Credence firm despite downgrades; Cubist gains on FDA approval; Nabors, Transocean up with stocks

By Kenneth Lim

Boston, May 26 - The convertible bond market ended the week on a quiet note as investors headed out for the long weekend, with news-driven activity focused on a handful of names.

"It's pretty much a ghost town," a buy-side convertible bond trader said.

Credence Systems Corp.'s 1.5% convertible due 2008 held up and expanded on a dollar-neutral basis as the stock tumbled amid stock downgrades after the semiconductor test equipment maker scrapped a product development project.

"Depending on what your hedge was it may have expanded a little bit," the trader said.

Cubist Pharmaceuticals Inc.'s 5.5% convertible due 2008 inched up slightly but stayed below par as the stock surged after the biotech company received approval from the U.S. Food and Drug Administration for expanded uses of a key drug.

Also active on Friday was Gilead Sciences Inc.'s 0.5% convertible due 2011, which was seen trading at 95 against a stock price of $56.25, while its 0.625% convertible due 2013 changed hands at 93.25 versus a $55.75 stock price. The convertibles were sold at par in April. Shares of Foster City, Calif.-based Gilead (Nasdaq: GILD), a biopharmaceutical company, closed at $57.16 on Friday, up by 2.44% or $1.36.

"I think a lot of those recent issues have come down quite a bit," a sellsider said.

Nabors Industries Ltd.'s new 0.94% convertible due 2011, however, managed to eke out a slight gain outright on the back of recent share movements. The convertible, which was issued on May 18, was flat and in line with the stock at 99.5 against a stock price of $35.625 on Friday. Nabors stock (NYSE: NBR) declined 0.67% or 24 cents to close at $35.75. Nabors is a Bermuda-headquartered land drilling contractor.

Elsewhere in the oil and gas sector, Transocean Inc.'s 1.5% convertible due 2021 was up about a point on an outright basis on a modest gain in the stock. The contract driller's convertible traded at 113.5 versus a stock price of $80.75 on Friday. Shares of Houston-based Transocean (NYSE: RIG) rose 0.15% or 12 cents to end at $81.12.

Credence expands amid stock downgrades

Credence Systems' convertible held firm in the face of its tumbling stock on Friday after the company scrapped a key development project and several analysts downgraded the stock.

The semiconductor test equipment maker's 1.5% convertible due 2008 was marked at 88.5 bid, 89.5 offered against the closing stock price of $4.67, a sell-side convertible trader said. Credence stock (Nasdaq: CMOS) fell 28.59% or $1.83 on Friday.

"When the stock cracked the bonds held up pretty well, expanded about 3 points," the trader said. "At the end of the day they came in for sale, probably brokers cleaning residual positions for the weekend."

Credence said Thursday after the market closed that it was stopping work on a development project for next-generation flash memory testing. The company cited weak demand in the memory segment and reduced spending by customer Intel Corp. for ending the Kalos project.

Milpitas, Calif.-based Credence also guided for a third-quarter loss of 9 cents to 11 cents, below the 8 cents per share profit analysts were expecting.

Analysts at Merriham Curhan Ford and Co., ThinkEquity Partners and Global Crown Capital downgraded the stock, while Credit Suisse maintained its underperform rating. Citigroup maintained a hold recommendation on the stock, but its analyst Timothy Arcuri called the stock "dead money" in a report.

"If you're a stock holder or if you're just holding the bonds outright you may be somewhat disturbed, but it didn't seem to be a credit story," a sell-side convertible analyst said. "It was certainly a bad result from the point of view of the stock holder...the company has been erratic in their performance recently, but it was already kind of a turnaround story, they still appear to generate a little bit of cash, it doesn't look to me like they're going to be hugely cashflow negative for the next couple of quarters."

The semiconductor industry has always been "lumpy," so the reports are not necessarily a big concern in terms of the company's credit, the analyst said.

"The only caveat that I would have is there's beginning to be more concern now in the semiconductor space about what the second half will look like," the analyst added. "That might be the softening that Credence saw this quarter, but whether it's going to get much worse is going to be difficult to say."

The analyst said the bond was now trading much closer to its investment value.

"They were at least worth a look this morning [Friday], the kind of situation where it may be kind of interesting for either an outright account or someone who likes to set up low-delta hedges," the analyst said.

Cubist gains slightly on stock jump

Cubist Pharmaceuticals' convertible inched up about half a point outright on Friday after the stock soared on news of a drug's approval by the Food and Drug Administration, but convertible bond traders said the notes were not equity-sensitive.

Cubist's 5.5% convertible due 2008 was seen trading at 98 against a stock price of $24.75, while Cubist stock (Nasdaq: CBST) climbed 22.31% or $4.74 to end at $25.99.

"They expanded a little," a buy-side convertible bond trader said of the convertibles. "It's a busted bond anyway. It was kind of a highly anticipated announcement. It ticked up half a point or so. It's a pure credit play, no equity sensitivity."

Cubist said Thursday after the market closed that the FDA approved its application to expand marketing for the intravenous antibiotic Cubicin. Cubicin, which was previously approved as a treatment for certain skin infections, may now be sold as a treatment for certain bloodstream infections as well. Cubist said Cubicin will be the only intravenous antibiotic given the green light to treat those bloodstream infections. The Lexington, Mass.-based company maintained its full-year revenue guidance at $190 million to $205 million.

A sell-side convertible bond trader said that while the news did not make much of an impact on the company's existing convertible, it could lead Cubist to tap the capital markets again as it launches its marketing of the drug.

"What's interesting there is the potential for another deal or so from Cubist," the trader said. "But I don't know how or if they're able to go out and sell another convert."

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