Convertibles market moves mostly in-line, dollar neutral; Best Buy, Cephalon gain; Affymetrix drops

By Rebecca Melvin

Princeton, N.J., Jan. 6 - Against a backdrop of stronger stocks and energy markets, the convertibles market remained fairly busy on Friday, capping off a surprisingly ebullient first week of trading for 2006. Buyers still dominated the market, pulling prices up on an outright basis. But on swap, or a hedged basis, prices were mostly in line, traders said.

"I think everyone was surprised at how well the market did this week," a New York-based sellside trader said. As for Friday, "The outrights are doing great, but there were no real credit or volatility moves, so things were mostly in-line," he said.

Best Buy Cos. Inc. was active in trade, gaining in line with its underlying shares, after reporting a better-than-expected 5.8% rise in same-store sales for December.

Other retail names were also trading in a continuation of moves initiated earlier this week amid better-than-expected sales figures, including The TJX Cos. Inc. and The Men's Wearhouse Inc. Dress Barn Inc.'s 2.5% convertibles due 2023 flirted with double par this week, with trades on Thursday at about 195.

In biotechnology, Alkermes Inc. and Cephalon Inc. remained strong on heady expectations for their promising alcoholism treatment drugVivitrol, which received an approvable letter from the FDA last week.

But on the downside was Affymetrix Inc., which lowered for a second time its fourth-quarter revenue outlook.

In energy, Houston-based oil-services company Halliburton Co. saw its 3.125% convertibles trade little changed at about 182.125, as its shares notched a 2% gain. And Oil States International Inc., based in the same town, was active amid trades sparked by volatility, according to a West Coast sellside trader.

Utility names were also mentioned Friday, including Entergy Corp., which was at 50.5 versus a share price of $70, compared to 49.7 versus $68.50 on Dec. 30.

NRG Energy Inc. was higher at 1295 versus a stock price of $46.75, compared to 1291 bid, 1292 offered versus a share price of $47.12 on Dec. 30. Duke Energy Corp. was also mentioned as active in trade on Friday.

On Wednesday Merrill Lynch & Co. said that stocks in the utilities sector looked poised to outpace the broad market for a third year in a row.

Merrill Lynch analyst Steven Fleishman said in a research note that utilities have "at least an even chance" of outperforming again in 2006, based on projected earnings growth of about 10% through 2008.

In technology, strong advances for Yahoo Inc. and Google Inc. drove the technology sector, with Yahoo's 0% convertibles due 2008 at 211 to 212.

Intel Corp.'s new 2.95% convertibles were also better Friday at 101.5 versus a share price of $26.35, compared with 97.5 versus a share price of $24.96 at the end of last week.

"What I'm afraid of is that we have a repeat of 2005 when everyone was on the same side of the trade - everyone was a buyer - and then all of a sudden everyone was a seller," a West Coast-based sellside trader said. "Everyone says they're going to sell into the buying and buy into the selling, but I've never seen any evidence of that."

A second trader echoed that fear saying the market can turn around very quickly and he's seen it happen before.

While the secondary market didn't need any priming for the week through Jan. 6, the same was not true for the primary market. Only one new deal emerged, a $500 million mandatory from NRG, which had been seen on the horizon since the fall.

That deal, in conjunction with $1 billion of common stock and $2.6 billion of unsecured notes, is expected to price on Jan. 25.

But at least one market source predicted new issues to begin flowing beginning Jan. 9, having allowed a week after the holiday period for people to get settled back in to work.

Best Buy jumps on sales figures

The 2.25% convertibles of Best Buy gained 3 points outright in line with its shares after the No. 1 consumer electronics retailer said Friday that same-store sales climbed 5.8%, boosted by products like flat-panel TVs.

The Richfield, Minn.-based retailer said that December sales were up 12% overall and that fourth-quarter earnings would be near the top of its earlier guidance.

A Connecticut-based sellside analyst said that with the new price of the 2.25s at about 113, the parity is right around par or a little above. And upside is capped since the bonds are callable in a year, or in 53 weeks, and "that 11 points of premium is going to go away," he said.

He said that given that scenario the Best Buy bonds are unattractive to hedged buyers. "It's much harder to set up. You need a lot of volatility in the common to recapture the premium once the time value disappears," he said.

The Best Buy 2.25s gained 3 points to 112.50 bid, 113 offered. Its shares closed up $3.55, or 8.16%, at $47.05.

As far as names in the retail sector that present opportunities on a hedged basis, the Connecticut analyst said Men's Wearhouse has room for upside and TJX is OK outright. "But there isn't a lot of anything. You've got a flat yield curve, low coupons and a lot of supply disappearing from the market," he said.

Houston-based Men's Wearhouse reported December same-store sales at U.S. shops rose 8.1%, compared with the expected range of 3% to 4%. Total sales climbed 10.6% to $234.5 million from $212 million a year ago.

Suffern, N.Y.-based Dress Barn said its December same-store sales, or sales in stores that have been open at least a year, grew by 8%. Analysts polled by Thomson Financial expected the retailer to report a 5% increase on average.

Cephalon, Alkermes up

The 2% and 0% convertibles of Cephalon were higher again on Friday, in line with a rise in their underlying shares. Alkermes gained as well as traders continue to revel in news that the companies received an approvable letter from the Food and Drug Administration for Vivitrol last week.

Health regulators requested additional data from Alkermes but the company reiterated expectations of a launch in the second quarter.

In just this week alone, Frazer, Pa.-based Cephalon has seen its 2s rise 10 points outright to 157.125 versus a closing share price of $68.81, compared with 147.125 versus a share price of $64 on Tuesday.

Meanwhile, Cambridge, Mass.-based Alkermes' 2.5% convertibles were up 6 or 7 points this week to 157 bid, 158 offered.

Lower guidance douses Affymetrix

The Affymetrix 0.75% convertibles due 2033 traded down about 10 points on Friday to around 146.11 after the Santa Clara, Calif.-based scientific and technical instruments maker issued another warning on fourth-quarter revenue after the bell on Thursday.

The company blamed sales and delays in completing genotyping processing under a services contract.

Based on preliminary data, the company said that that product and related revenue for the quarter ended Dec. 31 will be roughly $15 million below previous guidance. Sales for those products are now targeted at about $105 million, while total revenue would fall to $108 million. In October, Affymetrix lowered previous projections by $10 million.

Affymetrix shares fell $3.62, or 7.7%, to $43.27.

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