Peabody dragged lower with stock; ExpressJet calm on stock downgrade; Manor Care, Ciena gain slightly

By Kenneth Lim

Boston, Dec. 21 - The convertible bond market saw scattered trading on Thursday, with Peabody Energy Corp. continuing to sink outright on a soft common stock.

ExpressJet Holdings Inc. shrugged off a sharp drop in the stock, with holders of the short-dated convertible unflustered by an equity downgrade.

No single theme dominated the convertible market, with the recent wave of new issues having petered off and investors distracted by the coming holidays.

"There is nothing going on today," a sellside convertible bond trader said. "I'm getting extremely limited feedback from the dealers."

Another sellsider added: "It's going to get quieter tomorrow."

Manor Care Inc.'s 2% convertible due 2013 was flat to slightly better, marked at 104.75 bid, 105 offered against the closing stock price of $47.06. Manor Care stock (NYSE: HCR) declined 0.21% or 10 cents on Thursday.

"We saw good outright buy interest in the Manor Care bonds," the sellsider said.

Manor Care is a Toledo, Ohio-based operator of nursing and assisted-living centers and health care services provider.

Ciena Corp.'s 0.25% convertible due 2013 gained about ¼ point, marked at 92.25 bid, 92.5 offered versus the closing stock price of $28.14. Ciena stock (Nasdaq: CIEN) ended lower by 1.44% or 41 cents.

"The Cienas saw better sellers of the 0.25% bonds, not sure why," the sellsider said.

Ciena is a Linthicum, Md.-based supplier of communications equipment and services.

AAR Corp.'s 1.75% convertible due 2026 gained about 3 points outright as the stock continued to rally on the company's fiscal second-quarter results. The convertible was 115.375 bid, 115.5 offered against a stock price of $28.60. AAR stock (NYSE: AIR) rose 4.29% or $1.17 to close at $28.42.

"There was only one quote earlier, but it looks like it's better with the stock," a convertible bond trader said.

AAR, a Wood Dale, Ill.-based provider of products and services for aerospace and defense companies, on Wednesday reported a 75% increase in earnings for the quarter ended Nov. 30. AAR had net income of $13.77 million for the quarter, from $7.88 million in the year-ago period.

Peabody slips with stock

Peabody's recently issued 4.75% convertible due 2066 dropped about ½ point outright on Thursday, as the stock continued its weeklong slide.

The Peabody convertible traded at 96.375 against a $40.91 stock price on Thursday. Peabody stock (NYSE: BTU) was 1.32% or 55 cents lower at its close of $41.06.

"It looks like it's in line," a buyside convertible bond trader said. "The convertible is probably a little more attractive now, but not by much."

Peabody's stock has come off 6.8% or $2.78 since the start of the week as prices of natural gas softened amid the mild weather in the United States.

"I don't think the prices are that big of a concern," a sellside convertible bond analyst said. "Peabody has a solid credit, and they've already managed to sell most of their production for '07, so even if prices fall this winter, they're not going to be terribly affected."

Another convertible bond analyst said the general consensus appeared to be that investors like Peabody's business. Peabody is a St. Louis-based coal company.

"I think it's been said a lot, but I think people like the name, they don't like the structure," the analyst said. "It's a really long-term paper, and it's not going to open up [when the stock falls], so you can't capitalize on it that much. But when you look at the valuations, with the larger coupon, it kind of mitigates that."

ExpressJet steady as stock falls

ExpressJet's 4.25% convertible due 2023, which may be put in August 2008, was unmoved on Thursday even as an equity downgrade sent the stock on a dive.

The convertible, which was last seen at 95.5 on Dec. 15, did not trade on Thursday. ExpressJet stock (NYSE: XJT) dropped 8.66% or 75 cents to close at $7.91.

Merrill Lynch equity analyst Michael Linenberg downgraded ExpressJet stock to sell from neutral on Thursday, citing Midwest Air Group Inc.'s decision to award a regional contract to SkyWest Inc. instead of ExpressJet.

Midwest on Thursday said it chose SkyWest to operate at least 15 and up to 25 50-seat Canadair Regional Jets for five years. Specific routes will be announced later. Houston-based ExpressJet, which operates regional routes for Continental Airlines, had been in the running for the contract.

"SkyWest's gain is ExpressJet's loss as we - and we believe the market - were of the view that ExpressJet was in the lead to get the Midwest business," Linenberg wrote in a research note.

A sellside convertible bond analyst said holders of the ExpressJet convertibles were unlikely to be ruffled by the news.

"The thing with ExpressJet is they're so short, they're not really an equity story at all," the analyst said. "And they're busted. They're more of a credit story, a cash balance story. And their cash balance is fine. It should be more than enough to take care of these in a year and a half."

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