St. Jude flat, drags Medtronic lower; AMR gains on profit; Home Properties, Minefinders quiet in the gray

By Kenneth Lim

Boston, Oct. 18 - The convertible bond market picked up on Wednesday as earnings-related news kept investors busy.

New deals planned by Home Properties Inc. and Minefinders Ltd., however, were quiet in the gray market.

"It's getting into earnings season, maybe guys are concentrating on other stuff," a sellside convertible analyst said.

St. Jude Medical Inc. shrugged off the company's profit drop ahead of a put in December, but concerns about its market sent rival Medtronic Inc. slightly lower.

AMR Corp. also improved outright after the American Airlines parent swung to a profit for its third quarter.

St. Jude unmoved by results

St. Jude Medical's 2.8% convertible due 2035, which may be put in December this year, was mostly unchanged after the company reported a 31% drop in its third-quarter profit.

The convertible was marked at 99.25 against a stock price of $36.90 on Wednesday. St. Jude stock (NYSE: STJ) fell 4.13% or $1.54 to close at $35.73.

"St. Jude is a really short piece of paper," a sellside convertible bond trader said. "They get put back in December, so it's just trading to the put...It's such a short-term paper now that it no longer makes any difference how the stock is doing."

St. Paul, Minn.-based St. Jude on Wednesday reported third-quarter net income of $116 million, or 32 cents per share, from year-ago profit of $168 million, or 44 cents per share. For the fourth quarter, the medical device maker guided for earnings between 38 and 40 cents per share, below the Street estimate of 41 cents. St. Jude, which had earlier warned of a slowdown in the market for implantable cardioverter defibrillators, also said it could not be certain when that segment will recover.

"They were pretty much in line for their third quarter," a sellside convertible bond analyst said. "But the concern here is that the ICD market continues to be weak, and their outlook for the fourth quarter isn't great...I think the problem now is with oversupply and strong competition."

The analyst said the news should not significantly affect the convertible or the company's credit quality.

"Their credit is still fine," the analyst said. "Holders of the convertible are obviously still confident of being able to put the convertible back in December, judging by where they're trading."

Medtronic dragged by St. Jude

Medtronic's 1.5% convertible due 2011 declined by about ½ point outright on Wednesday amid concerns fueled by St. Jude's lackluster quarter.

The convertible traded at 99.375 bid, 99.5 offered against a stock price of $48.10. Medtronic stock (NYSE: MDT) closed at $48.10, down by 1.13% or 55 cents.

"It's probably down in sympathy with St. Jude," a sellside convertible analyst said.

Minneapolis-based Medtronic is also a medical device maker, whose implantable cardioverter defirbrillators compete with St. Jude's.

But the analyst said some of the slip on Wednesday was probably a knee-jerk overreaction.

"People were already expecting a tough quarter for St. Jude," the analyst said. "I think the weak ICD market has also been priced into most of these device makers, so there really isn't any big surprise here."

AMR climbs on profitability

AMR's 4.25% convertible due 2023 added about 5 points outright after the airline company reported its first back-to-back quarterly profit in six years.

The convertible traded at 160 versus a stock price of $25.60. AMR stock (NYSE: AMR) rose 7.47% or $1.80 to close at $25.90.

"Airlines have been raging higher," a convertible bond trader said.

Fort Worth, Texas-based AMR on Wednesday reported a profit of $15 million, or 6 cents per share, for the quarter ended Sept. 30, from a loss of $153 million, or 93 cents per share, a year ago.

"This is obviously good news for AMR, and I think people are hoping that this will also mean good news for the other airlines," a buysider said. "If oil prices continue to fall, and if there isn't another terrorism scare, and if the airlines continue to watch their costs and capacity, the next quarter could be decent as well."

Home Properties, Minefinders quiet in gray

The planned convertible bond deals by Home Properties and Minefinders were quiet in the gray market on Wednesday ahead of their post-market pricing, despite views that the offerings were potentially interesting.

Home Properties' $175 million offering of 20-year exchangeable senior notes were talked at a coupon of 3.875% to 4.125% and an initial conversion premium of 18% to 22%. There is an over-allotment option of a further $25 million. Home Properties stock (NYSE: HME) closed at $62.15 on Wednesday, up by 0.11% or 7 cents.

Merrill Lynch is running the books for the Rule 144A deal.

"It looks interesting," a buyside convertible bond trader said. "It looks like it could be attractive if it comes in at the cheap end."

A sellside convertible bond analyst said Home Properties was not an investment-grade company, but "I didn't have any real issue with the credit."

Home Properties, a Rochester, N.Y.-based real estate investment trust that focuses on residential apartment communities in the United States, said it will use about $58 million of the proceeds to concurrently buy back stock, and another $70 million to repay an outstanding revolving loan. The rest of the proceeds will be used for general corporate purposes.

The offering was about 2% cheap at the midpoint of price talk, the analyst said.

"But it looks like it might actually come a little bit cheap," the analyst said. "No one on the desk has seen it today...maybe it's just another REIT."

Minefinders' planned $75 million of five-year convertible senior notes was talked at a coupon of 4%-4.5% and an initial conversion premium of 26% to 32%. There is an over-allotment option for a further $10 million. Minefinders stock (Amex: MFN) fell 11.11% or $1 to close at $8.

JP Morgan was the bookrunner of the Rule 144A offering.

Minefinders, a Vancouver-based precious metals exploration company, said the proceeds of the deal will be used to build and set up its proposed Dolores gold and silver mine in Mexico.

A buyside convertible bond analyst said the Minefinders convertible seemed like it would receive decent interest from the market because it looked reasonable as a hedged instrument.

"It looks pretty cheap on the arb side, because the vol's pretty high on the name," the analyst said.

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