Freeport-McMoran surges on strong earnings; JDS Uniphase rebounds; Gilead plans $1.1 billion deal

By Kenneth Lim

Boston, April 18 - The convertible market was busy Tuesday as bond investors bought on stronger confidence that the Federal Reserve's trend of hiking interest rates may be coming to an end.

One of the most active names Tuesday was Freeport-McMoran Copper and Gold Inc., which gained in line with a surge in its stock on Tuesday after the company said first-quarter profit nearly doubled, beating Wall Street estimates.

JDS Uniphase Corp. rebounded on an outright basis, climbing back from a Monday fall prompted by poor guidance from an industry peer.

Meanwhile, Gilead Sciences Inc. proposed $1.1 billion of new convertible bonds to be issued in equally sized tranches of five- and seven-year notes. Talk on the five-year convertibles guides for a coupon of zero to 0.5% and an initial conversion premium between 20% and 25%, while the seven-year bonds are talked at a coupon of 0.125% to 0.625% and an initial conversion premium of 19% to 24%.

Also seen trading on Tuesday was Supervalu Inc.'s zero-coupon convertible due 2031, which held firm against a slight drop in the stock after the company reported a 93.5% plunge in its fourth-quarter profit on charges from store closures. The convertible was quoted at 32.75 bid, 33 offered versus a stock price of $29.31 in the morning, similar to levels from the previous week. Supervalu stock (NYSE: SVU) closed at $29.23, down 8 cents or 0.27%.

Eden Prairie, Minn.-based Supervalu said Tuesday that it had earnings of $6 million, or 4 cents per share, in the quarter ended Feb. 25, from $92.9 million, or 65 cents per share, in the year-ago period. Part of the drop came from $72.4 million in costs incurred from closing stores and supply chain improvements ahead of the grocer's planned acquisition of competitor Albertson's Inc. Supervalu, which is buying Albertson's as part of a consortium with drugstore CVS Corp., will pay about $6.3 billion in stock and cash and take on about $6.1 billion of Albertson's debt.

Overall, the convertible market saw general strength on Tuesday, market sources said.

"Everything was strong across the board," said a Connecticut-based convertible bond trader.

The trader said buyers came to the market after minutes from the latest Federal Reserve meeting suggested that some members of the Federal Open Market Committee saw a possible peak in the funds rate at 5%.

"Guys were willing to bid on anything," the trader said. "I think it was just the general opinion that rates may have run their course. It sure wasn't oil prices, it sure wasn't gold prices."

Freeport-McMoran gains on results

Freeport-McMoran's 5.5% convertible preferreds were about 90 points higher outright in line with a 6.72% jump in the stock after the copper and gold mining company reported a 93% increase in its first-quarter profit.

The 5.5% convertible was seen at 1,475 bid, 1,480 offered versus a stock price of $69.60 late in the day, said Connecticut-based trader. Another trading desk had the security marked at 1,469.49 bid, 1,474.49 offered against the closing stock price of $69.57. The company's 7% convertible due 2011 was seen trading 15 points better on an outright basis, and was marked at 227.73 bid, 228.73 offered versus the closing stock price. Freeport-McMoran stock ended Tuesday higher by 6.72% or $4.38.

"They were really busy today [Tuesday]," the trader said. "A lot of the Freeport preferreds that never trade were trading."

New Orleans-based Freeport-McMoran said net earnings for its first quarter rose to $251.7 million, or $1.23 per share, from $130.4 million, or 70 cents per share, in the same period a year ago on the back of rising gold and copper prices.

"They blew the numbers away, what else can you say?" said a sell-side convertible analyst.

Freeport-McMoran also reported that its copper and gold production figures slid in the first quarter, but the analyst said the drop was expected as the company mines its way toward higher ore grades.

"They've always maintained that they're going to mine a lot more dirt than ore for now" because they are digging through the lower ore grades, but "the fourth quarter of this year would be the best quarter," the sellsider said.

The sell-side analyst said the convertibles are now so far in the money that they have essentially become stock plays.

"The premium on the preferreds is like 6%, and so if the stock goes up you expect it to go up," the analyst said. "The premium on the 7%s is 4%, so it's also a stock play. There's no bond value really here."

A buy-side analyst, who also noted that Freeport-McMoran's gold production was "significantly higher than expected," agreed that the convertibles would trade "pretty close to the stock."

The buysider added that concerns about Freeport-McMoran's troubles in Indonesia - the company has been the target of protests over its operations and controversial payments to security forces - may already have been worked into the stock price.

"Every once in a while there will be an incident, but it trades at a discount to its peers, mostly because of the sovereign risk in Indonesia, so I think that's already priced into the stock," the buysider said. "And the fact that they're the Number One taxpayer in Indonesia, it's in the best interest of the government to protect their business and their rights."

JDS Uniphase rebounds

JDS Uniphase saw its convertible rebound in line with the stock on Wednesday as the market recovered from industry peer Bookham Inc.'s reduced earnings guidance a day earlier.

The company's zero-coupon convertible due 2010 was about 2.5 points better on an outright basis, marked at 100.22 bid, 100.72 offered at the closing stock price of $3.67. JDS Uniphase stock (Nasdaq: JDSU) ended up by 26 cents or 7.62%.

A buy-side analyst said the market continues to be confident about industry prospects for JDS Uniphase, a San Jose, Calif.-based maker of optical communications equipment.

"Globally the trends are in favor of the sector," the analyst said. "There was a lot of overbuild in the '90s, and ... estimations were that last year the market was already close to being in balance in terms of the supply and demand of the bandwidth."

With demand rising significantly in the past three years due to new consumer trends such as video downloads, file sharing and voice-over-IP, broadband providers have started to fill up the capacity built a decade ago, the analyst said.

"At some point telcos will have to expand, so the names are rallying," the buysider said.

Gilead's deal seen with "upside"

Gilead Sciences has proposed two $550 million tranches of convertible notes with the five-year paper talked at a coupon of 0% to 0.5% and an initial conversion premium of 20% to 25%, and the seven-year tranche talked at a coupon of 0.125% to 0.625% and an initial conversion premium of 19% to 24%.

All the convertibles will be offered at par, and pricing is expected Wednesday after the market closes.

Each tranche has an over-allotment option of a further $100 million, bringing the total deal size to $1.1 billion with greenshoe options worth $200 million.

Gilead will also enter into convertible note hedge and warrant transactions to increase the effective premium of the deal.

Morgan Stanley, Merrill Lynch and Banc of America are the bookrunners for the deal, which is offered under Rule 144A with registration rights.

"This is a biggie," said a convertible fund manager. "It's really two issues in one. It makes our market grow, and... it makes it easier to beat the index."

The fund manager said it seems like the company timed the offering to take advantage of its strong stock. Gilead (Nasdaq: GILD) announced on Tuesday that first-quarter profit was up 67% at $262.7 million or 55 cents per share due to stronger sales of its Truvada pill used to treat HIV.

"I think we're seeing a spate of issues that are aimed at a hot stock market," said the fund manager who added later: "Good news for GILD! Time to tap the market!"

The deal's features - the convertibles are non-callable for life and will have relatively low conversion premiums - offer "a lot of upside" if the stock goes up, but also plenty of downside risk if the Gilead stock falters, the fund manager said.

"Obviously all new deals come to take advantage of whatever the market conditions are," the fund manager said. "We're getting more equity upside sensitivity, in tune with the market. There's no bond upside with such a low yield, so the bond risk here is substantial. With a coupon of only 0.25%, there's not much cushion on income either. So there's a lot of downside on these two tranches if the stock price goes down."

"It's more like a stock, although the upside/downside doesn't look too bad on the 5-year," the fund manager added.

Gilead, a Foster City, Calif.-based biopharmaceutical company, said it will use the proceeds of the deal to buy back about $500 million of its stock and to fund the convertible note hedge transactions. Remaining proceeds will be used for general corporate purposes.

The stock buyback could support the company's share price, the fund manager said.

"You'd think so. It's buying back stock with very low cost debt, so that may be a new trend. I like it. It means greater convertible issuance," the manager said.

But the buysider said the offering may not have to be bought at issuance because there are "tremendous opportunities in the after-market."

"Am I excited about this? Not yet, we've got to look at the company," the fund manager said.

Gilead stock closed at $61.84 on Tuesday on Nasdaq.

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