General Motors gains, Intel falls on quarterly results; Gilead new deal stumbles on debut;

By Kenneth Lim

Boston, April 20 - Quarterly results fueled most of the activity in the convertible bond market on Thursday, with General Motors Corp.'s smaller-than-expected first-quarter loss giving investors something to cheer about on hopes that the news would lead to better liquidity.

"The stock is rallying pretty big, that's good for the convert market," said a sell-side analyst. "It's a liquidity issue here."

But Intel Corp.'s convertibles ended slightly lower on an outright basis in line with slide in the stock after the company announced poor earnings and gave guidance that some on Wall Street criticized as too bullish.

Gilead Sciences Inc.'s new convertibles fell on a dollar-neutral basis, failing to make a splash on their debut after they were priced cheaper than talked.

Overall the market was described as quiet despite the first of the quarterly results starting to trickle in, market sources said. But a convertible trader said the market could get busier soon.

"It's pretty quiet here, but I expect things to start picking up as soon as we get into earnings season," the trader said.

The newest Amgen Inc. convertibles, which have been active since their debut in February, were flat Thursday as the stock gained slightly after the previous session's retreat on poorer-than-expected results. The Amgen 0.125% convertible due 2011 traded at 96.5 versus a stock price of $68.50, while the 0.375% convertible due 2013 changed hands at 95 against the same stock price. Thousand Oaks, Calif.-based Amgen (Nasdaq: AMGN), the world's largest biotech company, reported first-quarter earnings per share of 82 cents on Tuesday, below Street estimates of around 89 cents. Amgen stock, which fell 3.8% on Wednesday, closed up 0.31% or 21 cents at $68.51 on Thursday.

Also in the biotech/medical tech sector, St. Jude Medical Inc.'s 2.8% convertible, due 2035 but callable in December this year, stayed just below par despite a 2.4% gain in the stock. The convertible was seen trading at 99.25 versus a stock price of $37.50. St. Jude stock (NYSE: STJ) gained 90 cents or 2.4% to end at $38.40 on the back of a 15% increase in first-quarter profit and a planned $700 million share buyback program. St. Jude is a St. Paul, Minn.-based maker of heart devices.

General Motors rallies on Q1 results

All three General Motors convertible bonds ended better Thursday as the stock surged on hopes of a turnaround at the Detroit auto maker after its first-quarter loss was narrower than expected, market sources said.

General Motors' 6.25% convertible due 2033 (NYSE: GPM) was seen trading at 17.90 versus a stock price of $22.25, ending the day up 0.86 point or 4.97% at 18.15 against the closing stock price of $22.64. The 5.25% convertible due 2032 (NYSE: GBM) traded at 16.40 versus a $22.25 stock and closed 0.38 point or 2.38% higher at 16.36 against the closing stock price. The 4.5% convertible due 2032 (NYSE: GXM) finished the day up 0.4 point or 1.73% at 23.55. General Motors stock was 10.06% or $2.07 better at the end of Thursday's session.

"They were better dollar-neutral," said a buy-side convertible trader. "They had better than expected earnings, more favorable than the market expected, so there's talk of a turnaround."

General Motors posted on Thursday a first-quarter loss of $323 million, or 57 cents per share, a sharp improvement from the $1.3 billion loss, or $2.22 per share, reported in the year-ago period. The company also said it was on track to meet its target of reducing costs by $4 billion by the end of the year, and it expects a sizable gain in the fourth quarter from its $14 billion deal to sell a majority stake in its financial arm General Motors Acceptance Corp.

A sell-side analyst said investors were expecting a larger loss from the car maker, so the results not surprisingly gave the stock and convertibles a boost on Thursday. Any improvements in the company's financial health would improve the liquidity of its convertibles and the market, the analyst said.

Intel falls on lower earnings

Intel's convertible bonds were slightly lower in line with a small slide in the stock after the company posted poorer first-quarter profits and gave guidance that the Street criticized as too optimistic.

"It's pretty bad across the board [at Intel]," said a buy-side analyst.

Intel's 2.95% convertible due 2035 changed hands at 85.625 against a stock price of $19.55 on Thursday. Intel stock (Nasdaq: INTC) slid 0.56% or 11 cents over the session to close at $19.45, and the convertible was marked at 85.4 at that stock price.

Intel said late Wednesday that net income for the quarter ended April 1 was $1.35 billion, or 23 cents per share, down from $2.18 billion, or 35 cents per share, in the same period a year ago. Intel also said it had stopped losing market share to Sunnyvale, Calif.-based rival Advanced Micro Devices Inc.

But even though Santa Clara, Calif.-based Intel lowered its full-year revenue forecast to a 3% drop and cut its 2006 gross margin estimate to 53% from the earlier guidance of 57%, analysts still felt the company was too optimistic about its prospects in the second half of the year.

"They [Intel] still feel confident, but the word on the Street is that they are too aggressive," the buy-side convertible analyst said. "I think that's why the stock kind of started high and fell off throughout the day. There's not a lot of conviction about what the management is saying. It looks like they would have to create the perfect storm for that to occur."

The analyst said the company stood firmly by its guidance during an analysts' conference call, so the company may have good reasons for its optimism.

"If they do execute on their new products, and I don't know what the restructuring is going to be like, but if they do that well, it may be an opportunity, although it's a high risk opportunity here," the buy-side analyst said.

The buysider said he continues to like Intel because the stock now seems "pretty cheap" and the convertibles have become more "balanced."

"They're balanced. That means you have a good opportunity to capture the upside," the buysider said. "Now the bond is at 85, and the floor is somewhere in the mid-50s, so it's a lot more balanced than previously when it was above 100."

"It's [the convertible] actually more attractive than the stock at this point," the buysider added.

Gilead goes under on debut

Gilead Sciences' new five- and seven-year convertibles were weaker on a dollar-neutral basis on Thursday on their first outing in the secondary market as market observers described the deals as "not compelling" even after they were priced cheaper than talked.

The 0.5% convertible due 2011 was seen trading at 99.875 against a stock price of $65.40, while the 0.625% convertible due 2013 changed hands at 99.625 versus the same stock price. Gilead stock (Nasdaq: GILD) rose marginally by 3 cents or 0.05% to close at $65.16.

The five-year paper had been priced with an initial conversion premium of 19%, below talk of 20% to 25%. The seven-year paper's initial conversion premium was set at 17%, below talk of 19% to 24%. Price talk for the coupons was 0% to 0.5% for the five-year convertible and 0.125% to 0.625% for the seven-year.

"It's like all these other bid deals that have been coming out, they're just priced very fairly," a sell-side analyst said. "They don't look terrible, they just don't look compelling."

A buysider said the deal was poorly received by investors and said his firm did not get involved for a simple reason: "It was terribly priced."

A sell-side convertible trader said his firm's equity analyst was actually very bullish on the stock. "But when you look at the convertibles, the terms were a little bit too rich," the trader said. "The deal was just too rich and you're not going to be able to realize the volatility."

Gilead, a Foster City, Calif.-based biopharmaceutical company, said it would use the proceeds of the deal to buy back about $500 million of its stock and to fund convertible note hedge transactions, making it the latest company to fund stock buybacks with convertibles and hedging transactions. Medtronic Inc. earlier in the month launched $4 billion of convertibles to buy back $2.5 billion of stock and fund convertible note hedge and warrant transactions.

The sell-side analyst said the companies could be trying to please existing shareholders by trying to make better use of its capital without diluting any stakes.

"You can take some shares out of the float for...three years or five years, and you may be able to convince your shareholders that over that time there are better uses for your cash," the analyst said.

Companies with strong balance sheets may also be trying to make better use of their credit strength.

"If your balance sheet was underlevered, the equity market is telling you you're not using your balance sheet to the fullest extent possible, so you borrow money via convertibles and take out stock, and you're basically levering up," the analyst said.

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