Earnings help convertibles extend strength; Ford gains on profit; OSI, Human Genome higher

By Rebecca Melvin

New York, July 23 - Earnings reports drove trading in the convertibles market on Thursday, with paper getting bid up as equities continued to climb.

Ford Motor Co.'s convertible bonds and preferred shares were higher after the Dearborn, Mich.-based carmaker posted a surprise second-quarter profit of $2.3 billion, which was largely related to non-recurring items, including debt reduction and cost-cutting efforts.

Bids were better on both Ford issues, a New York-based sellside trader said.

Terex Corp. convertibles edged up while its underlying shares added nearly 6% despite the fact that the Westport, Conn.-based maker of industrial equipment missed forecasts.

Allegheny Technologies Inc., which fell Wednesday on earnings news, recouped some of that loss on Thursday.

OSI Pharmaceuticals Inc. was stronger on earnings news, and Human Genome Sciences Inc. continued to expand following game-changing news that came Monday about a late-stage trial of its experimental lupus drug.

"What a turnaround!" a Connecticut-based sellside analyst said of Human Genome.

NII Holdings Inc. saw two of its convertible bonds add about 0.5 point each outright after the Reston, Va.-based wireless communications company reported lower second-quarter profit, but reiterated guidance.

Ford gains on profit news

Ford's 4.25% convertibles due 2036 were trading at 18.625 points over parity Thursday, according to a sellside trader, who called the paper "better to buy."

That translated to about 92 versus a share price of $6.98 on Thursday, compared to 88 versus $6.38 on Wednesday, and compared to 83 versus $5.80 on July 1.

The Ford 6.5% convertible trust preferreds due 2032 were at about 25, or 5.5 points over parity, compared to 23 at Wednesday's close.

Ford posted net income of $2.3 billion for its second quarter, versus a net loss of $2.7 billion, or $3.89 per share, for the same period a year earlier.

But the profit was mainly on the back of non-recurring items including its debt reduction initiative in April, which took out 90% of the convertible bond issue. It was originally $4.5 billion in size.

Ford's loss from continuing operations and excluding one-time items was $638 million, or 21 cents per share. Analysts were looking for Ford to report a loss of a little more than 50 cents on that basis.

Revenue fell to $27.2 billion in the quarter, from $38.2 billion a year earlier. Analysts had expected $23.39 billion.

During the second-quarter the car company, which is the only one of the big three that didn't take a turn in bankruptcy court, burned through cash at a much slower pace than in the first quarter.

The company used about $1 billion in cash during the quarter as it controlled incentive spending around the world.

Ford expects the economy will start to come back in the third quarter with further improvement in the fourth quarter and into 2010.

It also reiterated its expectation of returning to profitability in its second quarter.

There was speculation that Ford may issue more equity to reduce its debt.

Terex edges up

Terex 4% convertibles due 2015, which priced May 28, traded at 107 versus a share price of $13.25 during the session. And it was last at 108.383, according to Trace data.

Shares of the company settled higher by nearly 6% at $14.38.

Early this month, Terex convertibles slipped below par to trade at 98.5 versus a share price of $12.06, and that compared to 108.5 versus a share price of $14.40 on June 11.

Late Tuesday, Terex reported a second-quarter loss of $77.6 million, compared to profit of $236.3 million for the same period last year.

It also said that it expects net sales for the year to decline a worse-than-expected 50%, but that it has a liquidity position strong enough to be able to weather the downturn.

Terex will be managing its business for cash in the second half of 2009.

Ron DeFeo, Terex chief executive, said Thursday during the company's second-quarter earnings conference call Thursday that a severe contraction in demand and inventory adjustments continued to lower the company's net sales, which were down 55% in the second quarter as compared to the same period in 2008.

At the same time, Terex's total liquidity increased by $525.1 million during the quarter, reflecting capital markets activity and cash flow generated through improved working capital during the period.

The company ended the second quarter with $1.42 billion in total liquidity, comprised of $938.5 million in cash and $485.9 million of borrowing availability under its revolving credit facility.

"With no near-term debt maturities, our liquidity position and expectations of additional cash flow generation, we are well positioned to weather the current downturn," Phil Widman, the company's chief financial officer, said during the call.

A portion of the proceeds raised through three capital markets issuances during the quarter was used to pre-pay $58.4 million of the company's term loans and to repay revolving credit facility borrowings, according to its earnings release.

In connection with the second-quarter financings, Terex secured an amendment to its credit facility that eliminates financial covenants based on its consolidated leverage ratio and consolidated fixed charge coverage ratio, removing concern over the impact of earnings on covenants during difficult times, Widman said.

Terex had $1.74 billion of total debt at June 30, comprised of $136.2 million of senior bank debt, $1.51 billion of notes and $89.9 million of other debt.

The company announced a second-quarter net loss of $77.6 million, compared to net income of $236.3 million in the second quarter of 2008.

Meanwhile, Allegheny Technologies' 4.25% convertibles due 2014, which priced a day earlier than the Terex paper on May 27, traded at 106 versus a share price of $29.30, which was up from 104 on Wednesday.

NII Holdings recoups

NII Holdings' 2.75% convertibles due 2025 traded between 96 bid, 96.5 offered on Thursday, compared to 95.625 on Wednesday.

The recovery from Wednesday was on the back of better than expected earnings released early Thursday.

The NII Holdings' 3.125% also traded at 83.25 bid, 83.50 offered on Thursday, according to a New York-based sellside analyst.

NII Holdings stock jumped $2.18, or 10.6%, to $22.80.

"They trade outright," the analyst said of the two bond issues, "so the move in the equity wouldn't have had an impact on the converts."

The company, which has a business focus in Latin America, reiterated guidance, but there are still some concerns with the weak economies in Mexico and Argentina, the analyst said.

Mentioned in this article:

Allegheny Technologies Inc. NYSE: ATI

Ford Motor Co. NYSE: F

Human Genome Sciences Inc. Nasdaq: HGSI

NII Holdings Inc. Nasdaq: NIHD

OSI Pharmaceuticals Inc. Nasdaq: OSIP

Terex Corp. NYSE: TEX

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