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Published on 7/11/2005 in the Prospect News Convertibles Daily.

Northwest Airlines spurs airlines convertibles; Schlumberger extends gains; but biotech, technology ease

By Rebecca Melvin

Princeton, N.J., July 11 - The convertibles of Northwest Airlines Corp. flew higher on Monday, spurring activity in its sector, with trades in Delta Air Lines Inc. and JetBlue Airways Corp. Some oil and gas services also moved higher despite lower oil prices. But strength in the biotech and technology sectors waned after a boost Friday, although Human Genome Science Inc. gained.

Meanwhile, FEI Co. announced that it repurchased $70 million face value of its 5.5% convertibles due 2008. And bondholders had until the end of the day to put Cephalon Inc.'s 2.5% convertible, which matures in 18 months, traders said.

June traffic seen favorably

Two convertible issues of Northwest Airlines gained 1.5 points, as the Eagan, Minn.-based carrier's share price surged. Other airline paper also saw action on Monday although prices were more in line with where they went out Friday, traders said.

"We did a bunch of airlines," a New York sellside trader said. The activity came after a lull in the last couple of weeks during which not much of anything in airlines had traded.

The strength seemed to be due to a combination of lower oil prices, a report on June capacity and load growth for the airlines that was viewed favorably, and technical factors.

"I do not know the exact reason [Northwest Airlines rose] because it will trade around headline risk and there are no headlines. Fundamentally, the stock is just an out-of-the-money option on restructuring without a bankruptcy," said analyst Roger King of CreditSights, which published the report.

In fact, the report showed that load factor growth slowed in June, but Northwest, which was the clear favorite in the convertibles market on Monday, did stand out as a winner in the report in certain respects.

Load factor, which is a calculation of revenue passenger miles divided by available seat miles, for Northwest Airlines across the Atlantic was 92%, higher than its competitors, including AMR Corp., the parent company of American Airlines, Delta and Continental Airlines Inc.

In terms of overall domestic load factor, Northwest's stood at 84%, the same level as AMR. Delta had among the lowest domestic load factor rates, at 81%: but JetBlue was highest with 89%, according to the CreditSights traffic analysis.

In point terms, Northwest's domestic load factor growth was 1.4 points, while JetBlue's was 3.5 points, Delta's 0.6 point, and Southwest Airlines Inc.'s minus 2.6 points.

Northwest's available seat miles in the Atlantic grew by 12%, compared with AMR and Delta, which both saw 5% growth in Atlantic available seat miles.

But none of the report's written commentary mentioned Northwest. The report said that summer winners looked to be Frontier Airlines Inc., American, Continental, JetBlue and Alaska Air Group Inc., while summer losers looked to be Delta, Southwest Airways and US Airways.

Oil prices played a role in Monday's activity, convertibles traders said. On the New York Mercantile Exchange, crude oil prices fell for a third consecutive day, losing 71 cents, or 1.2%, to $58.92 for August delivery.

Fears were relieved when Hurricane Dennis made landfall east of where it had been forecast initially, missing rigs and platforms concentrated off the Texas and Louisiana coasts. But oil prices had come off on Friday too before the hurricane made landfall.

Technical factors also pushed Northwest up, a convertibles trader said.

"These things are just massively oversold, so anything in the market to get a sporadic short squeeze is jumped on," a New York sellside trader said. "I traded about $10 million today, and I didn't trade any on Friday, so today's the day."

Northwest's 7.625% convertible cash-to-zero senior notes due 2023 traded up 1.5 points to 40.5 bid, 41.5 offered, compared to a stock price of $4.73. The airline's 6.625% convertible also due 2023 rose 1.5 points to 46 bid, 47 offered. Shares of Northwest went out Monday up 33 cents, or 7.5% at $4.74.

JetBlue Airways' 3.75% convertible due 2035 traded relatively flat at 104.172 bid, 104.672 offered, versus a stock price that was up slightly at $20.73. The JetBlue 3.5% convertible senior notes due 2033 were at 88.226 bid, 88.246 offered.

Delta's 8% convertible due 2023 also traded flat at 35.293 bid, 35.355 offered, and its 2.875% convertible due 2024 traded at 32.099 bid, 33.099 offered.

Oil services extends gains

The convertibles of a few oil and gas services companies continued to gain despite the fact that crude oil retraced some gains. Schlumberger Inc.'s 1.5% tranche A due 2023 gained more than a point to trade Monday at 118.109 bid, 118.609 offered, compared with 116.965 bid, 117.215 offered on Friday.

Schlumberger's 2.125% tranche B due 2023 traded up by nearly a point at 114.7 bid, 115.2 offered; compared to 113.84 bid, 114.09 offered on Friday. The company's shares closed up $1.10, or 1.4%, at $78.57.

Meanwhile, Halliburton Holdings Inc.'s 3.125% due 2023 traded up 0.5 point at 140.523 bid, 141.023 offered, compared with 139.359 bid, 139.609 offered on Friday. Its shares closed out up 46 cents, or 1%, at $48.82.

Biotech takes a breather

The convertibles of Rockville, Md.-based biotech Human Genome Science were up about 0.5 point as its shares continued to strengthen. The company's 2.25% convertible due 2011 traded at 107.301 and its 5% due 2007 was seen at 99. Its shares went out at $13.78, up 53 cents, or 4%.

But less interest was seen elsewhere in the sector on Monday.

"It seems a bit quieter today," a sellside trader, who focuses on technology and biotechnology issues, said.

Other names that traded Monday were Lucent Technologies Inc., Novell Inc., and Agilent Technologies Inc. But they traded in line with their share prices and no trend was seen, a New York-based sellside desk analyst said.

Lucent's 7.75% convertible traded at 99 versus a stock price of $3. The analyst said of the Murray Hill, N.J.-based company's convertibles paper, which trades steadily: "Some days everybody wants it, and other days they don't want to see it."

LSI Logic Corp. 4% convertible subordinated notes due 2010 traded a little stronger at 107 on Monday, another trader said.

FEI buys back 5.5s

FEI Co. said it bought back $70 million worth of its 5.5% convertible subordinated bonds due 2008. The initial proceeds of the deal, which dates from July 2001, were $175 million.

The buyback led to a $1.8 million charge and was part of the Oregon-based company's lowered profit and sales outlook for its second quarter. The nanotechnology company also said that it reorganized its business to focus on three nanotechnology markets.

The company now expects revenue in the range of $109 million to $111 million, compared with a previous forecast of $114 million to $120 million.

Three traders said they hadn't seen FEI's convertibles trade on Monday. Its shares ended the session up 10 cents at $24.30; but the shares dropped nearly 10% in after-hours trading.


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