Convertibles crimped by batch of poor earnings; Hutchinson, Kodak, International Game down

By Rebecca Melvin

New York, July 28 - A raft of earnings disappointments seemed to drive trade in the convertible bond market Wednesday, with names set up on a hedged basis seemingly poised for gains, but with liquidity so low it was difficult to tell if hedge plays did well.

"If you're set up right, yeah, that would be true; but I can't tell if that is the case. It seems the market is taking things mostly lower along with their underlying shares," a New York-based trader said.

The trader said activity was thin, and a second sellsider said there were a lot of calls on Wednesday about convertible markets but not many trades.

An exception was Hutchinson Technology Inc., which traded actively and sank about 6 points outright after the company posted a larger-than-expected loss on revenue that missed estimates. Shares the disk drive suspension assembly maker skidded 13%.

Eastman Kodak Co. was lower, but may have held up somewhat on a hedged basis, after the Rochester, N.Y.-based digital imaging company's narrower loss fell short of estimates and sent its shares down 15%.

Superior Energy Services Inc. was indicated to be a point better ahead of the oilfield services company's earnings report expected out after the close of markets Wednesday. That report came in better than expected.

International Game Technology was also lower by about 4 points outright after the Reno, Nev.-based gaming equipment maker posted weak earnings.

But Newmont Mining Corp. was quiet despite the gold and copper mining company's earnings and revenue miss. It posted higher quarterly profit but missed consensus estimates.

A sellside analyst said that six trades of Newmont bonds were recorded by Trace data, accounting for about $20 million of bonds.

Massey Energy Co. missed its consensus earnings estimate on Tuesday, with UBS lowering its numbers on Massey through 2011 on Wednesday.

Elsewhere in the secondary market, Gilead Sciences Inc.'s newly priced 1% convertibles and 1.625% convertibles were pretty much flat on Wednesday; and Transocean Ltd. was little changed to mixed amid ongoing uncertainty about the outcome of the BP plc oil well leak and the implications for oil drilling in the Gulf of Mexico.

As for the implications for the convertible bond market in light of the earnings misses, one sellsider said, "I'm not seeing a lot of credit changes. The stocks are being affected because forecasts are not being met, and people are guiding lower, crushing for the stock. But for the credit, it probably doesn't affect it."

Hutchinson disappoints

Hutchinson Technology's 3.25% convertibles due 2026 traded in round lots at 73 bid, 73.5 offered and were later reported changing hands at 73, which was down from about 79 previously.

On July 22, the Hutchinson convertibles traded at 80.5.

It was "pretty ugly," a Connecticut-based trader said of Hutchinson, which trades on an outright basis, rather than on a hedged basis.

Shares of the Hutchinson, Minn.-based supplier of suspension assemblies for disk drives dropped 59 cents, or 13%, to $3.82 on Wednesday.

The slide was "on the back of disappointing earnings," a trader said.

The company reported revenue for the quarter of $77.3 million and a loss of 79 cents a share, which was below expectations for revenue of $83.6 million and a loss of 70 cents.

Shipments were down 11% from the previous quarter "primarily due to reductions in disk-drive makers' production plans," the company said.

For its fiscal fourth quarter, Hutchinson expects its suspension assembly demand to be down 5% to 10% sequentially due to loss of market share with certain customers.

It's targeting cost reductions of $25 million to help it weather the reduced demand.

Kodak lower on earnings miss

Kodak's 7% convertibles due 2017 traded at 93.5 versus a share price of $4.50 on Wednesday, according to a New York-based sellsider. Later the paper was indicated lower at 90. And that compared to a trade of 95.75 versus a share price of $5.70 last Thursday.

Shares of the imaging company fell 75 cents, or 15%, to $4.18 on Wednesday.

The company's second-quarter loss from continuing operations was $167 million, or 62 cents a share, down from $191 million, or 71 cents a share, in the year-ago period.

Quarterly sales fell 11% to $1.56 billion. Gross margin widened to 19.3% of sales from 18.5%.

Excluding one-time items, the imaging company said it would have lost 51 cents a share. On average, analysts had forecast a loss of 28 cents a share on sales of $1.75 billion, according to FactSet Research.

Kodak also maintained its outlook for full-year sales of between $7.5 billion and $7.7 billion.

Superior steady ahead of earnings

Superior Energy's 1.5% exchangeable senior notes due 2026 were indicated at 94.5 to 95 on Wednesday, compared to 93.5 bid, 93.75 offered on July 16. Shares of the New Orleans-based company were little changed at $23.83.

Superior's 1.5% convertibles started the month trading into a bid at 91.8 versus $18.69 on swap and sold at 92 outright.

On Wednesday, the company posted better-than-expected quarterly results but said its full-year profit may be hurt by the drilling moratorium in the Gulf of Mexico related to the BP plc well leak.

International Game trades at 110.5

International Game's 3.25% convertibles due 2014 traded at 110.5 versus a share price of $15.20 on Wednesday, which compared to a level of about 114 on Tuesday.

Shares of the Reno, Nev.-based gaming equipment company slumped $1.68, or 10%, to $15.02 on Wednesday.

International Game posted an increase in its fiscal third-quarter earnings, even as its domestic operations, adjusted earnings and revenue fell. Profit was boosted by a tax benefit.

Mentioned in this article:

Eastman Kodak Co. NYSE: K

Gilead Sciences Inc. Nasdaq: GILD

Hutchinson Technology Inc. Nasdaq: HTCH

International Game Technology NYSE: IGT

Massey Energy Co. NYSE: MEE

Newmont Mining Corp. NYSE: NEM

Superior Energy Services Inc. NYSE: SPN

Transocean Ltd. NYSE: RIG

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