Lincare, Alpha Natural add on positive earnings; Waste Connections expands; Annaly prices

By Rebecca Melvin

New York, Feb. 9 - Earnings news continued to drive a portion of activity Tuesday in the convertible bond market, which picked up a notch from Monday's levels.

Lincare Holdings Inc. convertibles moved up with their underlying shares after the Clearwater, Fla.-based provider of respiratory therapy services posted lower fourth-quarter profit that beat expectations.

Alpha Natural Resources Inc. convertibles added 4 points outright as shares gained nearly 5% after the Abingdon, Va.-based coal producer reported a fourth-quarter profit rise.

Ahead of earnings seen out Wednesday, Equinix Inc. convertibles were quiet, but shares of the provider of colocation, interconnect and managed internet technology services gained $1.25, or 1.4%.

A Boenning & Scattergood analyst said growth in demand bodes well for Equinix's earnings, and he upgraded the shares to "outperform" from "neutral."

Waste Connections Inc.'s 3.75% convertibles due 2026 expanded after the Folsom, Calif.-based water and recycling company said it will redeem all of the remaining $200 million outstanding at par plus interest to April 1. Holders may convert their securities until March 31.

Chicago-based air carrier UAL Corp. jumped again, trading at 186.75 versus a share price of $14.80 on Tuesday for the 6% convertible paper due 2029, compared to 169.75 versus a share price of $13.25 on Monday.

In the primary market, Annaly Capital Management Inc.'s newly priced 4% convertibles traded at their discounted issue price of 98.

Annaly Capital was the first new issue to price at a discount in quite a while, a New York-based sellside analyst said, agreeing that the paper was a "tough sell" for several reasons, including because its "structure was complicated."

The bonds are subject to a provisional call with a forced conversion at a 130% price hurdle for the life of the bonds. There is no non-callable period.

Whether the discounted paper will mark a turning point in the market that results in other new issues also pricing at a discount was not known.

"I can't really conclude any trend," the analyst said.

Greece concerns eyed

Credit spreads in general have widened in Europe amid concerns about the credit strength of Greece, a London-based trader said.

"While there aren't very many Greek issuers - there are only a couple outstanding - people are concerned about the knock-on effects in Spain and Portugal," the trader said. "We've seen widening of spreads for Spanish and Portuguese banks...the convertibles are taking the lead from how the financials are trading."

Asian convertibles also saw a slight pickup on Tuesday following recent sell-offs.

"We had quite heavy sell-off in the last couple of days, and we've got a couple of offers that got lifted," the trader said. "What we have had is people fishing around the distressed names...some of the third- and fourth-tier names. People are looking at those with a longer-term horizon, and they think that if there's a sell-off, that's the time to step in."

Lincare adds with shares

Lincare's 2.75% series A convertibles due 2037 traded up to 106.5 versus a share price of $39.25 on Tuesday, compared to at least one trade at 103.875 on Friday.

Lincare's 2.75% series B convertibles due 2037, which have typically traded a couple points higher than the series A paper, weren't heard in trade on Tuesday. But on Monday, the B paper was at 105.924, according to Trace data.

Shares of Lincare gained $1.77, or 4.6%, to $39.95 on Tuesday.

After the close of markets on Monday, Lincare said it earned 61 cents per share in the fourth quarter, which was higher compared to analysts' estimates for earnings of 55 cents per share.

Revenue was about 2% lower because of cuts in Medicare reimbursement rates that were instituted last year, the company said. Lincare expects those rates to be reduced again in 2010.

For the quarter ended Dec. 31, net revenue was $405.8 million, compared with net revenue of $415.1 million for the fourth quarter of 2008.

The company estimated that the 2% decrease was comprised of 13% internal and acquisition growth offset by a 15% negative impact from Medicare reimbursement reductions that took effect in 2009.

Net income for the quarter was $40.6 million, compared with net income of $55.6 million for the prior year's quarter.

Alpha Natural adds

Alpha Natural's 2.375% convertibles due 2015 traded at 109 versus a share price of $42.65, which was up almost 4 points from the previous session. Shares of the coal company added $1.43, or 3.5%, to $41.83 on Tuesday.

Alpha's fourth-quarter earnings of $18 million, or 15 cents a share, compared with $5.6 million, or 8 cents a share, a year earlier. Revenue rose to $787.5 million from $512.8 million in the year-earlier quarter.

Excluding amortization of coal supply agreements and other one-time items, profit from continuing operations was 51 cents per share, which was 6 cents higher than analysts expected.

Equinix quiet ahead of earnings

Equinix's 4.75% convertibles due 2016 were mostly quiet but were seen closing at 131.9, according to a pricing source. That price is down from about 150 in early to mid-January.

Equinix's 3% convertibles due 2014 were seen closing at 104.56, which was down from 120 in January.

Shares of Equinix settled up $1.25, or 1.4%, at $93.01 on Tuesday.

Boenning & Scattergood analyst Steve Salberta said catalysts for growth exist like demand for financial-trading colocation space, carrier Ethernet exchange services and the growth of the managed services industry.

These growth areas should "contribute to upside to our estimates in 2010. While we are not increasing our estimates at this time, we believe that 4Q09 guidance was conservative and we should see upside when the company reports results," Salberta wrote in equity research published Tuesday.

"Additionally, we see strong growth in 2010 with only limited operating expense investments needed ahead of the Switch & Data acquisition. We are upgrading the shares to outperform and establishing a $121 price target," the analyst said.

"Consensus estimates for 4Q09 look low to us relative to recent bookings strength and the incremental EBITDA margins the company has historically generated in the fourth quarter," Salberta wrote.

Equinix's earnings conference call is set for 5.30 p.m. ET on Wednesday.

Annaly comes at a discount

Annaly Capital's newly priced 4% convertibles traded at 98, a New York-based sellsider said, which was steady on where the issue priced.

Shares of the New York-based real estate investment trust that owns a portfolio of mortgage-backed securities dropped 59 cents, or 3.3%, to $17.29 on Tuesday.

In addition to the new issue's "complicated" mandatory conversion at 130%, there weren't good comparable companies for the mortgage-backed securities REIT on which to base valuations, a sellside analyst said.

While the dividend yield is very high and that dividend is passed though to bondholders, which is positive, "if you pay off dividends like that, the stock price is going to decease, so it offsets each other," the sellsider said.

Annaly's issue of $500 million of five-year convertibles wasn't upsized from original talk and came at the cheap end of talk, for a coupon of 4% with an initial conversion premium of 20%.

There is a $75 million over-allotment option for the registered offering.

Credit Suisse Securities (USA) LLC was the bookrunner.

The unsecured senior notes will be provisionally callable with a forced conversion for the life of the bonds if the daily volume-weighted average price of shares exceeds 130% of the conversion price for 10 of 15 consecutive trading days, subject to a full coupon make-whole. That trading period is a bit shorter than is the norm.

Proceeds are expected to be used to purchase mortgage-backed securities for the company's investment portfolio and for general corporate purposes.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Annaly Capital Management Inc. NYSE: NLY

Equinix Inc. Nasdaq: EQIX

Lincare Holdings Inc. Nasdaq: LNCR

UAL Corp. Nasdaq: UAUA

Waste Connections Inc. NYSE: WCN

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