Kodak improves dollar neutral after CEO comments; Cubist paper adds; Radian extends gains

By Rebecca Melvin

New York, Aug. 30 - Eastman Kodak Co., which has been a staple of the convertible bond market lately, improved on a dollar-neutral basis on Tuesday as the securities tagged along with the underlying shares on a ride upward - and then some - as the liquid capital structure of the loss-making digital photography company continues to trade actively on speculation about its prospects for survival.

The Kodak convertibles added 2.5 points dollar neutral after reported comments by chief executive Antonio Perez in which he said there are many potential buyers looking at investing in the company's patent portfolio.

Cubist Pharmaceuticals Inc. also traded actively with the in-the-money convertibles rising at least several points outright along with a 2% gain in the underlying shares of the Lexington, Mass.-based biopharmaceutical company amid no particular news.

Mortgage insurer Radian Group Inc.'s bonds added another point or so, extending a 3-point gain Monday for the Philadelphia-based mortgage insurer on speculation regarding improved market conditions in that sector, a New York-based sellside analyst said.

Kodak was among names that were rallying in response to better stock prices, and coming back after the entire high-yield market took a beating this summer.

Radian is another name that had come down swiftly in the last few months and was finding a bid again with underlying shares better.

"Credit markets were definitely a little bit better today," the analyst said. Still, the market overall was pretty quiet in the absence of many market participants.

This last week of summer before the long Labor Day weekend is typically quiet, but with the after effects of Tropical Storm Irene and the fact that many postponed vacations are underway means things are even sleepier than usual, sources said.

Residents of New York, Connecticut and New Jersey continue to struggle with prolonged power outages and flooding after devastation wrought by Irene over the weekend.

In addition, "it's pretty quiet because people postponed vacations due to all the market turmoil and volatility earlier in the summer and all the stuff going on in Europe," an analyst said.

"In the last few weeks, the stock markets massively corrected. People thought it was going to stabilize after the debt ceiling, but then it was concerns about Europe, so they didn't feel that they could afford to get away until now," the analyst said.

Trading was expected to peak on Wednesday and then taper off into Thursday and Friday ahead of the long holiday weekend.

"This is a short week," the analyst said.

Equity markets managed to eke out another day of gains, however, following a strong rally on Monday. Data coming in Tuesday was mixed to negative. The S&P/Case-Shiller index showed mixed results for the housing market. Property values in 20 cities fell 4.5% in June from the same month a year earlier, which was a little better than expected.

But the Consumer Confidence Index for August came in at a two-year low of 44.5, which is down sharply from July's 59.2 reading and much worse than the 52.0 expected by analysts.

Kodak improves dollar neutral

Kodak's 7% convertible due 2017 traded mostly in the area of 71 bid, 73 offered with the underlying stock up 20 cents on Tuesday.

But shares actually ended the session higher by 36 cents, or 12%, to $3.40, so the convertible paper went out "feeling stronger," a New York-based trader said.

On Monday, the Kodak convertibles were seen at 67.5 versus an underlying share price of $2.85, which represented about 29 points of premium. On Friday, the convertibles traded at 65 to 65.5.

On Tuesday, the points of premium actually expanded a little bit, contrary to the expectation that they would go down in conjunction with the shares rising.

The paper expanded by 2.5 points on a dollar-neutral, or hedged, basis.

Pulling both the stocks and bonds higher on Tuesday were comments from the company's chief executive that "a large number of people" have been contacted about the company's patent portfolio and a number of people have signed non-disclosure agreements.

Those patents are being held out as a savior for the company. Last week a bullish report on the value of the company's patents caused a rally in the company's securities.

Analysts in that report valued the company's suite of about 1,100 digital imaging patents at about $3 billion, significantly more than the company's current market capitalization.

Another factor in the company's future prospects equation is a ruling by the U.S. International Trade Commission about patent infringement by Apple Inc. and Research in Motion Ltd. That ruling has been postponed probably for a couple of months due to the fact that a judge has retired in the middle of the case and it will take a while for the new judge to get up to speed.

"The bonds are definitely up a lot dollar neutral," an analyst said. "The bond price is increasing faster than the stock price."

The bond had 27.35 points of premium at the mid market at the end of Monday, compared to 27.87 points of premium at the mid market at the end of Tuesday.

Kodak has a "pretty robust capital structure and people are searching what they think would be a pricing discrepancy, in the convertibles, the credit default swaps, the stock options and other securities, the analyst said.

Cubist convertibles rise

Cubist's 2.5% convertibles due 2017, of which there are about $450 million outstanding, traded up by about 4 points outright to as high as 132.

One pricing source saw the paper cross at 131.5 versus an underlying share price of $33.50.

Cubist shares were up by 67 cents, or 2%, at $39.26 at the end of the session.

Cubist also has 2.5% convertibles due 2013, of which there is about $100 million outstanding, but that issue was not heard in trade.

There was no particular news cited for the activity in the name.

Cubist is "a one-trick pony. It has one product, and people aren't fully comfortable with the credit," a New York-based sellside analyst said.

The analyst was referring to its injectable Cubicin antibiotic.

Radian extends gain

Radian Group's 3% convertibles due 2017 traded at 57, according to a New York-based sellsider. That compared to 55.75 bid, 56 offered on Monday, which represented a 3-point gain.

The paper was traded outright. Shares of Philadelphia-based Radian ended down 4 cents, or 1.1%, to $3.47 after rallying 198% on Monday.

On Monday, Radian and the entire mortgage insurer sector was "extremely well bid," an analyst said. He attributed part of the rally to an anticipated announcement from the Obama Administration about a potential federal mortgage refinancing program.

"If they can stay alive long enough, there is a light at the end of the tunnel," the analyst said.

Mentioned in this article:

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Eastman Kodak Co. NYSE: EK

Radian Group Inc. NYSE: RDN

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