RadioShack down on warning; MannKind plans new convertible, existing MannKind paper quiet

By Rebecca Melvin

New York, Jan. 31 - RadioShack Corp. traded down about 2 points outright on the Fort Worth, Texas-based electronics retailer's warning that fourth-quarter earnings will be a lot lower than expected when reported Feb. 21. Some of the 2-point decline came on Monday after the warning late in the day and some came on Tuesday, market players said.

MannKind Corp.'s existing convertibles were quoted wide and appeared to trade in the Street during Tuesday's session after the Valencia, Calif.-based biopharmaceutical company announced that it was planning to price a new convertible as well as stock and warrants to repay debt and shore up its weak financial situation.

MannKind's 3.75% convertibles, which mature in 2013, did trade after the market close at a price that was higher than previous levels, at 60.25, after being quoted at 55 bid, 63 offered during the session, a Connecticut-based trader said.

MannKind plans to sell $161 million of secured convertible notes due 2019 that will yield 7% and that will be convertible at an initial conversion price of $3 per share, according to a regulatory filing.

The notes, to be sold under Rule 144A, are expected to price before the market open on Thursday. They will be secured by a first-priority lien on substantially all of the company's assets, excluding its insulin inventory and subject to other exclusions.

Investment-grade names were the most active segment of the market Tuesday and were seen mostly in line with the underlying shares. Otherwise, the last day of the month was quiet as traders focused on marking their books for January, which looked to have been "a pretty good month for just about everyone," a New York-based trader said.

The month's strength in the secondary market was helped by a move up in stock markets for much of the month. But that updraft appeared to be on the wane as the month drew to a close, resulting in a modest losing streak for stock markets.

In the convertible primary market, there was just $400 million in new issuance in two deals, not counting the new MannKind deal, which is on tap for this week. That low level of issuance meant that vigor in the convert market was not nearly what it might have been, as new paper draws investors' attention, and often causes them to trade around existing paper as well as the new issues.

"Liquidity is still an issue. Things aren't as active as they can be, and a lot of people are trying to do the same trades, and going the same way on things," a trader said.

RadioShack lower

RadioShack's 2.5% convertibles due 2013 were seen at the end of Tuesday at 94.25 bid, 94.75 offered after fairly active trade.

The bonds, which trade mostly outright, or on a low, 10% to 12% delta, were previously around 96 to 97. One market player said they had been as high as 98 before the news.

RadioShack shares slumped $3.05, or 30%, to $7.18 in ultra-heavy volume.

The earnings warning wasn't seen as a credit event, said another market player, given that the RadioShack convertibles are fairly short dated, and given that the news was only from a preliminary release, in which no cash flows or other details were reported.

A second trading source said, "The credit held in there; it's a short piece of paper, but it's still a real company. It will only become an issue if they [RadioShack] have several quarters of this; we'll see."

The consumer electronics retailer warned that it beat fourth-quarter revenue estimates, but missed profit expectations, blaming "significant declines" in its Sprint Nextel business.

RadioShack said fourth-quarter revenue rose about 6% to $1.39 billion from $1.31 billion, beating the analysts' consensus estimate of $1.35 billion.

But fourth-quarter earnings of between 11 cents per share and 13 cents per share were sharply below 51 cents per share reported in the 2010 fourth quarter, and well below the estimate of 37 cents per share. In addition, gross profit margin as a percentage of sales fell to 35% from 41% in the year-earlier period.

Existing MannKind quiet

MannKind's 3.75% convertibles due December 2013 traded late in the day at 60.25 after being quoted at 53 to 55 bid, and 63 to 65 offered. Previously the bonds were seen at 53.

MannKind 5.75% convertibles due 2015weren't heard in trade, but are generally quoted a little higher than the 2013 bonds, which are the ones to be repaid with the new paper.

The longer-dated paper was seen being quoted higher than the shorter-dated paper due to its higher coupon, or yield, a trader said.

The MannKind bonds don't trade frequently, and, in fact, traders said, they hadn't traded in months. So even a new deal didn't do much to pull them into the market.

"People want to see if a deal gets done, and see if the company buys them back," a trader said referring to the 2013 bonds and whether they will trade much in the next several days.

MannKind is a development-stage enterprise and has incurred significant losses since its inception in 1991; nevertheless, one trader said of the MannKind bonds, "people that own them, kind of believe in the story."

As of Sept. 30, 2011, MannKind incurred a cumulative net loss of $1.9 billion and an accumulated stockholders' deficit of $280.8 million, according to a regulatory filing.

"To date, we have not generated any product revenues and have funded our operations primarily through the sake of equity securities, convertible debt and borrowings under a party loan. If we are unable to obtain additional funding in the future, there will be substantial doubt about our ability to continue as a going concern," MannKind stated in the filing.

Valencia, Calif.-based MannKind is a biopharmaceutical company specializing in the discovery, development and commercialization of therapeutic products for diseases like cancer and diabetes.

MannKind to price

MannKind, which is awaiting a regulatory decision on its Afreeza diabetes drug perhaps by year-end, said it planned to price $161 million of seven-year convertibles. The notes, to be sold under Rule 144A, will be secured by a first-priority lien on substantially all of the company's assets, excluding its insulin inventory and subject to other exclusions.

The deal was seen pricing ahead of the market open on Thursday, according to a market source.

Concurrently, the company plans to raise $50 million through a registered public offering of units, with each unit consisting of one share of MannKind common stock and a warrant to purchase 0.6 of a share of MannKind stock. MannKind plans to grant underwriters an over-allotment of units.

Jefferies & Co. Inc., Piper Jaffray & Co. and Cowen and Co. LLC are acting as joint bookrunners of the offerings.

MannKind also said it planned to issue to the Mann Group LLC, which is controlled by MannKind's chief executive Alfred E. Mann, restricted shares of common stock in exchange for cancellation of outstanding debt.

The offerings are being conducted as separate transactions and are not contingent upon each other.

Net proceeds of the convertibles will be used to repay or repurchase MannKind's 3.75% convertible notes due 2013.

Mentioned in this article:

MannKind Corp. Nasdaq: MNKD

RadioShack Corp. NYSE: RSN

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