Level 3 hammered on earnings; Countrywide down on borrower bailout; Medtronic coming back?

By Evan Weinberger

New York, Oct. 23 - Level 3 Communications Inc. convertibles got mugged Tuesday as the company announced, to put it mildly, disappointing earnings and a profit warning for the next year.

Countrywide Financial Corp. convertibles also slipped, but not nearly as much, after America's largest home lender announced a plan to bail out $16 billion worth of faltering subprime mortgages.

Moving into positive territory, Medtronic Inc. convertibles regained some strength Tuesday. St. Jude Medical Inc. saw its convertibles end the day mixed.

Amgen Inc. convertibles ended the day up on news that it had won a patent case against a rival firm. And Symantec Corp. convertibles rose on positive expectations for its third-quarter earnings, which will be announced Wednesday. Itron, Inc. was up strong as it flew past the contingent conversion hurdle set in its terms.

Market watchers reported Tuesday trading that was "a little bit" more active than this past sleepy Monday.

Stocks moved on a jagged line over the course of the day before breaking into the open field at the end. Powered by strong third-quarter earnings from big name companies like Apple Inc., AT&T Inc. and American Express Co., among others, all three major indices performed solidly Tuesday.

The Dow Jones Industrial Average added 109.26 points, or 0.81%, to close at 13,676.23.

The Nasdaq closed at 2,799.26, a gain of 45.33 points, or 1.65%.

The Standard & Poor's 500 picked up 13.26 points, or 0.88%, for a close of 1,519.59.

One new American issue came in after market close. Golden Star Resources Ltd. launched $125 million in convertible senior unsecured debentures due Nov. 30, 2012. The debentures are talked at a coupon of 3.5% to 4% and an initial conversion premium of 32.5% to 37.5%.

There is no greenshoe on the Rule 144A transaction. The debentures are also being offered in Canada on a private placement basis subject to Regulation S.

The debentures have call protection for life.

Golden Star is a Littleton, Colo.-based gold mining firm. The company plans to use the proceeds to repay its existing $50 million in 6.85% senior convertible notes due April 15, 2009 and the balance for property development and for general corporate purposes.

Two new issues came in from overseas since Monday. French renewable energy producer Theolia launched €190 million in 2% convertible bonds due Jan. 1, 2014 in the Oceane structure talked to yield 3.25% to 3.75% with an initial conversion premium of 25% to 30% Tuesday before the market open in France.

The Regulation S transaction is expected to price Tuesday after the market close. Theolia has the option to increase the offering to €215 million, and there is a further €25 million greenshoe.

The bonds will be issued at par, and the settlement date is Oct. 31.

The bonds are callable beginning Jan. 1, 2012 subject to a 135% hurdle, and there is a put option beginning Jan. 1, 2012. The bonds have full takeover protection.

Theolia is based in Aix-en-Provence, France, and plans to use the proceeds to speed up its wind farm implementation program throughout Europe and for potential acquisitions.

China Green Holdings Ltd. priced RMB 1 billion in U.S. dollar settled zero-coupon convertible bonds due Oct. 29, 2010 to yield 1.5% with an initial conversion premium of 35.2% Monday.

The convertibles were offered at par and have a redemption price of 104.6%. The closing date on the Regulation S transaction is Oct. 29.

The conversion price is HK$11.

There is a call option beginning Oct. 29, 2009 subject to a 130% hurdle. There are no puts. The convertibles have change-of-control, delisting and takeover protections.

China Green is a Hong Kong-based agricultural company. The company plans to use the proceeds to develop new cultivation bases in the People's Republic of China and for general corporate purposes.

Level 3 sinks to new level

Broomfield, Colo.-based telecommunications firm Level 3 announced its earnings for the third quarter early Tuesday, and the markets were not impressed. Check that, the markets were alarmed.

Level 3 announced a net loss for the third quarter of $174 million, or 11 cents per share. That was somewhat of an improvement on the $0.13 per share loss in the second quarter of 2007.

Maybe it was the announcement that things are looking bleak at the company that sent the stock and convertibles on a freefall. Level 3 chief executive officer James Q. Crowe said in a statement that the company was forced to lower its estimates for the foreseeable future.

"The breadth of the problem was greater than we had earlier diagnosed, and we did not increase provisioning capacity as we had expected," Crowe said in the statement. "This increase in provisioning capacity was necessary to meet the revenue increases we had previously projected. As a result, we are lowering our Consolidated Adjusted EBITDA guidance for the full year 2007 and the full year 2008."

Level 3 stock and convertibles were bludgeoned and left bleeding in an alley Tuesday. Level 3's 3.5% convertible senior notes due June 15, 2012 closed at 90.6182 versus a closing stock price of $3.28 Tuesday. They closed Monday at 104.744 versus a stock price of $4.32.

"They were active," one analyst said, in the understatement of the day.

Level 3 stock (Nasdaq: LVLT) lost $1.04, or 24.07%, on Tuesday.

Countrywide slips on big bailout

Calabasas, Calif.-based Countrywide saw its two outstanding convertibles slip on news that it was starting up a $16 billion refinancing and restructuring program for adjustable-rate mortgage holders. Countrywide estimated that the program could help 82,000 borrowers avoid foreclosure.

Meanwhile, all eyes will be on Countrywide Friday when it announces its third-quarter earnings.

Countrywide's Libor minus 350 bps series A convertible senior debentures due April 15, 2037 slipped to 87.467 versus a closing stock price of $15.05 Tuesday. The convertibles finished trading Monday at 88.034 versus a stock price of $15.68.

Countrywide's Libor minus 225 bps series B convertible senior debentures due April 15, 2037 closed Tuesday at 84.978 versus a stock price of $15.05. They closed Monday at 85.725 versus a stock price of $15.68.

Stock in Countrywide (NYSE: CFC) tumbled 63 cents, or 4.02%, on Tuesday.

Medtronic rebounding?

It may be too early to tell, but Minneapolis-based Medtronic saw its convertibles and stock rise for the first time in more than a week. The medical device maker was slammed after announcing the recall of one of its heart defibrillators last Monday.

Tuesday, though, Medtronic's 1.5% convertible senior notes due April 15, 2011 closed at 102.53 versus a closing stock price of $48.03. They closed Monday at 101.586 versus a stock price of $47.

Medtronic's 1.625% convertible senior notes due April 15, 2013 closed Tuesday at 102.47 versus a stock price of $48.03. They closed Monday at 101.187 versus a stock price of $47.

Medtronic stock (NYSE: MDT) added $1.03, or 2.19%, on Tuesday.

In a related note, St. Paul, Minn.-based medical device maker St. Jude saw its convertibles finish trading mixed Tuesday.

St. Jude's 1.22% convertible senior debentures due Dec. 15, 2008 close at 98.6 versus a stock price of $38.65. They closed Monday at 99.06 versus a stock price of $39.46.

St. Jude's 2.8% convertible senior debentures due Dec. 15, 2035 was an almost exact mirror image Tuesday. The debentures closed Tuesday at 99.216 versus a stock price of $38.65. They finished Monday at 98.985 versus a stock price of $39.46.

St. Jude stock (NYSE: STJ) slid 81 cents, or 2.05%, on Tuesday.

Amgen rises on patent win

Thousand Oaks, Calif.-based Amgen won a big patent case against Swiss rival Roche. A jury in Boston ruled that an anemia drug created by Roche and set for release in the United States violated 11 Amgen patents. Amgen announced that it would move to block the sale of Roche's new drug Mircera in the United States.

With Amgen set to announce its third-quarter earnings Wednesday, and with the thrill of victory hanging in the air, Amgen's convertibles moved up Tuesday.

Amgen's 0.125% convertible senior notes due Feb. 1, 2011 closed Tuesday at 93.88 versus a closing stock price of $57.70. They closed Monday at 93.27 versus a stock price of $56.12.

Amgen's 0.375% convertible senior notes due Feb. 1, 2013 had a stronger day, closing Tuesday at 92.68 versus a stock price of $57.70. They closed Monday at 91.53 versus a stock price of $56.12.

Amgen stock (Nasdaq: AMGN) gained $1.58, or 2.82%, on Tuesday.

Symantec up on earnings expectations

Analysts expect Cupertino, Calif.-based security software producer Symantec to see continued earnings improvement when its third-quarter results are announced Wednesday evening, according to a poll taken by Thomson Financial. Earnings at Symantec had been down earlier in the year due to a serious restructuring.

With high hopes, investors drove Symantec's 0.75% convertible senior notes due June 15, 2011 up to 119.978 versus a closing stock price of $20.96 Tuesday. They closed Monday at 117.76 versus a stock price of $20.36.

Symantec stock (Nasdaq: SYMC) stretched 60 cents, or 2.95%, on Tuesday.

Itron shoots up

On Oct. 1, a contingent conversion in the terms of Liberty Lake, Wash.-based Itron's 2.5% convertible senior subordinated notes due Aug. 1, 2026 kicked in. Common stock in the water and electricity meter producer traded at 120% of the conversion price of $65.16 for 20 days prior to the end of the quarter. Investors have until Dec. 31 to convert their notes into cash and common stock.

Predictably, the convertibles are on the rise, closing Tuesday at 169.262 versus a closing stock price of $103.38. They closed Monday at 165.90 versus a stock price of $101.11.

Itron stock (Nasdaq: ITRI) also leaped, adding $2.27, or 2.25%, on Tuesday.

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