Convertibles weak; Endeavour sells $120 million deal; WebMD collapses on lowered guidance

By Rebecca Melvin

New York, July 18 - There were sellers of convertible bonds on Monday as market trends remained more or less intact from the previous week. Convertibles lost ground and equities continued to struggle on a mix of European debt concerns and U.S. lawmakers' inability to reach a deal to raise the country's debt ceiling.

The primary market saw a new deal, however, bringing the total of recent new deals to three since a three-week drought in new issuance was snapped in the middle of last week.

Endeavour International Corp. launched early Monday an offering for up to $110 million of five-year convertible bonds that was later upsized at pricing to $120 million after the market close.

The new Endeavour 5.5% convertibles have a 30% premium, which was beyond the rich end of premium talk that was tightened during the session.

The new Endeavour was considered cheap, with a New York-based outright buysider saying prior to pricing that even at revised terms the Endeavour deal was a bargain and with excellent asymmetry.

WebMD Health Corp. saw its shares and bonds collapse after the New York-based health information provider announced lowered 2011 financial guidance. The company's two convertible bond issues held up better on a hedged basis than the stock.

Amgen Inc. remained active and traded in line with its underlying stock continuing to function as a safe place to park cash with markets under pressure, sources said.

Lincare Holdings Inc. wasn't heard in trade during the session, but the Clearwater, Fla.-based home health care company released earnings after the market close that missed earnings expectations. Shares traded lower in after-hours trade.

Steel Dynamics Inc. also reported earnings after the market close, with the Fort Wayne, Ind.-based steel-products manufacturer posting second-quarter net income of $99 million, or 43 cents per diluted share, on net sales of $2.1 billion, which was above the company's lowered second-quarter earnings forecast in June.

Endeavour looks cheap

Endeavour priced an upsized $120 million of non-callable five-year convertibles to yield 5.5% with an initial conversion premium of 30%.

Talk on the proposed Endeavour deal was revised to 5.25% coupon and a 22.5% to 27.5% initial conversion premium during the session, according to sources, compared to initial talk set at a 5.25% to 5.75% coupon and a 20% to 25% premium.

The deal looked cheap. About the only strikes against it were that it is a small deal, which some convertible players will ignore on that basis alone, and it is a small cap company for which the borrow is going to be tight.

Endeavour's Rule 144A private placement has a $15 million greenshoe and was being sold via bookrunners Citigroup Global Markets Inc. and Morgan Stanley & Co. Inc.

Most of the proceeds will be used for the Houston-based oil and gas development company's pending acquisition of acreage and related midstream assets in the Marcellus shale play.

Any remaining proceeds will be used for general corporate purposes, including funding a portion of Endeavour's 2011 capital program.

There is standard takeover and dividend protection.

WebMD paper sinks

WebMD's 2.25% convertibles due 2016 dropped about 7.5 points outright, but on a hedged basis they held in a little better, trading at 89.5 versus an underlying share price of $32.35, compared to 97 versus an underlying share price of $46.85 on Friday. Three weeks ago, the 2.25% convertibles traded at 96 versus an underlying share price of $45.75.

WebMD's 2.5% convertibles due 2018 traded at 86 versus the same $32.25 share price, which compared to 98 on Friday.

"On a hedged basis, they were better, but if you own it outright you are losing 10 points or whatever," a New York based sellside analyst said.

The premiums on both WebMDs were out by 10 points or more so far today," the analyst said at about 1:30 p.m. ET.

"If you are hedged, it widened out a few points, but you made more on the stock than you lost on the bond position," the analyst said.

The WebMD 2.25% convertibles have a 12% delta, and the analyst's firm owns them on 20% hedge.

The stock fell 30% after the company said it now forecasts 2011 revenue of $580 million to $600 million, down from its May forecast of $610 million to $640 million.

Shares settled at $32.48, which was down $14.00, or 30%. Earlier in the session, the shares had traded down to $31.66.

WebMD said it expects adjusted earnings before interest, taxes and other items of $200 million to $210 million, down from May's prediction of $215 million to $230 million.

For the quarter ended June 30, WebMD expects earnings of about $21.4 million, or 35 cents per share, on about $141 million in revenue.

The earnings include after-tax gains totaling 14 cents per share from investments and discontinued operations due to the resolution of a Department of Justice investigation tied to a business divested in 2006.

Analysts expected second-quarter earnings of 22 cents per share on $142.8 million in revenue from WebMD.

WebMD cited lower licensing revenue and budget cuts from several consumer products companies. Those led to unexpected delays and cancellations of new consumer sponsorships sold in previous quarters that were scheduled to launch later this year.

WebMD will release second-quarter results Aug. 2.

Citi analyst Mark S. Mahaney downgraded WebMD shares to "Hold/high risk" from "Buy/high risk."

Mahaney, who said he was wrong to defend the stock in a June report, said Monday in a research note that the second-half revenue outlook is worse than any WebMD saw during the recession.

He also wrote that he defended the stock in a June report, and he said that call was wrong.

Nevertheless, the stock plunge, which was worse than any the company has seen since it went public, "seems kind of overdone to me," a convertibles analyst said.

The company "guided down because the ad revenues won't be there," the analyst said.

Lincare misses on earnings

Lincare's 2.75% series A and series B convertibles due 2037 weren't heard in trade, but the Lincare 2.75% A convertibles, which are putable in 2012, did change hands at 108, which was 3.5 points lower than Friday's level, according to Trace data. The Lincare 2.75% series B convertibles are putable in 2014.

The home health care company, which is focused on respiratory services, reported earnings of 45 cents a share, which missed estimates by 6 cents a share.

But revenue rose 7.3% to $449 million in the latest quarter compared to a $449 million consensus estimate.

The company estimated that the 7.3% increase in net revenues in the second quarter was comprised of about 12.3% internal and acquisition growth offset by about 5% negative impact from $21.0 million of Medicare payment changes during the second quarter of 2011.

The Medicare payment changes impacting the quarter include reductions in average payment rates for respiratory medications, the impact of new Medicare payment rates in the nine markets affected by the competitive bidding program, and the ongoing effect of Medicare oxygen customers reaching the 36-month rental payment cap.

In addition the company incurred higher costs and expenses in the second quarter of 2011.

Mentioned in this article

Amgen Inc. Nasdaq: AMGN

Endeavour International Corp. NYSE: END

Lincare Holdings Inc. Nasdaq: LNCL

Steel Dynamics Inc. Nasdaq: STLD

WebMD Health Corp. Nasdaq: WBMD

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