Digital Realty lowers talk; Cadence Design hammered on outlook; Cameron down; BofA, WaMu 'rip'

By Evan Weinberger

New York, Jan. 31 - Cadence Design Systems Inc. got hammered on a desultory outlook for 2008. One analyst wrote that the company's outlook appeared to have no orders for the first or second quarter.

Cameron International Corp. was down on its first quarter outlook as well, although earnings were around where Wall Street expected them.

Medicis Pharmaceutical Corp. convertibles were down on a little problem with the Food and Drug Administration.

Bank of America Corp. and Washington Mutual Inc. convertible preferreds were higher with the markets.

WCI Communities Inc. saw a spike as well.

One new deal was launched before the market opened. Digital Realty Trust Inc. was set to price $300 million in series D convertible perpetual preferred stock after the market close Thursday.

The preferreds were talked at a 5% to 5.5% dividend. The initial conversion premium was originally talked at 20% to 25%, but that was lowered to 17.5% to 19% later in the day. Traders said they didn't see much bidding on the deal in the gray market.

Maybe that's because investors were watching stocks, which were something to see. After starting out more than 100 points lower on a worrying unemployment report and Armonk, N.Y.-based bond insurer MBIA Inc.'s $2.3 billion fourth-quarter, subprime write-down driven loss, stocks rallied.

The spark was MBIA's CEO, Gary Dunton, telling investors that the company would have enough capital available to maintain its vital AAA rating. The fate of the bond insurers has been weighing over the market like an anvil.

There was skepticism in some corners. When asked if he believed Dunton, one market source said flatly, "No I don't."

He questioned why investors would pump more money into the struggling bond insurer now, when it will be cheaper to do it later, after some sort of a prepackaged bankruptcy.

Another market watcher was also not totally convinced. "They're saying they expect to keep their AAA rating," he said. "I can't imagine that people talking about a company going bankrupt is going to keep its AAA rating."

Still, most market watchers said there would be some sort of a bailout, but also some reorganization.

"They will get capital," a trader said of MBIA. "[They'll] get diluted like crazy but survive and move higher in time."

MBIA's chief executive's confidence sparked a market that was looking for a sign that the worst might be over. Of course, Standard & Poor's announced that it may cut MBIA's rating within the next 90 days just before the close.

The Dow Jones Industrial Average jumped 207.53 points, or 1.67%, for a 12,650.36 close.

The Nasdaq leaped 40.86 points, or 1.74%, to close at 2,389.86.

And the Standard & Poor's 500 stretched 22.74 points, or 1.68%, for a 1,378.55 close.

Secondary trading in convertibles picked up a bit, a sellside analyst said. Other market watchers said the majority of the activity continued to be in the recent issues.

Digital Realty forced to reset talk

San Francisco-based technology real estate investment trust Digital Realty launched $300 million in perpetual convertible preferred stock before the market opened Thursday. The price talk was originally set at a 5% to 5.5% dividend and a 20% to 25% initial conversion premium.

The bids, apparently, weren't there. One trader reported seeing nothing going on in the gray market.

So Digital Realty and its bookrunners, Citigroup and Credit Suisse, reset price talk to 17.5% to 19%, although the dividend remained at the original talk.

There were also rumors that the deal would be offered at a discount.

According to traders, the bids started coming in, but at 99.75 to 99 5/8.

Observers said the deal actually looked pretty cheap at the original talk, however.

One sellside analyst said that he saw it as around 1.5% cheap prior to the reset of conversion premium talk. The analyst used what he called an aggressive 27% vol and a 375 basis point over Libor credit spread. "At the mids of the old talk, I actually had it looking decent," he said.

A fund manager concurred that the deal looked cheap. "[Their] earnings have been slowing but credit marginally improved. Nice coupon," the fund manager said.

"I think for an outright base, it's OK," a sellside trader said, adding that the stock probably has room to move up. He said the deal wasn't "awesome" for hedge funds.

The sellside analyst agreed. "I would think that at this point, I can't see vol being bid up much more. So from a hedge perspective, you're buying vol," he said. "The only saving grace for a hedge investor on this would be a tightening spread."

There is a $45 million greenshoe on the Securities and Exchange Commission-registered transaction.

The preferreds have five years of call protection, after which they are callable subject to a 130% hurdle.

There are no puts.

The fund manager said that like many REITs, the Digital Realty deal would be busy early. "[It] probably trades heavy for a while," he said. "All other REITs are trading cheap."

Digital Realty stock (NYSE: DLR) fell $1.13, or 3.06%, to close at $35.76 on the day.

Cadence out of step

San Jose, Calif.-based semiconductor production equipment maker Cadence Design Systems was battered on its 2008 outlook.

The company's fourth-quarter 2007 profit - $120 million, or 41 cents per share - came in around Wall Street estimates. Cadence had a profit of $48 million, or 16 cents per share, in the fourth quarter of 2006.

The problem, however, is that the company is predicting a first-quarter loss and lower revenues for 2008.

A Citigroup analyst, Terence Whalen, said that it didn't look like Cadence had any orders for either of the first two quarters of the year. Whalen maintained his "hold" rating for the stock but lowered his price target to $14 from $24.

A JPMorgan analyst, Sterling Auty, cut his rating on Cadence stock to "underweight" or "sell" from "neutral" after the earnings report and outlook.

People sold, in both stock and convertibles.

Cadence's 1.375% convertible senior notes due Dec. 15, 2011 were cut to 88.973 versus a closing stock price of $10.15 Thursday. They closed Wednesday at 97.96 versus a stock price of $15.16.

Cadence's 1.5% convertible senior notes due Dec. 15, 2013 closed Thursday at 83.365 versus a stock price of $10.15. They closed Wednesday at 97.359 versus a stock price of $15.16.

And the company's zero-coupon convertible senior notes due Aug. 15, 2023 closed Thursday at 98.175 versus a stock price of $10.15 after finishing Wednesday at 107.53 versus a stock price of $15.16.

Cadence stock (Nasdaq: CDNS) plummeted $5.01, or 33.05%, on the day.

Cameron down on outlook

Like Cadence, Houston-based oil and gas services provider Cameron International was also hurt by a less-than-pleasing outlook for the coming year.

The company's 30% jump in profits in the fourth quarter - to $125.9 million, or 54 cents per share, from $96.5 million, or 42 cents per share - couldn't shake the company's downbeat outlook.

Cameron's 2.5% convertible senior notes due June 15, 2026 closed Thursday at 140.24 versus a closing stock price of $39.92. They closed Wednesday at 144.485 versus a stock price of $43.06.

Cameron stock (NYSE: CAM) fell $3.14, or 7.29%, on the day.

Medicis down on FDA problems

Scottsdale, Ariz.-based Medicis Pharmaceutical wants to bring a new form of Botox called Reloxin to market because the world needs more anti-wrinkle treatments.

But the FDA denied Medicis' application, the company announced Thursday, because the application wasn't complete.

So the world will have to wait for a second botulism-based injection wrinkle treatment.

That displeased investors.

Medicis' 2.5% convertible senior notes due June 15, 2032 closed Thursday at 94.07 versus a closing stock price of $20.38. They closed Wednesday at 96.96 versus a stock price of $21.79.

Medicis stock (NYSE: MRX) was down $1.41, or 6.47%, on the day.

Bank of America, WaMu "rip"

The stock market surge helped financials, as investors found hope in MBIA's confidence.

"Bank of America stock ripped today," a sellside analyst said.

So did its 7.25% non-cumulative perpetual convertible preferred stock, series L, which closed Thursday at 1,135 versus a stock price of $44.15. They closed Wednesday at 1,094 versus a stock price of $42.21.

Charlotte, N.C.-based Bank of America stock (NYSE: BAC) picked up $1.94, or 4.60%, on the day.

Seattle-based Washington Mutual, the largest savings and loan in the United States, was also up.

The bank's 7.75% series R non-cumulative perpetual convertible preferred stock closed Thursday at 1,170 versus a closing stock price of $19.87. They closed Wednesday at 1,105 versus a stock price of $18.65.

Washington Mutual stock (NYSE: WM) moved up $1.22, or 6.54%, Thursday.

Rate cuts brighten WCI, homebuilders

The Federal Reserve's latest rate cuts have brought hope to the homebuilding sector, and stock and convertibles have consistently been up in recent days.

One beneficiary has been Bonita Springs, Fla.-based WCI Communities. On Thursday, the company's 4% convertible senior subordinated unsecured notes due Aug. 5, 2023 closed at 74.2 versus a closing stock price of $6.05. They closed Wednesday at 69.705 versus a stock price of $5.22.

WCI Communities stock (NYSE: WCI) gained 83 cents, or 15.90%, Thursday.

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