Financials mostly weaker; Medtronic, Teva mixed; Digital River strong despite steep slide in shares

By Rebecca Melvin

New York, Nov. 18 - Convertible financial names, particularly insurers, were mostly weaker Tuesday, pressured by downward moves in their underlying shares, but energy was better and health care convertible stalwarts like Medtronic Inc. and Teva Pharmaceutical Industries Ltd. were mixed.

Digital River Inc. was a bright spot as its bonds remained strong despite a slide in their underlying shares to a 52-week low after Stanford Group downgraded the e-commerce software service company to "sell" from "hold."

"It's nice to see a convert do what it's supposed to do," a West Coast-based sellside trader said, regarding the downside protection afforded by the Digital River convertibles.

Transocean Inc. was active and up in line with its shares, with at least some of the activity spurred by news that holders will be permitted to convert the paper in December, although few, if any, were expected to do so, traders said.

Prudential Financial Inc. was a little weaker, including its floating-rate convertibles that are putable in December, as it seemed generalized fear gripped the sector, with question marks surrounding insurers in particular.

MetLife Inc. saw its mandatory convertibles due in early 2009 trade down at 6.

Citigroup Inc. also extended its slide.

Financials under pressure

Volatility in insurers remained high, and there was "lots of fear" in the market regarding financials, according to a New York-based sellside trader.

During the session, Federal Reserve chairman Ben Bernanke and Treasury secretary Henry Paulson testified before the House Financial Services committee about the $700 billion Troubled Asset Relief Program.

Bernanke said there are some signs that credit markets are improving, although they remain strained. He said risk spreads remain very elevated and there has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks.

Paulson said that because conditions worsened substantially, the Treasury decided it would be more effective to inject capital directly into banks instead of buying troubled assets. He believes the economy will not recover as fast as anyone would like, but it will recover faster because of the TARP.

Prudential Financial's floating-rate convertibles of 2036, putable in December, was quoted in a range of 97.625 bid, 98.25 offered, compared to 98 bid, 98.5 offered on Monday.

The Prudential Financial floating-rate convertibles of 2037 were quoted at 98.125 bid, 98.25 offered at the end of the day, which was surprisingly stronger than the '36s, a New York-based sellside trader said.

MetLife 6.375% mandatory convertibles due 2009 traded at 6 versus a closing share price of $20.72, compared to 6.50 versus a share price of $22.23 on Monday.

Shares of the New York-based insurer fell $1.51, or nearly 7%, in heavy volume.

Citigroup's 6.5% convertible preferred shares stood at 25 at Tuesday's close, compared to 26 on Monday.

Shares of the New York-based bank and financial services company lost another 6%, or 53 cents, to close at $8.36.

CIT Group was a big loser, with its shares down 25.5% to $2.60. Its 8.75% convertible paper traded at 16.5 versus a share price of $2.75 intraday.

Medtronic lower outright, better hedged

Medtronic was lower outright but held up on a hedged basis after the Minneapolis-based medical device maker lowered full-year earnings-per-share and revenue forecasts and reported fiscal 2009 second-quarter results.

Medtronic's 1.5% convertibles due April 2011 (series A) were seen closing at 88 versus a share price of $31.60, compared to a close of 90.5 versus a stock price of $36.42 on Monday.

Medtronic's 1.625% convertibles due April 2013 (series B) closed at 80.75 compared to 84.5 on Monday.

Shares fell 13%.

Based on year-to-date results and an anticipated $300 million to $400 million negative revenue impact in the second half of the fiscal year from current exchange rates, the company projected fiscal-year 2009 revenue of $14.6 billion to $15.0 billion, adjusted from previous guidance of $15.0 billion to $15.5 billion.

The company revised earnings guidance based upon two factors not contemplated in the previous guidance of $2.94 to $3.02 per share. The first factor is a 3 cent per share charge associated with the write off of inventory made obsolete by the recent launch of angioplasty products on a rapid exchange delivery system in the United States. The second factor is the recently closed acquisition of CryoCath Technologies, which is expected to have a 1 cent per share dilutive impact in fiscal 2009.

Taking these factors into account, the company projected fiscal-year 2009 diluted earnings per share of $2.90 to $2.98. The company stated it was comfortable with the midpoint of that range.

For its fiscal second quarter ended Oct. 24, Medtronic reported $3.57 billion in revenue, a 14% increase over the same period a year earlier, and the company noted that revenue outside the United States grew 18%.

Net earnings were $571 million, or 51 cents a share, a decrease of 14% and 12%, respectively, after adjusting for certain litigation after-tax charges of $176 million.

The company makes cardiac rhythm, cardiovascular and core spinal and biologic products.

Transocean trades sideways to slightly better

Transocean's 1.625% (series A) convertibles due 2037 were seen closing at 87 versus a stock price of $70.36 Tuesday, compared to 86.5 versus a share price of $69.32 on Monday.

Transocean's 1.5% (series B) convertibles due 2037 were indicated to close at 81.3 compared to 80.6, and the Transocean 1.5% (series C) convertibles were little changed to slightly better.

After the close Monday, Transocean announced plans to move its place of incorporation to Switzerland from the Cayman Islands. The move triggers holder conversion rights under the papers' indenture, which perhaps stirred up initial interest.

But because the issues are trading well below par, nobody will convert them, sources said.

The Houston-based oil-services company said that the paper would be convertible in December.

The current conversion rate of the B notes is 5.9310 ordinary shares per $1,000 principal amount, which is equivalent to a conversion price per ordinary share of about $168.61.

Teva slips

Teva Pharmaceutical's 0.25% convertibles due 2024, known as the B paper, were seen closing at 122.9 Tuesday, compared to earlier trades at 124.548, 125.866 and 125.491 intraday.

The Teva 0.5% convertibles due 2024 closed at 112.6 Monday, compared to 116 on Monday.

Shares of Teva closed down 1.6% at $42.19.

Trades couldn't account for the weakness. The company and Active Biotech said they completed patient enrollment for the phase 3 clinical trial of Allegro in relapsing remitting multiple sclerosis.

The study is designed to evaluate the efficacy, safety and tolerability of the oral investigational compound Laquinimod versus placebo in the treatment of RRMS.

Digital River trades over 99

Digital River's 1.25% convertible senior notes due 2024 were seen late in the day at 99.25 bid, 99.375 offered versus a share price that tumbled 17% to $18.66.

The bonds, which are putable in January 2009, have stuck while the stock has fallen out of bed, a trader said. For the year to date, the shares are down 43%.

Shares of the Eden Prairie, Minn., company fell $3.74.

A Stanford Group analyst downgraded the name to sell because of "profoundly weak" consumer spending that could hurt its business.

Because of the cost-effectiveness of online distribution, analyst Rod Ratliff said investment in e-commerce will likely continue, and Digital River will survive the economic downturn because of its very strong balance sheet.

But that won't compensate for substantially weaker consumer spending and the fact that the company's revenue model depends on transaction volumes when volumes appear to be declining, Ratliff said.

Mentioned in this article:

Citigroup Inc. NYSE: C

Digital River Inc. Nasdaq: DRIV

Medtronic Inc. NYSE: MDT

MetLife Inc. NYSE: MET

Prudential Financial Inc. NYSE: PRU

Teva Pharmaceutical Industries Ltd. Nasdaq: TEVA

Transocean Inc. NYSE: RIG

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