Gilead, Virgin eyed ahead of earnings; Molina adds on positive results; Clearwire gains

By Rebecca Melvin

New York, April 19 - Earnings and anticipated earnings generated some action in the convertible bond market on Tuesday. Many hedged names remained under pressure as investors seemed interested in lightening up on fully valued convertibles, while a lack of buying interest tempered most moves, sources said.

Gilead Sciences Inc. remained active for a second day ahead of first-quarter earnings expected Wednesday from the Foster City, Calif.-based biopharmaceutical company.

The super-short-dated Gilead 0.5% convertibles, which mature May 1, were active at a small premium, which was similar to Monday's move, while the Gilead 0.625% convertibles were more or less steady, having slipped on Monday after news that a study in Africa of Gilead's Truvada medication was halted because it was not showing benefit in helping prevent HIV infections.

Virgin Media Inc. convertibles were also seen higher along with an improvement in the stock ahead of first-quarter earnings expected Wednesday from the New York-based provider of communication services in the United Kingdom.

Molina Healthcare Inc. gained along with the underlying shares after the Long Beach, Calif.-based health management organization posted better-than-expected earnings on higher premium revenue.

Meanwhile, Clearwire Corp.'s convertibles improved relative to the underlying shares after news that Sprint Nextel Corp. has agreed to pay the Kirkland, Wash.-based mobile broadband services provider a minimum of $1 billion for 4G wholesale services in 2011 and 2012 as part of an amendment to the parties' long-term pricing agreement.

There were no new issues launched in the U.S. primary market.

Market activity was already slowing down ahead of the long holiday weekend for Easter, market sources said.

Gilead steady

Gilead Sciences' 0.625% convertibles due 2013, or the B paper, which trades on about a 70% delta, were at 119 versus a share price of $40.30 on Tuesday, compared to 121.25 versus a share price of $41.70 on Monday, a New York-based sellside desk analyst said.

Gilead's 1% convertibles due 2014, the C paper, traded at 109.25 and 109.50 versus a share price of $40.30, compared to 111.25 versus a share price of $41.70 on Monday.

Gilead's 1.625% convertibles due 2016, or the Ds, were at 113 versus $40.30 on Tuesday, compared to 115 versus a share price of $41.70 on Monday.

There are about $1.1 billion each of both the Gilead C and D convertibles, which priced last fall.

Gilead's 0.5% convertibles due 2011, or the A paper, which mature soon, weren't heard in trade but were seen little changed at 104 to 105.

"...the market is hoping for a big vol. event into earnings," a New York-based sellside trader said.

In addition, whether Gilead's A holders will move into the Gilead Bs after that $650 million of A paper goes away is a question. Market players say that the Bs, while active, are not seen as very attractive for holders because of their currently high valuation.

"With all these big issues rolling off, the obvious choice would be for people to put into the sister issues, but with so many of them overvalued, we're not seeing that," a New York-based sellsider said.

"People don't see a lot of value there," he said.

Other large, liquid issues that matured recently with sister paper outstanding had similar situations. They included Amgen Inc.'s $2.5 billion of 0.125% convertibles, which matured earlier this year, and last week's $2.2 billion of Medtronic Inc. 1.5% convertibles.

Nabors Industries Inc. will also see its 0.94% convertibles mature May 15. And June will bring the maturity of Archer Daniels Midland Co.'s 6.25% convertibles, of which there is $1.75 billion, and Symantec Corp.'s 0.75% convertibles, of which there is $1.1 billion.

Proposed suitable replacements published by the convertibles desk of Citigroup Global Market earlier this year included AngloGold Ashanti Ltd.'s $731.5 million of 3.5% convertibles that mature May 2014 and Boston Properties Inc.'s $750 million of 3.625% convertibles due February 2014, as well as OAO Lukoil Oil Co.'s $1.5 billion of 2.625% convertibles due 2015, SL Green Realty Corp.'s $300 million of 3% convertibles due 2017, Xilinx Inc.'s $690 million of 3.125% convertibles due 2037 and ArcelorMittal's $800 million 5% convertibles due May 2014.

Virgin watched before results

Virgin Media's 6.5% convertibles due 2016 were seen at 169.65 bid at the market close Tuesday, compared to 165.2 bid at the close on Monday, according to a New York-based pricing source.

Shares of the New York-based communication services provider closed up 68 cents, or 2.5%, to $28.09 on Tuesday.

A previous level of 167 versus a share price of $27.40 made the 6.5% convertibles look fairly valued using a credit spread of 500 basis points over Libor and a 20%, according to Citigroup Global Markets' convertibles analyst Stuart Novick.

The convertibles have a delta of about 92% and stand 24.4 points over parity, Novick said in a note Tuesday.

"The hefty coupon on the convert puts the bond's remaining cash flows well in excess of its 24 point premium," he said.

"While a flush out or exchange offer could represent an attractive opportunity for both the company and holders of this security, Virgin Media entered into a call spread last October which lessens the likelihood that the company would initiate such a transaction," he added.

Virgin Media is scheduled to report its first-quarter earnings on Wednesday.

There is a wide disparity in earnings estimates, ranging from a loss of $0.13 per share to income of $0.23 per share, with consensus anticipating slightly positive earnings of $0.03 per share, Novick said.

"Realized vol. has rebounded in the past week but remains depressed at about 19% relative to the longer term historical running in mid 20s," Novick said. Implied vol. is higher.

The credit situation is improving, he said. The convertibles aren't rated, but both Moody's and S&P have rated Virgin Media just below investment grade (BB/Ba1) with "stable" outlook after both agencies raised their ratings by one notch in February. At that time, the company issued £750 million in secured debt.

The company's credit line expires ahead of the convertible issue's maturity in 2016 and most of the company's outstanding debt aside from the convert is secured.

Molina adds on earnings

Molina Healthcare's 3.75% convertibles due 2014 traded at 116.5 versus a share price of $42 on Tuesday, according to a New York-based sellsider.

At the close, it was seen at 114.4 bid, compared to 112.86 bid at the close on Monday, a pricing source said.

Shares of the Long Beach, Calif.-based health management organization settled up $1.17, or nearly 3%, to $40.39 in heavy volume.

Net income of the HMO that works with low-income people on Medicaid and other government assistance programs rose 64% in the first quarter as its premium revenue grew and it spent a smaller portion of its revenue on medical care.

Profit rose to $17.4 million, or 56 cents per share, from $10.6 million, or 41 cents per share, in the year earlier quarter. Revenue grew 8% to $1.12 billion from $966.7 million.

Analysts expected a profit of 47 cents per share on $1.14 billion in revenue.

Premium revenue grew 12% to $1.09 billion, and membership increased 11% from last year. Molina said it spent 84.5% of that revenue on medical care, down from 85.3%. Its medical care ratio, or the portion of premium revenue that goes to providing care for members, decreased in California, Ohio, Utah, and Washington, and increased in Florida, Michigan, Missouri, New Mexico, and Texas.

Molina also reported $36.7 million in service revenue in the first quarter after reporting none a year ago. Its investment income rose to $1.6 million from $1.5 million. The company backed its 2011 profit forecast of $2.20 per share. Analysts expect $2.25 per share on average.

Clearwire improved

Clearwire's 8.25% convertibles due 2040 was seen at 110.5 versus a share price $5.60, which was lower outright compared to a previous level of 111, but improved relative to shares, which fell 20 cents, or 4.3%, to $5.53 on Tuesday.

"The news seemed better for the credit than for the equity, so the improved bonds made sense," a New York-based sellside trader said.

Sprint and Clearwire settled a dispute over wholesale pricing, which means Sprint will pay at least $1 billion over the next two years to use Clearwire's wireless service.

The payments are comprised of minimum usage commitments of $300 million in 2011, $550 million in 2012 and $175 million in pre-payments for 4G wholesale services to be used in 2011, 2012 and beyond, according to the companies' release.

The figures represent a minimum commitment, and the agreement brings clarity to Sprint and Clearwire's relationship, allowing them to push forward with their respective 4G strategies.

While the regular payments are designed to provide Clearwire with additional financial flexibility as it continues to roll out its 4G network across the country, the company said it would need additional financing if it wants to use a second variation of 4G technology more widely adopted by the wireless industry.

Mentioned in this article:

Clearwire Corp. Nasdaq: CLWR

Gilead Sciences Inc. Nasdaq: GILD

Molina Healthcare Inc. NYSE: MOH

Virgin Media Inc. Nasdaq: VMED

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