Amgen rises in mixed convertibles trading as earnings reports roil GM, Kodak, boost Wyeth

By Rebecca Melvin

Princeton, N.J., July 20 - The convertibles of Amgen Inc. gained in active trading and some airlines improved again Wednesday. But overall the convertibles market was mixed, with pockets of trading, as the paper of General Motors Corp. and Eastman Kodak Co. sank after disappointing earnings reports, while Wyeth gained after it topped expectations.

Calpine Corp. bonds traded mixed after news that an awaited $800 million offering of common shares for Rosetta Resources Inc. closed. Rosetta is the newly formed company that has purchased all of the domestic oil and gas exploration and production assets formerly owned by Calpine.

Meanwhile investors weighed again the affect that another potential federal funds rate hike will have on the market. Stock markets traded down initially but recovered smartly after Federal Reserve chairman Alan Greenspan in testimony before the U.S. Congress said sustained economic growth with low inflation is seen in coming months.

"I don't think anyone is surprised. It's like seeing a train from five miles away," a Connecticut-based buyside source said of an expected rate increase in August.

At the same time, the source said that higher rates make holding lower coupon bonds harder to justify, and those positions will shift over time. Also, higher short-term rates make it harder for sellside desks to finance carry costs, he added.

Stellar results lift Amgen

The convertibles of Amgen traded actively and rose about 3 points as its stock price surged on Wednesday on the Thousand Oaks, Calif.-based biotech's better-than-expected second-quarter profit and the company raised its full-year profit forecast.

The earnings report posted late Tuesday was followed on Wednesday by an upgrade from Piper Jaffray to "outperform" from "market perform."

The strong results were driven by demand for Amgen's arthritis and anemia drugs, including Aranesp, which is used to treat anemia in cancer and kidney dialysis patients.

Profit for the drug discovery company was $1 billion, or 82 cents a share, compared with $748 million, or 57 cents a share, a year earlier. Revenue gained 23% to $3.2 billion.

"This phenomenal move has made the bonds attractive and provided a great risk/reward opportunity," the Connecticut buyside source said. "What was a cash substitute convert a few days ago is now a true hybrid convertible, with great upside potential."

Amgen's 0% convertible due 2032 traded at 77.50 and 78.625 versus stock prices of $79.50 and $81.90, respectively, up from trades at the 74 level over the last couple of days. The stock closed Wednesday up $10.65, or 15%, to $81.17.

Other biotech names moved up, including Celgene Corp. and Genzyme Corp. Celgene's 1.75% issue traded up to 204.25 versus a stock price of $48.25. Recently the issue was trading just below double par.

Airlines gain after earnings

The convertibles of Continental Airlines Inc., AMR Corp. and Northwest Airlines Inc. gained after strong earnings reports from Continental and AMR.

The convertibles of AMR, the parent of American Airlines, added one or two points after the legacy carrier reported its first quarterly profit without special gains for the first time in four and half years, even though high fuel costs were a drag on its results. Revenue for the company grew 9.9% to $5.31 billion.

"The companies are showing some progress with managing costs even through oil has been high," said a New York-based desk analyst.

AMR's 4.25% convertible due 2023 gained more than 2 points to 99.29 bid, 99.79 offered, from 97.41 bid, 97.53 offered on Tuesday. Shares of AMR added 24 cents, or 1.69%, to $14.47.

Continental's 5% convertible due 2023 firmed up 0.5 point to trade at 100 bid, 100.50 offered, from 99.50 bid, 100.50 offered on Tuesday.

The Houston-based carrier posted a better-than-expected quarter but still expects to post a loss for the year. Continental's load factor increased by 2% to 79.6% amid an 8.3% rise in traffic and 5.5% growth in capacity. Mainline fuel expenses jumped 48.6%, or $188 million, to $575 million.

GM loses favor

The story for GM was different. Its convertible bonds were lower after the largest U.S. automaker posted an unexpected quarterly loss on Wednesday as high costs for everything from materials to worker health care to consumer incentives outweighed strong results from its finance arm.

A surge in U.S. auto sales in June when GM extended its employee discounts to all customers helped the company reduce inventories, but it added little to the bottom line.

"The sales were good, but obviously it comes at the expense of future sales. The incentives to buy now cleared out old inventory, but everyone realizes that it's at the expense of future sales down the road," the sellside desk analyst said.

The $25 bonds of GM lost ground, with its 6.25% convertible issue down 0.34, or 1.52%, at 22.00. The 5.25s shed 0.30 to trade at 19.20, and the 4.50% bonds traded down 0.01 at 24.47. Shares of GM lost 25 cents to close at $36.58.

The convertible preferred shares of Ford Motor Co. managed to squeak out a gain after trading lower early in the session. The shares ended up 0.35, or nearly 1%, to 41.88.

The trading turnaround was achieved despite the fact that Ford and its finance arm Ford Motor Credit were nudged closer to junk status Wednesday when Fitch Ratings cut their credit ratings by a notch, leaving them just a step above speculative grade.

Ford bonds gained on the news due to Fitch's reiteration that they are likely to remain investment grade through the year.

Wyeth floats up

Wyeth's convertible floater lifted after the Madison, N.J.-based pharmaceutical company delivered second-quarter results in line with its positive pre-announcement.

Strong quarterly results from Pfizer Inc., the world's largest drugmaker, also helped Wyeth, as did the expectation that higher interest rates, which make floating-rate convertibles more attractive, are around the corner, sources said.

The bulk of positive sentiment however was due to the 18% rise in Wyeth's reported net income and 12% climb in revenue.

Pharmaceutical sales, accounting for 80% of total sales, climbed 14%, while consumer health and animal health posted very low single-digit growth on an as-reported basis.

The company's depression-fighting drug Effexor grew 7% in the quarter and made up nearly 20% of the company's total revenue. Sales of the vaccine Prevnar rose 48% to $323 million in sales.

Wyeth's floating-rate convertible traded at 104, compared with trades at 103.53 bid, 103.66 offered on Tuesday.

Kodak's struggles continue

The convertibles of Eastman Kodak dropped about 5 points after the struggling photography company reported its second straight quarterly loss and said that accelerated restructuring of its businesses is needed to strip out its dependence on traditional film sales and move it into the arena of digital photography as a prime player.

The Rochester, N.Y.-based company said its restructuring plan will include additional employee cutbacks of up to 10,000 people and dismantling $2 billion worth of assets by mid-year 2007.

Kodak also said it will refinance two revolving bank loans that it has traditionally carried this summer, including a $1 billion 364-day revolver that expired earlier this month and a $1 billion five-year revolver, which will probably be boosted to the $1.22 billion level. The expired revolver will be replaced by a term revolver covering its Creo acquisition.

Kodak's 3.375% convertible due 2033 traded at 105.651, compared to a level of 110.831 bid, 111.331 offered on Tuesday. Shares of Kodak recovered some ground after steep early losses, closing down 64 cents, or 2.23%, to $28.10.

Calpine notes trade mixed

Calpine convertibles were slightly lower on the day, while its straight bonds were higher, a Connecticut-based sellside trader said. An active issue was Calpine's 4.75% convertible due 2023, which traded at 69 bid, 70 offered.

There was little news to spur activity in the bonds, the trader said, dismissing the announcement that Friedman, Billings, Ramsey Group, Inc. closed an $800 million offering of common shares for Rosetta Resources Inc.

In the offering, Rosetta sold a total of 45,312,500 shares of its common stock in a private placement for gross proceeds of $725 million under Rule 144A.

Rosetta used the net proceeds from the transaction, together with $325 million of proceeds from a new credit facility, to buy all of Calpine's domestic oil and gas exploration and production assets.

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