Charter Communications, Ceradyne climb on results; Core rises on debut; Medical Properties gains in gray

By Kenneth Lim

Boston, Nov. 1 - The convertible bond market was active on Wednesday, with strong earnings and a stock upgrade sending Charter Communications Inc. on a steep climb.

Ceradyne Inc. also improved on the back of its third-quarter profit growth, as investors described its results as nothing but good.

Core Laboratories NV's new convertibles gained slightly above their reoffered price on their Wednesday debut, but traders noted that the deal seemed to be mostly supported by the underwriters.

In the gray market, Medical Properties Trust Inc.'s planned $100 million offering of five-year exchangeables attracted better bids amid good interest.

Charter soars with stock

Charter's 5.875% convertible due 2009 climbed about 12 points outright on Wednesday in tandem with the stock, which received an upgrade by Citigroup a day after the company reported a third-quarter sales growth.

The convertible traded at 127 against a stock price of $2.30 on Wednesday. Charter stock (Nasdaq: CHTR) rose 15.65% or 36 cents to close at $2.66.

"The stock really shot up today," a sellside convertible bond trader said. "Citi upgraded them to a buy, and guys are thinking that the company is about to start turning in much stronger numbers in the next few months as its restructuring bears fruit."

St. Louis, Mo.-based Charter on Tuesday reported a third-quarter net loss of $133 million, or 41 cents per share, from a year-ago loss of $75 million, or 9 cents per share. Revenue for the third quarter was $1.39 billion, a 10% year-on-year improvement, said the cable services provider.

Citigroup equity analyst Jason Bazinet upgraded Charter stock to buy and raised his stock target price to $3.25 from $1.75. Charter's fundamentals have strengthened following its refinancing of its long-term debt and upgrading of its voice offerings, Bazinet wrote in a note.

"We think the company is poised for a turnaround," Bazinet wrote.

A Connecticut-based convertible bond trader was more cautious about Charter, noting that the company is highly levered.

"Somebody was reading a report to me today on Charter, and it was about how the common is good to buy," the trader said. "But all they ever do is issue more debt...Unless they start to retire more of their debt, it's kind of meaningless."

Ceradyne gets earnings boost

Ceradyne's 2.875% convertible due 2035 gained about 7 points outright on Wednesday after the company's profits swelled in the third quarter and beat Street estimates.

The convertible was quoted at 108.625 versus a stock price of $41.25 when the market opened, and the bond did not trade in the afternoon. Ceradyne stock (Nasdaq: CRDN) closed at $47.05, up by 14.06% or $5.80.

Costa Mesa, Calif.-based Ceradyne said Wednesday its third-quarter profit jumped to $36.9 million, or $1.34 per share, from $13.3 million, or 53 cents per share, a year ago. Analysts were expecting $1.15 per share. Ceradyne makes ceramic parts for military armor and industrial components.

"It looks like the results were really good...there was really nothing but good news there that I saw," a sellside convertible bond analyst said.

A buyside convertible bond trader said the convertible is not usually actively traded.

"With the stock up 14% it must be pretty good for whoever is holding on to the converts," the trader said. "But you don't usually see much of these trading. Guys are probably sitting on it."

Core rises slightly on debut

Core Laboratories' new 0.25% exchangeable senior note due 2011 improved by about 1/8 point on its first day of trading despite a slip in the stock.

The convertible traded at 99.875, slightly above its reoffered price of 99.75, while Core stock (NYSE: CLB) declined 2.66% or $1.94 to close at $70.95.

"They probably traded a ton, but nobody else got them," a sellside convertible bond trader said, explaining that the underwriters appeared to be providing support for the paper.

Core priced the $250 million offering Tuesday after the close, at a coupon of 0.25% and an initial exchange premium of 30%, with a reoffered price of 99.75.

The notes were talked at a coupon of 0% to 0.25% and an initial exchange premium of 30%.

There is an over-allotment option for a further $50 million.

Banc of America and Lehman Brothers were the bookrunners of the Rule 144A offering.

Core, an Amsterdam, Netherlands-based provider of oil reservoir management services, said $72 million of the proceeds will be used to fund convertible note hedge and warrant transactions. About $101 million will be used to repay a revolving loan and another $98 million will be used to buy back Core common stock.

A sellside convertible bond analyst explained that investors' views of the offering likely varied depending on how much volatility they thought there was in the stock. The analyst's model had the deal fair where it priced, which ended with the coupon at the cheap end of talk.

"You get some coupon now versus basically nothing, but it doesn't really change things," the analyst said, adding: "To me it looks like a 'no-no' - no discount, no coupon."

Medical Properties gains in gray

Medical Properties' planned $100 million offering of five-year exchangeable senior notes was bid ¼ point above par in the gray market on Wednesday, as investors said the deal appeared to be fairly interesting.

The deal, which was expected to price Wednesday after the close, was talked at a coupon of 6.125% to 6.625% and an initial exchange premium of 17.5% to 22.5%. Medical Properties stock (NYSE: MPW) closed at $13.53, down by 0.37% or 5 cents on Wednesday.

"It was 0.25 bid in the gray market, but that's on the Street so it's probably stronger than that," a sellside convertible bond trader said.

There is an over-allotment option for a further $15 million.

UBS Investment Bank and JP Morgan are the bookrunners of the Rule 144A offering.

Medical Properties, a Birmingham, Ala.-based real estate investment trust that develops and leases healthcare facilities, said part of the proceeds will be used to complete its planned $90 million acquisition of six facilities during the fourth quarter of 2006. It will also use the proceeds to reduce its revolving debt and to pay for capped call transactions.

A convertible bond analyst said the deal appeared cheap at first glance, although the company appeared to be below investment-grade credit. Hedge investors could find the deal interesting, the analyst said.

"You don't have to put a very big hedge on them to set them up," the analyst said.

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