Convertibles mixed: Ford gains; Savvis, Headwaters down outright; Mesa Air, Hologics edge higher

By Rebecca Melvin

New York, April 30 - The convertible bond market was mixed on Wednesday, with some typically illiquid names pulled into trade by earnings news and end-of-month activity. Meanwhile, Ford Motor Co. presented as a main feature to the upside, sources said.

Convertibles traders remained busy even at the end of the session as stocks gave up steep gains after the Federal Reserve cut the fed funds rate another 25 basis points but indicated further cuts were by no means certain, and investors were left wondering about what the next move would be.

"The markets had a ride up and down," a West Coast-based sellside trader said, characterizing the convert bond market as "okay."

"People were digesting the Fed's latest move," the trader said.

The statement that accompanied the rate cut to 2% indicated that the central bank is less worried now than in March about economic growth. While the economy remains weak and the outlook on inflation is uncertain, it thinks its rate cuts and lending efforts over the past several months "should help promote moderate growth over time and to mitigate risks to economic activity."

End of month activity as traders "cleaned up their books," was also seen as playing a role. "I guess there could be some juggling for funds," a New York-based sellside desk analyst said.

Disappointing earnings pulled the stocks and bonds of both Savvis Inc. and Headwaters Inc. sharply lower, but on a dollar-neutral basis, the convertibles of both held up, traders said.

Mesa Air Group Inc.'s stocks and bonds jumped after a settlement with Hawaiian Airlines promised to yield a little cash for the company, and airline securities overall were higher on lower oil prices.

Also trading up was Hologic Inc. which has been quiet recently, a trader said.

In the primary arena, ProLogis, an industrial-oriented real-estate investment trust, said after the close that it plans to price $350 million of 30-year convertible senior notes late Thursday.

GM earnings spur more gains for Ford

Although forecasts for the automotive industry indicate continuing weakness, the sector was higher on Wednesday after General Motors Corp. posted a smaller than expected quarterly loss.

Standard & Poor's Equity Research analyst Efraim Levy reiterated a "hold" rating on GM, and raised earnings estimates, while lifting the 12-month target price to $26 from $24.

On Monday, Ford stocks and bonds jumped on news that billionaire investor Kirk Kerkorian through his Tracinda Corp. investment company had acquired 4.7% of Ford and was making a tender offer for more. The offer price of $8.50 per share represented a 13% premium over Ford's closing share price on Friday. For the month of April, Ford shares are up more than 45%.

On Wednesday, Ford's 4.25% convertibles due 2036 traded at 111.25, versus a share price of $8.25, which compared to a close of 83.8, versus a stock price of $5.59 on the last day of March.

The Ford 6.5% convertible trust preferred shares due 2032 were up 75 cents, or 2.1%, at $36.85 on Wednesday, compared to $28.95, versus a share price of $5.59 at the end of last month.

Ford shares (NYSE: F) closed Wednesday up 14 cents at $8.26.

Savvis drops on earnings disappointment

The 3% convertibles that Savvis issued almost exactly a year ago, were lower, but holding up, after the computer network service provider lowered its 2008 sales forecast and analysts followed with downgrades of the Town & Country, Mo.-based company.

Savvis now expects to report $840 million to $870 million in revenue for the year, down from an earlier forecast of $910 million to $925 million. The reduced forecast was due to customers delaying orders and its network business coming under pressure, the company said.

Goldman Sachs analyst Jason Armstrong downgraded the stock to "neutral" from "buy," and said the company's sales capacity has been limited by an upgrade in its network business.

A Lehman Brothers analyst downgraded the stock to "equal weight" from "overweight," and a Jefferies analyst cut his rating to "hold" from "buy."

A convertibles trader said that a "bunch of bonds traded" after the earnings report and downgrades, although players see the issue as a credit play and on a dollar neutral basis it held up.

The Savvis 3% convertibles due May 15, 2012 last traded at 74.676. Its shares (NYSE: SVVS) dropped $4.03, or 22%, to $14.65.

Headwaters holds up amid earnings woes

Headwaters, a supplier of building materials, coal combustion products and alternative energy reported a wider-than-expected quarterly loss due to a combination of the expiration of some tax credits, a downturn in residential construction and poor winter weather.

The revelation sent its shares spiraling 20% lower, and its convertibles were lower but "holding in okay," a trader said

"The market is seeing some cross-over buying from high yield because high yield is going well and convertibles have become cheaper over the last couple of months," he said..

The 2.825% convertibles traded at 81, versus a stock price of $11, and the 2.50% convertibles traded at 71. Shares of the South Jordan, Utah-based company (NYSE: HW) closed down $2.83, or 20%, at $11.43.

Settlement news lifts Mesa

The convertibles of Mesa Air gained on a 20% pop in their underlying shares after news that the ailing airline settled a suit with Hawaiian Airlines, which bond traders saw as freeing up cash for the company, a source said.

Under the terms of the settlement, Phoenix-based Mesa will receive $37.5 million from the bond the company previously posted with the United States Bankruptcy Court for the District of Hawaii.

Hawaiian Airlines will be entitled to the remaining collateral of the bond totaling $52.5 million. The settlement does not restrict go!'s ability to continue to offer services in the Hawaiian inter-island market, according to a company release.

Mesa launched go! in June 2006, and subsequently Honolulu-based Hawaiian sued Mesa, alleging the company misused company secrets.

The Mesa step-up convertibles don't trade actively. The 2.483% bonds that are putable in June traded at 25. They have a put price of 39, according to a New-York based sellsider. The 2.115% convertibles, which are putable in 2009, traded Wednesday at 20, which was up from about 17 on April 14.

Shares of Mesa (Nasdaq: MESA) added 11 cents, or 20%, to $0.66.

Meanwhile another gainer was Hologic, which hasn't been active in recent weeks, but on Wednesday gained about 0.25 point to 0.50 point to 99.625, compared to a stock price of $29.55.

Shares of the Bedford, Mass.-based medical technologies company (Nasdaq: HOLX) closed the day lower than that level, shedding 77 cents, or 2.57%, to $29.19.

ProLogis to price Thursday

ProLogis, a Denver-based industrial REIT, plans to price $350 million of 30-year convertibles, with a greenshoe of $50 million.

Price talk was for a coupon of 2.25% to 2.75%, with an initial conversion premium of 20% to 25%.

Concurrent with the offering, ProLogis will offer $350 million of 10-year fixed-rate senior notes.

Proceeds from the sales of both offerings are expected to be used to repay a portion of the outstanding balance under its global line of credit and for general corporate purposes.

Goldman Sachs & Co., Banc of America Securities LLC, and Morgan Stanley & Co. Inc. will act as joint bookrunning managers for the offering of the convertible senior notes.

Shares of ProLogis (NYSE: PLD) sagged 1% in after hours trade, after closing down 2.45% at $62.61 for the day.

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