Convertibles quiet; Amylin adds 2 points on positive drug data; Kinetic up by 0.5 point

By Rebecca Melvin

New York, July 8 - Convertibles resumed their quiet mode Friday but were holding up and even slightly better on a dollar-neutral basis after poor jobs data shocked the broader markets, sending equities into a tailspin. Stocks recovered a lot of the ground lost by the market close, however.

Friday's convertibles performance followed improvement on a dollar-neutral basis Thursday as pricing moved up in tandem with higher underlying shares that day and then some.

The train wreck Friday was caused by the U.S. Department of Labor's latest employment situation report for June, which showed slower labor market growth, with a net gain of only 18,000 non-farm payroll jobs, which was not even close to what analysts had been expecting at more than 100,000 jobs. The national unemployment rate edged up to 9.2% from 9.1%.

The holiday-shortened week had generally light volumes, but activity had picked up Thursday. Nortel Networks Corp. was an exception to light volume and saw quite heavy action all week following news last week of an unexpectedly high price tag being paid for its intellectual property.

"That news boosted recovery prospects for bonds," a New York-based sellside analyst said. But the convertibles are traded mostly on distressed desks.

Overall, the market seems to be "holding up OK," a New York-based sellside desk analyst said of Friday's convertibles session, despite many investors sitting on their hands.

Names in trade seemed to be in line with the underlying shares or a little better on swap, a market participant said.

Amylin Pharmaceuticals Inc.'s convertibles jumped 2 points outright to 93.25 as the underlying shares gained after news that heart study data for its experimental once-a-week Bydureon diabetes medication showed it doesn't adversely affect the electrical activity of the heart. This was a key safety concern, regarding which regulators sought additional data.

Kinetic Concepts Inc.'s convertibles ended the week up about 0.5 point on a hedged basis. Rumor of a leverage buyout sent Kinetic shares sharply higher on Wednesday by about 10%.

Textron Inc. was mentioned as a name in focus, as investors early in the session spied out deeper, in-the-money, low-premium names as part of the risk-off trade.

They "are in demand today," a New York-based sellside trader said of such names as Textron.

A second source said he hadn't heard in-the-money, low-premium names were in demand, however.

Drug data lifts Amylin

Amylin's 3% convertibles due 2014 traded at 93.25, which was up about 2 points on the day with the underlying shares up 6% early on.

Shares of the San Diego, Calif.-based biopharmaceutical company ended off their highs, however, settling up 50 cents, or 3.7%, at $14.22 in heavy volume on Friday.

The convertibles have a 300% premium, so they trade outright or maybe on very light hedge, an analyst said.

The Food and Drug Administration declined approval for Amylin's Bydureon drug in October, requesting more information about the drug's heart safety.

Bydureon is designed to be a next-generation version of the twice-daily injection Byetta, which is marketed by Amylin and Eli Lilly & Co. of Indianapolis. Alkermes, based in Waltham, Mass., created the technology that gradually releases the drug over a seven-day period.

The companies said Thursday that a 75-patient study of Bydureon showed it did not interfere with the heart's electrical signals or timing.

Kinetic expands 0.5 point

Kinetic Concepts' 3.25% convertibles due 2015 traded at 139 versus an underlying share price of $64.55 on Friday, which was essentially unchanged from Tuesday, when it traded at 139 versus an underlying share price of $64.50.

The previous week, the Kinetic 3.25% convertibles traded at 127.75 versus an underlying share price of $57.35.

The bonds have expanded by about 0.5 point since the start of the week, Citigroup's convertibles sales and trading desk said in published commentary.

"If a deal were to occur within the speculated $70.00 to $75.00 price range over the next six months, a hedge fund investor would break even given the additional shares received via the takeover table on an 80% delta," Citigroup said.

Shares of the San Antonio-based maker of advanced wound-care products ended the week at $65.01, which was up 48 cents, or 0.75%, on the day, and up more than 10% for the week.

The shares surged on reports that the company is attempting to sell itself for about $5 billion in a leveraged buyout to private equity and has held talks with several firms. Should a deal be reached it would be one of the largest private equity transactions since the end of the 2008 credit crisis.

Textron gets a look

Textron's 4.5% convertible due 2013 traded between 181.6 and 185.25 on Friday, which was flat to lower, according to Trace data.

Shares of the Providence, R.I.-based aircraft maker ended down 16 cents, or 0.7%, at $23.30 in average volume trade.

One source, who hadn't traded Textron convertibles on Friday, had the bonds marked at 185.625 bid, 186.125 offered versus an underlying share price of $23.33 going into the day.

The bonds are one of the deeper, in-the-money names with a low premium in the convertibles universe.

The prior week, Textron announced that the 4.5% convertibles will remain convertible at the option of holders through Sept. 30.

They are convertible because Textron's common shares exceeded the stock threshold price of $17.06 per share, or 130% of the conversion price, for at least 20 days during 30 consecutive trading days ended June 30.

Mentioned in this article:

Amylin Pharmaceuticals, Inc. Nasdaq: AMLN

Kinetic Concepts Inc. NYSE: KCI

Nortel Networks Corp. Pink Sheets: NRTLQ

Textron Inc. NYSE: TXT

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