Convertibles market sees strength in airlines, energy, as biotechs weaken; Lucent falls, but Lowe's gains

By Rebecca Melvin

Princeton, N.J., July 19 - Convertibles traders opted to boost some names in airlines, energy and materials on Tuesday, while scrutinizing the biotechnology and technology space for issues to merit their continued good favor.

"It feels a little weaker. The equity markets are doing well. But the biotechs are weaker and even things like generic pharmaceuticals are off," a New York sellside trader said. "But remember we had quite a run up."

Recent market darlings, like Invitrogen Corp., were off. The biotechnology company's 1.50% convertible due 2024, for example, traded down more than a point to 96.25 on Tuesday, compared to a level Monday of 97.633 bid, 98.133.

The Carlsbad, Calif.-based company's 2% convertible due 2023, however, eased only slightly to 104.50, compared to 104.49 bid, 104.99 offered on Monday.

Meanwhile the convertibles of companies including Freeport McMoRan Copper and Gold Inc. and Sirius Satellite Radio Inc. gained steam Tuesday, and retail names like Lowe's Cos., Inc. remained strong following gains added stealthily over the last few sessions.

Skepticism sent the paper of Lucent Technologies Inc. lower after its earnings report, even as prices for competitor Juniper Networks Inc. remained firm.

The market also got wind of an upcoming new deal from Annapolis, Md.-based management services company FTI Consulting Inc. But lack of price talk on its coupon deterred too much early interest from would-be players.

FTI plans to price $125 million of convertible securities, with a greenshoe of $25 million, at an initial conversion premium of between 27.50% and 32.50%.

Goldman Sachs & Co. and Bank of America are joint bookrunners of the deal, which is expected to price after markets close on July 28.

The seven-year convertibles will be offered concurrently with $175 million of senior notes due 2012.

AMR climbs ahead of earnings

The convertibles of AMR Corp., parent of American Airlines, and Continental Airlines Inc. rose along with their stocks ahead of earnings reports from the two companies expected Wednesday.

But Northwest Airlines was weaker after its mechanics union voted to authorize the leaders of the Aircraft Mechanics Fraternal Association to strike over cost cuts. Meanwhile, the paper of Delta Air Lines Inc. was flat.

AMR's 4.25% convertibles due 2023 rose about two points to 98.337 bid, 98.837 offered, according to one New York sellside shop. Its 4.5% convertible due 2024 was up to 85 bid, 85.5 offered, compared to a level of 83.63 bid, 83.80 seen Monday.

Shares of AMR gained 35 cents, or 2.52%, to $14.23.

Continental's two issues - a 4.5% convertible due 2007 and a 5% convertible due 2023 - also rose about two points, while Continental stock jumped 62 cents, or 4.11%, to $15.70.

Energy names strengthen

Energy convertibles and stocks were supported by higher crude oil prices, which advanced after an initial decline in the session as investors watched Hurricane Emily and production shutdowns in Mexico's offshore oil fields.

The convertibles of oil-services company Halliburton Co., which have been on a roll since June, jumped again as its stock advanced 6%.

The Houston based company on Tuesday also declared a third quarter dividend of $0.125 a share on its common stock payable September 23.

The Halliburton 3.125% convertible due 2023 traded at 139.786 bid, 140.286 offered on Tuesday, compared to Friday's level at 135.475 bid, 135.975 offered, according to a New York sellside shop.

The convertibles of refinery operator Amerada Hess Corp. and contract driller Diamond Offshore Drilling Inc. were also higher, as were Schlumberger Ltd. convertibles. Schlumberger's 1.5% convertible A tranche due 2023 was at 117.033 bid, 177.533 offered, compared to a 115 level on Friday. Shares of Schlumberger climbed 3%.

Meanwhile, the convertibles of New Orleans-based Freeport McMoRan gained after the mining and exploration concern reversed losses in its latest quarter amid higher gold and copper sales volume and prices.

The company posted second quarter net income of $175.2 million, or 91 cents a share, compared to a net loss of $53.3 million a year ago.

It projected 2005 total sales of around 1.47 billion pounds of copper and 2.8 million ounces of gold.

Freeport McMoRan's 5.5% convertible preferreds traded at 950.5, compared to a recent level of 944.893 bid, 945.393 offered. Shares of the company closed up 11 cents to $38.76.

Sirius jumps up

The convertibles of Sirius Satellite gained steam Tuesday amid no particular news, but investors had recently been eying the prospects of this showy satellite operator around which rumors are prone to fly.

Most recently investors mulled the possibility that the Mel Karmazin-led company could buy radio assets on the block from Walt Disney Co. Some convertibles participants said such an acquisition would be too expensive for Sirius, but others saw it as a perfect fit.

"If the idea is to try to get satellite video into cars, then a link up with Disney would make perfect sense because who watches videos in the car?" a Connecticut-buyside source said recently.

Sirius' 3.25% convertible due 2011 traded Tuesday at 150, compared to a level of 143.6 bid, 144.2 offered on Monday.

Lucent lies down

The convertibles of Lucent sank about two points in active trade after the company presented what investors considered lackluster results for its third quarter on Tuesday.

The bonds seemed to trade off as the day wore on as investors had a chance to digest what the results meant and what the company's future prospects are (see related story in this issue).

Investors judged that positive news on its gross margin was a one-off improvement that was based on timing benefits related to its accounts receivables.

Nevertheless the company was able to manage a $300 million-plus debt reduction, mostly in the form of convertibles, in the quarter, while at the same time keeping its cash essentially flat at a healthy $1.4 billion.

"In the medium-term it's improved," said a New York-based sellside trader, who said the credit was weaker Tuesday amid "a lot of activity."

Lucent's 2.75% convertible A tranche due 2023 traded at 110.489 bid, 110.989 offered, compared to trades at 112.75 on Monday.

Its 2.75% convertible B tranche due 2024 traded at 115.686 bid, 116.186 offered, compared to 117.25 on Monday.

Lucent shares dropped 11 cents, or 3.5%, to $3.02.

But retailer Lowe's got another boost in its convertibles after Citigroup Smith Barney raised its stock price target on the retailer to $75 from $65, saying that any inventory risk seen at the end of the first quarter was likely mitigated by stronger-than-expected seasonal category sales.

Citigroup suggested business fundamentals have materially strengthened in recent weeks, driven by outdoor seasonal demand for paint, home furnishings, appliances and hurricane preparation needs.

Lowe's 0.861% convertible due 2021 traded at 114.769 bid, 115.269 offered, compared to 112 levels on Monday.

Its 0% convertible also due 2021 traded at 108.557 bid, 109.057 offered, compared to 106 levels on Monday.

Its shares climbed $1.42, or 2.20%, to $65.98.

But Tuesday's addition was by no means a brand new move. The Moorsville, N.C.-based company has seen its convertibles creep up on recent favorable sector news. A week ago on July 12, for example, the 0.861% convertible was trading at 109, and the 0s were at 102 bid, 103 offered.

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