down two cents, or 1.25%, at $1.58.

A sister issue, the Nortel's shorter-dated 1.75% convertibles due 2012 were seen closing higher than the B paper at 46.875, but lower compared to Thursday when it closed at 47.125.

Santa Ana, Calif.-based Advanced Medical was higher Friday. Its 3.25% convertibles due 2026 were seen closing at nearly 43, compared to about 40 on Thursday.

Shares of the medical-device maker gained pretty steadily through the session, to close up 81 cents, or 12%, to $7.50 on higher-than-average volume.

Huntington earnings down but beat estimates

Huntington Bancshares' 8.5% convertible perpetual preferred was indicated to have risen to 855, versus a share price of $9.25 on Friday, compared to 800.875 versus a share price of $9.48 on Thursday. The bank's shares fell 2%.

The Ohio-based regional bank's third-quarter net income fell 17% to $115.2 million, or 28 cents a share, compared with $138.2 million, or 38 cents a share, a year earlier.

While the result beat analysts' estimates by four cents, Huntington upped its credit-loss provisions to $125.4 million in the quarter, nearly triple that of a year earlier, and lowered its outlook again for 2008 earnings to $1.12 to $1.16 a share, from $1.25 to $1.35 a share.

Chairman and chief executive Thomas E. Hoaglin said he expects fourth-quarter results to mirror those of the third quarter in many ways. "2008 has turned out to be a much more challenging year than anyone ever envisioned," he said, adding that he thought third-quarter performance was "solid."

The result comes amid a backdrop of the overall global financial system showing small, but perceptible signs of improvement.

There were "modest improvements" in the key Libor-OIS and TED spread indicators, but they were are not nearly enough to signal normal inter-bank lending, independent research firm CreditSights said in a report Friday morning.

The TED spread is the difference between the interest rates on three-month Treasuries and the three-month eurodollar lending rate.

Traders were buzzing about the TED spread last week when it was widening unbelievably, and making people nervous about getting the banks to the point where they could lend to one another, a Connecticut-based sellside analyst said.

The TED spread has risen vertically in recent weeks to as high as 464 basis points last Friday, up from 50 bps in June and 100 bps in September.

"The government is lending to banks, but banks are lending to no one," according to the CreditSights report.

The truncated holiday week in U.S. fixed income markets was initially met with optimism in the equity market on the heels of expanded global support of the financial system. Broadly speaking, however, inter-bank lending and credit markets are not functioning in the normal realm, the report said.

"The decline in Libor suggests a slight thawing, but it is clear that credit markets will need much more time to digest and react to new programs put in place. The numerous programs announced have come so fast that confusion about the full slate of efforts still exists among market players," CreditSights analysts said in the report.

About the TED spread, CreditSights said it's "well improved," but this government versus bank funding spread level "remains onerous and well above the 2008 average of 140 bps, which was elevated."

The majority of the benefit that has come in the last week is resulting from a drop in Libor. However, a rise in T-bill yields to 43 bps up 25 bps from last week, also contributed to the improvement.

"While the lower Libor rate reflects improved inter-bank funding, the rise in T-bill rates reflects a movement out of the fight to quality trade," CreditSights said.

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