Scottish Re stays high; Reckson rides counter-bid rumors; Invitrogen shrugs off miss; PDL gains in line

By Kenneth Lim

Boston, Aug. 4 - The convertible bond market continued to be driven by quarterly results announcements on Friday, with Scottish Re Group Ltd. hovering near its high for the week after the company reaffirmed its confidence in meeting a December put.

Meanwhile, Reckson Associates Realty Corp. gained further amid speculation that a competing offer for the company may emerge after SL Green Realty Corp's bid to buy the real estate company at a discount to its stock price.

In the biotech sector, Invitrogen Corp. held firm after the company missed estimates for its second-quarter results.

PDL BioPharma Inc. gained slightly outright in line with a modest gain in the stock, with news of a failed drug trial tempering the company's strong second-quarter results.

Also seen trading on Friday was Ceradyne Inc.'s 2.875% convertible due 2035, which gained about 2 points outright in an early trade before the stock fell back later in the day. The convertible changed hands at 109.75 against a stock price of $47.60. Ceradyne stock (Nasdaq: CRDN) declined 1.24% or 58 cents to close at $46.18.

Costa Mesa, Calif.-based Ceradyne on Friday said its second-quarter profit reached $30 million, or $1.10 per share, more than double the $11.4 million, or 46 cents per share, that it earned in the year-ago period. Street estimates were for $1.04 per share.

But the maker of industrial and specialty ceramics also said it had to take a $1.5 million after-tax charge following its own investigation into the timing of stock option grants that go back to 1997. The company said the charge could change significantly as the investigation develops.

Scottish Re rides confidence

Scottish Re's 4.5% convertible putable in December was mostly unchanged on Friday, staying near its week-high after the company reassured investors of its ability to meet the put.

The convertible traded at 96 against a stock price of $7.50 on Friday, more than the low of 74 that the convertible hit earlier in the week after Scottish Re warned of a second-quarter loss. Scottish Re stock (NYSE: SCT) closed at $7.48, up by 10.32% or 70 cents.

"The stock's up, the bonds are probably a point or so higher than they were two days ago," a sellside convertible bond analyst said.

A convertible bond trader remarked that, at Friday's levels, the convertible reflected how sentiment had changed over the week regarding the company's ability to meet the put.

"No one believed me that these would be money good!" the trader said.

Scottish Re on Friday said told analysts at a conference call that it was "comfortable" with its liquidity and the credit implications of meeting the put of its $115 million of 4.5% convertibles.

"We've got sufficient liquidity available to us through either cash at the holding company, cash at other legal entities, to operating cashflow we know we generated and other available facilities to meet that obligation with no concern," the company said.

Scottish Re reported a second-quarter loss of $123.9 million, or $2.31 per share, from a year-ago profit of $1.6 million, or 3 cents per share, and cited "non-recurring, non-cash adjustments" for the loss. The Bermuda-headquartered reinsurance company also said it does not expect to restate results, and has hired Goldman Sachs and Bear Stearns to help chart a strategy that could include building capital reserves, seeking a partnership or selling the company.

A convertible bond analyst said the company's remarks at the conference call were "mixed" and reckoned that there was still "a fair amount of uncertainty and worry about the long-term future of the company."

"I think they stuck to their assurances to the convertible holders that they have the liquidity to meet the put in December... but there are so many moving pieces," the analyst said. "In addition to what the strategy review process is going to be, there's also a concern about whether we've now seen the end of the surprises. It's going to take the company a couple of quarters to prove that they've disclosed everything that needs to be disclosed."

Under the original issue prospectus, the company has the option of paying convertible holders in shares if the convertibles are put back to the company.

"But I think that the company would try very hard not to do that," the analyst said. "It would be a lot of shares at this point. It would be very dilutive to them. I don't think that holders would be all that happy about getting shares. If you thought that you're going to get stock, you could hedge it, but I'm not sure that people are going to want to do that, I think people would rather get cash."

Reckson gains on bid

Reckson Associates' 4% convertible due 2025 gained about 2 points outright on Friday amid speculation that competing takeover offers may emerge after SL Green's bid was seen by some as too low.

The convertible traded at 113.25 versus a stock price of $43.25. Reckson stock (NYSE: RA) ticked up 0.98% or 42 cents to close at $43.22.

SL Green, which manages properties in Manhattan, said Thursday that it was buying Melville, N.Y.-based Reckson and assuming about $2 billion in debt for about $4 billion in cash and stock, which would value Reckson shares at $43.31 apiece based on SL Green's stock price at the time of the announcement. That was below Reckson's closing stock price of $43.95 on Wednesday.

The deal is expected to close in January 2007 and requires the approval of Reckson shareholders.

"I think there's some chatter now that one of the largest holders of Reckson is unhappy with the deal," a sellside convertible analyst said. "So there's obviously some people who think that there will be a counter bid."

Fitch Ratings has put Reckson on watch for a possible ratings downgrade, saying that although SL Green's ability to service its debt was "solid, its funding profile is somewhat constrained."

Invitrogen resists earnings miss

Invitrogen was slightly better on an outright and dollar-neutral basis on Friday after the company's second-quarter results missed Street expectations.

The Invitrogen 3.25% convertible due 2025 traded at 93 against a stock price of $58.125, up by about 2 points outright. Against the same stock price, the 2% convertible due 2023 was 102.75, while the 1.5% convertible due 2024 was marked at 84. Invitrogen stock (Nasdaq: IVGN) fell 9.03% or $5.63 to close at $56.70.

Carlsbad, Calif.-based Invitrogen said late Thursday that its second-quarter profit increased 32% to $19.7 million, or 90 cents per share excluding items. The provider of biological research materials also lowered its full-year earnings outlook to between $3.70 and $3.90 per share, from the earlier forecast of $3.90 to $4.10 per share.

A sellside convertible bond analyst said part of the reason the stock dived as much as it did was that Invitrogen, which also missed estimates in its first quarter and sought to reassure analysts a couple of months ago, is building a bad track record.

"It seems to me that the market is overreacting a little bit, but it could be the last straw for a lot of analysts," the analyst said. "It seems like they're serial disappointers."

But convertible holders have been able to weather the stock's beating because the company's credit quality remains solid.

"The credit's really good," the analyst said. "So you lower your guidance by 5%, the stock goes down 10%, you're still quite a large company...even after this it's a $3 billion market cap company."

PDL in line on mixed news

PDL BioPharma's convertibles were up about 2 points outright and in line with the stock after the company reported better-than-expected second-quarter results but also announced the failure of a drug during trials.

PDL's 2.75% convertible due 2023 was marked at 105.5 against a stock price of $17.25, while its 2% convertible due 2012 was marked at 97.5 against the same stock price. PDL stock (Nasdaq: PDLI) ended at $17.44, up by 1.22% or 21 cents.

PDL said late Thursday that its second-quarter net loss widened to $6.1 million, or 5 cents per share, from $3.4 million, or 3 cents per share, in the year-ago period. But excluding items, the company saw a profit of 17 cents per share, above analysts' estimates of 10 cents per share.

The company also said that its Terlipressin drug, which was aimed at treating advanced liver disease, failed a Phase 3 clinical trial after measurements of improvement in patients treated with the drug did not show "statistical significance."

A convertible bond analyst said the Terlipressin disappointment obviously offset the positive earnings. Although Terlipressin was not seen as a critical product for the company, its failure still means some revenue lost for PDL, the analyst said.

Convertible bond holders will also be disappointed from a hedge perspective because PDL only had a few products in the pipeline, and the failed trials mean one less catalyst to spur volatility in the stock, the analyst noted.

"You're taking something out of the pile of the potential volatility," the analyst said. "It's obviously bad that this drug isn't going to get on the market because of the revenue. It's also bad between now and the date that it was going to launch ... because we were going to see a lot of trading in the stock."

"It's a shame," the analyst said.

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