Kodak collapses on patent ruling; lesser credits weak; Newmont expands; SanDisk active

By Rebecca Melvin

New York, May 21 - The 7% convertibles of bankrupt Eastman Kodak Co. slumped nearly 10 points into the mid-teens on Monday afternoon after a negative ruling in a patent infringement case.

"They got smoked," a Connecticut-based trader said of the Kodak convertibles because U.S. International Trade Commission judge Thomas Pender ruled that Kodak's patent rights weren't violated by Apple Inc. and Research in Motion Ltd. because the patent is invalid.

The two-year-old case was viewed as a "benchmark" among the patents that form the basis for Kodak's asset valuation, the trader said.

Elsewhere, other distressed bonds were also weaker, including AMR Corp. and Suntech Power Holdings Co. Ltd., despite a bounce in equity markets.

AMR's 6.25% convertible due 2014 traded actively in the 50 bid, 51 offered context, which was a little lower than where they had been; and Suntech Power's 3% convertibles due 2013 traded at 63.5, bit, 64 offered, which was down about a point from 64 bid, 65 offered Friday.

Suntech shares added 3 cents, or 1.5%, to $2.03 on the day.

In the main arena of the convertible bond market, many credit-oriented issues were little changed and many in-the-money names were slightly weaker because volatility compressed, a New York-based trader said.

The majority of trading volume occurred in higher quality credits like Medtronic Inc., and Newmont Mining Corp.'s B convertibles were active in the top-five volume names, and said to have expanded about 0.5 point on a dollar-neutral, or hedged, basis, as the underlying shares gained 4%.

SanDisk Corp. saw trades in its longer-dated 1.5% convertibles during the session that were up in line with the underlying shares of the Milpitas, Calif.-based maker of flash memory storage chips. The SanDisk 1% bonds traded several times at the market close around the unchanged mark.

Meanwhile, Isis Pharmaceuticals Inc.'s 2.625% convertibles due 2027 traded Monday at 97.75, with shares of the Carlsbad, Calif.-based drug maker up 5%; and BioMarin Pharmaceutical Inc.'s 1.875% convertibles due 2017 traded up toward double par at 192.

Kodak gets smoked

Kodak's 7% convertibles due 2017 traded down to 15.5 to 16, and were seen ending the day wrapped around 16, down from an early level of 24 bid, 25 offered.

"That makes up the valuation," a trader said of the patent that was ruled against by an ITC judge. "Now bondholders might not get anything."

Given the reaction in the bonds, holders were hoping that the ruling would go the other way and not that it would be "a flat out, negative ruling against them," the trader said.

"The whole Kodak estate is the patents and this was a big case on that one patent that is a benchmark," he said.

The disputed patent, which Kodak claims is used in all modern cameras, covers a feature that previews low-resolution versions of a moving image while recording still images at a high resolution.

A different judge in an earlier ruling had found the patent valid and infringed by Samsung Electronics Co., and Kodak said that it will appeal this latest decision.

Volume of trading in the Kodak convertibles wasn't as heavy as might be expected perhaps because "people were loath to sell them down here," the trader said.

"I would have thought they'd be more active," he said.

Kodak is a Rochester, N.Y.-based imaging technology products and services provider that filed for bankruptcy on Jan. 19.

SanDisk active, flat

SanDisk's 1% convertibles due 2013 traded multiple times after the market close at around 98.5, which was little changed from the previous level. During the session, the 1% bonds traded a point higher at 99.7.

The SanDisk 1.5% convertibles due 2017 traded during the session at 100.625, which was up 1.6 points.

SanDisk shares traded up $1.04, or 3.3%, to $32.56 on lighter-than-average volume.

One trader said the shorter-dated 1% convertibles are more appealing than the longer-dated issue due to the fact that in the one year until they mature what is essentially a cash substitute will deliver 2% yield.

The company, which sells USB flash drives and embedded memory for mobile phones, has a strong balance sheet with nearly $4 billion in net cash, so it is more or less guaranteed that the bonds will be redeemed, he said.

"This is not a bad issue in a diversified portfolio for over 2% yield," the trader said.

But the SanDisk 1.5% convertibles were still seen somewhat rich.

"They don't model particularly well, and with just 61% premium, I'm not that excited about it," the trader said.

The company's stock is down more than 20% for the year to date due to a weak first quarter and poor forecast for the second quarter.

Industry demand has been weaker than expected, and supplies increased more than estimated at the beginning of the year. "This led to greater-than-expected price decline, particularly in the second half of the first quarter, impacting our revenue and gross margin," SanDisk's president and chief executive said in the company's latest earnings release.

Mentioned in this article:

AMR Corp. NYSE: AMR

BioMarin Pharmaceutical Inc. Nasdaq: BMRN

Eastman Kodak Co. Pink sheets: EKDKQ

Isis Pharmaceuticals Inc. Nasdaq: ISIS

Medtronic Inc. NYSE: MDT

Newmont Mining Corp. NYSE: NEM

SanDisk Corp. Nasdaq: SNDK

Suntech Power Holdings Co. Ltd. NYSE: STP

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