Genzyme, AAR jump outright with earnings; Archstone-Smith slows; Health Management gains further

By Kenneth Lim

Boston, July 12 - The convertible bond market had another slow session on Wednesday, with earnings-related news pushing up a couple of names although volume was lower than expected.

Genzyme Corp.'s 1.25% convertible due 2023 was stronger on an outright basis, in line with a jump in the stock after the company beat estimates with its second-quarter earnings.

AAR Corp.'s 1.75% convertible due 2026 also improved outright after the company said fourth-quarter profit more than doubled.

Archstone-Smith Trust's new convertible was flat as volume thinned a day after the new issue made a positive debut.

The market in general was shuffling its feet in an unexciting session on Wednesday.

"I don't know what it is," a convertible bond trader said. "I looked like it was going to be slow [early in the day], and it turned out just like it looked."

A sellside convertible bond analyst said the market was slower than expected.

"It's been fairly quiet after earnings [are being released], which is unusual," the analyst said.

Some of the names that traded included Medtronic Inc., whose shares saw a modest decline on Wednesday.

The Minneapolis-based medical device maker's 1.5% convertible due 2011 was slightly lower outright at 97.5 against a stock price of $48, while its 1.25% convertible due 2021 changed hands at 99.25 versus the same stock price. Medtronic stock (NYSE: MDT) finished at $47.73, down by 0.52% or 25 cents.

Health Management Associates Inc.'s 1.5% convertible due 2023, which becomes 4.375% paper if not put by August, continued to gain on Wednesday as the put date approaches. The convertible traded at 101.5 against a stock price of $20, about 0.75 points higher outright from the previous session. Health Management stock (NYSE: HMA) inched down 0.4% or 8 cents to close at $20.01. The Naples, Fla.-based operator of acute care and psychiatric hospitals offered in June to increase the interest payout on the convertible if it is not put.

"That was probably enough for some guys to not put it," a sellsider said.

In the oil and gas sector, Nabors Industries Ltd.'s newest 0.94% convertible due 2011 was unchanged at 96.625 against a stock price of $33 on Wednesday. Shares of the Bermuda-headquartered land drilling contractor (NYSE: NBR) closed at $32.97, down by 0.27% or 9 cents.

Solectron Corp.'s 0.5% convertible due 2034 stayed largely unchanged on an outright basis but widened slightly on a dollar-neutral basis after the stock fell on a negative research note, a convertible trader said. The convertible changed hands at 75 versus a stock price of $3.15, while Solectron stock (NYSE: SLR) slipped 3.42% or 11 cents to end at $3.11.

Lehman Brothers on Wednesday initiated coverage on Solectron, a Milpitas, Calif.-based contract electronics manufacturer, with an underweight recommendation.

Genzyme gains in line on results

Genzyme's 1.25% convertible due 2023 jumped about four points outright on Monday, staying in line dollar-neutral against the stock after the company beat expectations for the second-quarter results.

The convertible was marked at 105.25 versus a stock price of $62.70. Genzyme stock (Nasdaq: GENZ) jumped 8.21% or $4.76 to close at $62.74.

"Those traded up with the stock but kind of in line with the stock," a sellsider said. "They were already traded pretty tight, I think."

Genzyme said its second-quarter net earnings rose to $134.5 million, or 49 cents per share, from $123.6 million, or 46 cents per share, in the year-ago period. Earnings per share excluding one-off items were 68 cents, a couple of cents above Street estimates. For 2006, Genzyme continues to expect earnings per share between $1.78 and $1.88.

Genzyme is a Cambridge, Mass.-based biopharmaceutical company.

"They're doing well because they beat numbers," a convertible analyst said. "But they [the convertibles] have like a 25% premium or something, so they're going to move with the stock, so you'd expect the bonds to be up."

Citigroup equity analyst Yaron Werber said Genzyme stock was a good value play among large market capitalization biotech names.

"While Genzyme posted a weak Q1 due to low revenues and higher expenses, the strong Q2 results signal a turn around that should continue over the balance of the year," Werber wrote in a report.

AAR soars outright on earnings

AAR Corp.'s 1.75% convertible due 2026 added about seven points outright on Wednesday, in line with a jump in the stock, after the company said its fourth-quarter profit more than doubled.

The convertible changed hands at 101.25 against a stock price of $24.25 early Wednesday, but closed around 103.75 versus the closing stock price of $25.17. AAR stock (NYSE: AIR) ran up 6.88% or $1.62.

"Its earnings were good," a convertible bond trader said.

AAR said Wednesday that for the quarter ended May 31, 2006, it saw net earnings of $12.9 million, or 31 cents per share. The Wood Dale, Ill.-based aerospace services provider also saw its operating margin improve to 8% in its fiscal fourth quarter, up from 4.3% in the year-ago period.

Archstone-Smith slows down

Archstone-Smith's newest 4% exchangeable due 2036 stayed flat at around par on Wednesday, losing the momentum from its positive debut the day before.

The exchangeable traded at par versus a stock price of $51.375, largely unchanged from the day before. Archstone-Smith stock (NYSE: ASN) closed almost flat at $51.38, just 0.02% or 1 cent higher.

The exchangeable was reoffered early Tuesday below talk at 98.75 as part of a $500 million deal, and managed to gain about 1.5 points outright in its first day on the secondary market.

A sellside convertible bond trader said the new paper by the real estate investment trust saw only limited interest with hedge funds unlikely to find any yield advantage in the exchangeable.

"I haven't seen them at all," the trader said.

Nonetheless, the company said the $75 million greenshoe has already been exercised in full.

Archstone-Smith is an Englewood, Colo.-based real estate investment trust with a portfolio of apartment communities run under the Archstone and Charles E. Smith brands.

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