Kodak holds against outlook; Scottish Re calms nerves; Itron gains off the blocks; GM declines

By Kenneth Lim

Boston, Aug. 1 - The convertible bond market was quieter than usual on Tuesday, with Eastman Kodak Co. holding firm after the company announced a surprise cut in full-year revenue forecast and a wider second-quarter loss.

Scottish Re Group Ltd. bounced back from Monday's dive after the company reassured investors of its solvency and stated that it was confident about meeting its obligations when its convertible becomes putable in December.

Itron Inc.'s new 2.5% convertible due 2026 received a warm reception on its debut, trading above par after the $300 million deal was priced within talk.

The convertible bond market in general had another slow session in the summer lull.

"I find it to be kind of a quiet day again," a sellside convertible bond trader said. "It's getting a little annoying."

Also trading on Tuesday was Par Pharmaceutical Cos. Inc.'s 2.875% convertible due 2010, which improved about a quarter-point on a dollar-neutral basis amid better demand.

The convertible traded at 88 against a stock price of $15.25, about a point better on an outright basis. Par Pharmaceutical stock (NYSE: PRX) slipped 1.38% or 21 cents to close at $15.03.

"Par Pharmaceutical kind of ticked up," a sellsider said. "We saw better buyers today."

Woodcliff Lake, N.J.-based Par Pharmaceutical, a generic drug maker, is currently in the process of restating its results going back to 2004 after it discovered early July that it had understated its accounts receivables reserves. Tuesday's improvement in the convertibles puzzled onlookers.

"I'm not sure why it's up," a Connecticut-based convertible bond analyst said. "Some people think that they may get something if they don't report on time, but they still have some time so it really depends on what you think is going to happen."

General Motors Corp.'s convertibles were lower in line with the stock after the Detroit auto maker saw U.S. vehicle sales fall by almost a fifth in July.

General Motors' 4.5% convertible due 2032 (NYSE: GXM) closed unchanged at 24.85 against the closing stock price of $31.30. Versus the same stock price, the company's 5.25% convertible due 2032 (NYSE: GBM) slipped 1.48% or 0.29 point to end at 19.36 while the 6.25% convertible due 2033 (NYSE: GPM) retreated 1.44% or 0.31 point to close at 21.20. General Motors stock (NYSE: GM) dropped 2.89% or 93 cents on Tuesday.

General Motors said its U.S. sales fell 19.5% in July as high fuel prices drove customers away from trucks and sports utility vehicles.

"They need to start making better cars," a buyside convertible bond analyst said.

Weingarten Realty Investors' recently issued 3.95% convertible due 2026 continued to stay above its reoffered price of 98.125, trading unchanged outright at 98.5 versus a stock price of $39.50. Weingarten stock (NYSE: WRI) eked out a modest gain on Tuesday, closing at $39.97, up by 0.03% or one cent.

Weingarten is a Houston-based real estate investment trust specializing in shopping center and industrial properties.

Kodak steady on shaky view

Eastman Kodak's 3.375% convertible due 2033 fell about 3.5 points outright but was slightly better on a dollar-neutral basis on Tuesday after the company reported wider second-quarter losses and lowered its outlook.

The convertible changed hands at 93.625 versus a stock price of $20.10 on Tuesday. Eastman Kodak stock (NYSE: EK) fell 13.71% or $3.05 to close at $19.20.

"I saw it slide down pretty good," a sellsider said of the stock.

Eastman Kodak on Tuesday said its second-quarter loss widened to $282 million, or 98 cents per share, from $155 million, or 54 cents per share, in the year-ago period. The company said it expects an operating loss of $500 million to $850 million for 2006, and lowered its digital sales growth forecast to 10% from the previous guidance of between 16% and 22%.

Eastman Kodak, a Rochester, N.Y.-based film and camera equipment maker, also said it would stop manufacturing digital cameras, focusing instead on designing and selling those cameras.

"Obviously this isn't good," a convertible bond analyst said. "They really need to demonstrate that they can make this transition to digital."

A sellside convertible bond trader said the credit outlook of the company is tied to its ability to move away from the photographic film business that has been its staple for most of the company's history and into the digital photography arena.

"I just don't think these guys have the ability to transfer themselves from an old economy model to a new economy," the trader said. "The printing business is such a competitive business and film is a dying business."

Scottish Re bounces back

Scottish Re's 4.5% convertible due 2022 and putable in December 2006 recovered about four points outright on Tuesday after the company said it does not face any near-term liquidity or solvency issues.

The convertible, which is trading to its put, changed hands at about 94, while Scottish Re stock (NYSE: SCT) closed at $6.84, up by 71.43% or $2.85. The stock lost about three quarters of its value on Monday.

"It was a nice bounce from previous levels," a convertible bond analyst said. "The data point most people are looking for is the earnings release at the close of Thursday. That will probably give us a better picture."

The Bermuda-headquartered reinsurance company issued its statement a day after the company's profit warning and chief executive's resignation prompted ratings cuts by credit agencies.

In its statement, Scottish Re also said it is confident that it can meet its obligations with regards to the $115 million outstanding 4.5% convertible notes that may be put on Dec. 6, 2006.

Scottish Re on Monday warned of a $130 million operating loss for its second quarter. The company also expects third- and fourth-quarter earnings to fall below earlier guidance. Scott Willkomm also resigned as chief executive.

A sellsider noted that the original issue prospectus for the convertible allowed the company to meet the put by issuing shares at a 2.5% discount to current stock prices, which would free the company from having raise more capital.

"If you are short then perfect and if you like the company, better getting shares as low as possible, no?" the sellsider said.

A convertible analyst, who noted that Scottish Re may have amended its indenture, said the company would like the option of paying convertible bond holders in shares, but that option may not be ideal for some convertible bond holders.

"I would rather have the cash," the analyst said.

Itron rises on debut

Itron's newly priced 2.5% convertible due 2026 gained about a point outright on Tuesday after the $300 million deal priced within talk.

The convertible was bid at 101 against the previous close of $46.54 early Tuesday. The convertible was offered at par. Itron stock (Nasdaq: ITRI) closed at $45.05, down by 3.2% or $1.49.

The deal was talked at a coupon of 2% to 2.5% and an initial conversion premium of 35% to 40%. The initial conversion premium was set at 40%, or an initial conversion price of $65.16.

The over-allotment option is for a further $45 million.

UBS Investment Bank was the bookrunner of the registered off-the-shelf deal.

Itron is a Spokane, Wash.-based provider of measurement equipment and software for utilities. The company said the proceeds of the deal will be used for acquisitions and investments and for general purposes.

"It looked like they priced the deal relatively cheaply and attractively," a sellside convertible analyst said.

A convertible bond trader said the deal priced "OK."

"I like the coupon, I'd rather have seen the premium a little lower, but it is what it is," the trader said. "I heard it was several times oversubscribed."

The trader said Itron had a decent credit and a reasonable stock story.

"I expect it to be a stock that trades around, I expect the volatility to be decent," the trader said.

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