Level 3 strong after earnings; Tesla extends gains; Goodrich better; American Realty weak

By Rebecca Melvin

New York, July 26 - Level 3 Communications Inc.'s 3% convertibles traded stronger on Friday post earnings and amid relief that there was no mention of plans to redeem the bonds in the New York-based defense company's earnings report Thursday, a New York-based trader said.

Tesla Motors Inc.'s convertibles continued to ride higher as the underlying shares of the electric car maker purred upward to a 52-week high, and amid strong demand from outright players even as borrow pressures ease.

Goodrich Petroleum Corp.'s 5% convertibles gained, marking the continuation of a trend of recent weeks, and amid some speculation that the Houston-based oil and natural gas company will refinance imminently, an East Coast-based buysider noted.

The multiple convertibles issues of Gilead Sciences Inc. saw some interest as shares hit a 52-week high and amid some outright sellers.

But American Realty Capital Properties Inc.'s 3% convertibles due 2018, which priced earlier this week, continued to trade weakly at levels below its discounted issue price.

Standard Pacific Corp.'s convertibles were quiet after the Irvine, Calif.-based home builder reported strong second-quarter profit that was mostly in line with expectations.

Equities rallied back Friday from losses early in the session. The S&P 500 stock index closed up 1.4 points to 1,691.65; the Dow Jones industrial average edged up 3.22 points to 15,558.83; and the Nasdaq stock market closed up 7.98 points, or 0.2%, to 3,613.16.

Focus began to shift to next week even before this week was over. Next week is slated to bring some important economic news and data including an update from the Federal Reserve's Federal Open Market Committee's two-day meeting beginning Tuesday and the July jobs report to be released on Friday.

Level 3s worries abate

Level 3 Communications' 3% convertibles due 2035 were seen at 106.375 bid, 106.875 offered versus an underlying share price of $92.00 on Friday afternoon, a New York-based trader said.

The bonds were up a point in active trade, according to Trace data. After the market close, the bonds printed about 2 points higher at 107.5 on Trace.

Level 3 shares were mostly steady during the session, closing at $92.15, which was higher by 11 cents.

The New York-based defense company reported earnings early Thursday that sent shares lower as the company guided lower for 2013 revenue. But the report cheered convertibles players because it didn't include notification that the bonds would be called any time soon.

"I think people were worried they were going to call them, and now they are feeling more comfortable with the bonds," a trader said.

For the second quarter, Level 3 beat earnings estimates, posting $185 million, or $2.03 per share, in profit, which was better than $1.94 per share profit for the year-earlier quarter.

Net sales for the quarter rose 2%% to $3.2 billion and was better than the $3.06 billion consensus estimate. But guidance for 2013 was pared back to $12.5 billion to $12.6 billion versus prior guidance of $12.55 billion to $12.75 billion.

The company had had strong sales and international orders in the most recent quarter but said it expects to feel the effect of sequestration, which may pose a headwind going forward.

Tesla purrs higher

Tesla's 1.5% convertibles due 2018, which priced on May 16, traded up more than 2.5 points on Friday to 125.8, according to Trace data, with shares of the Palo Alto, Calif.-based electric car maker higher by $5.32, or 4.3%, to $129.39.

The bonds are already in the money given their initial conversion price of $124.52.

The bonds were seen up "a little bit" for the week on a dollar-neutral basis, a trader said.

A week ago, the Tesla bonds traded at 118.125 when the shares closed at $119.03.

Shares fell last week when Goldman Sachs lowered its per-share price target to $84.00. The shares had regained most of that loss, but on Friday they recaptured the rest and were back up to 52-week highs after Deutsche Bank raised its price target to $160.00 per share from $50.00.

The Deutsche Bank analyst Dan Galves said he thinks the shares could more than double in three or four years, riding on good design and best in class product.

"Outright accounts love them; there is a compelling story," a New York-based trader said of the Tesla convertibles.

In addition, the ability to borrow the shares, which had been a problem before, has "freed up a little bit," the trader said.

Goodrich moving up

Goodrich Petroleum's 5% convertibles due 2029 were seen in trade at 101 bid, 101.75 offered versus an underlying share price of $17.65.

Shares of the Houston-based oil and gas exploration and development company added 46 cents, or 2.75%, to $17.67 in active trade.

A buysider who has a position in the Goodrich convertibles said that the bonds "have been moving up nicely over the past few weeks. People are talking about potential refi today, but that is not really new news."

The bonds are relatively short dated with a put Oct. 1, 2014, and the company has said that it may come back to the preferred market with an add-on to its $100 million preferred offering earlier this year with the intention of using the proceeds to take out at least part of the looming convertible maturity.

The company has $281.9 million outstanding of the 5% convertibles.

In June, president and COO Robert C. Turnham Jr. told participants at the EnerCom London Oil & Gas Conference that the company could add on to the preferred, take half of the convert out by the end of the year on a privately negotiated basis and then perhaps amend and extend the remainder.

American Realty weak

American Realty Capital's 3% convertibles due 2018 traded at 99.25 during the session and a print with a 98 handle also went up on Friday when the shares were flattish. This pricing was below its 99.5 reoffer price.

But shares of the New York-based real estate investment company climbed with the broader market into the close and ended up 30 cents, or 2%, to $14.65.

Also around the close, the new convertibles traded a little higher at 99.625. On the convertibles' first day of trading on Wednesday, the underlying shares closed at $14.44.

The new issue "is trading poorly, at below issue, on a dollar-neutral basis," a New York-based trader said regarding the new American Realty convertibles.

He blamed investor fatigue with the company's sector in the mortgage real-estate-investment trust space.

Mentioned in this article:

American Realty Capital Properties Inc. Nasdaq: ARCP

Gilead Sciences Inc. Nasdaq: GILD

Goodrich Petroleum Corp. NYSE: GDP

Level 3 Communications Inc. NYSE: LLL

Standard Pacific Corp. NYSE: SPF

Tesla Motor Inc. Nasdaq: TSLA

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