Hedgies buying Calpine notes; Amgen loses 1-2 points ahead of earnings; Nextel up on buybacks

By Ronda Fears

Nashville, Oct. 20 - Earnings were the focus of the secondary market Monday as nothing emerged on the new issue front.

Amgen Inc. was weaker by 1 to 2 points ahead of its earnings, traders said.

Calpine Corp. was higher, although after the market close Moody's cut the convertible notes and preferreds deeper into junk territory. Traders said hedge fund players seemed to be getting more involved in the Calpine converts, which one attributed "purely due to the yield these offer."

Barnes & Noble Inc. was downgraded last week, but traders said the converts were standing pat Monday on an outright basis at 104.875 bid, 105.875 offered with the stock gaining 50c, or 1.76%, to $28.93.

Nextel Communications Inc. was mentioned at several shops, which is not unusual as that name is fairly active on a regular basis. Recent activity, traders said, is still motivated by buybacks by the company, as has been the case for months.

On Friday, Nextel said it would redeem the remainder of its 4.75% convertible senior notes due 2007 and 9.95% senior discount notes due 2008. The company also sold $500 million of new 6.875% senior notes due 2013 at par on Friday.

"Nextel has been proactive in buying back the converts. For some reason, they have not been happy about having convertibles outstanding, probably due to dilution issues," said a buyside trader in New Jersey.

"It's pretty widely known, in the convertible market at least, that they've said they will never issue another convertible. Never is a pretty strong word, but I guess they have strong feelings about it."

The Nextel 4.75s were at 103.5 bid, 104.5 offered with Nextel shares off 2c, or 0.09%, to $22.44.

More buyers were seen for the Nextel 5.25% convertibles due 2010, traders said. That issue was quoted at 96 bid, 97 offered, unchanged on a dollar-neutral basis.

The company also has been a strong buyer for that issue in the open market, another trader noted. He said there's about $324 million of the 5.25s outstanding, versus some $607 million at March 31.

Nextel's 6% convertible due 2011 was quoted at 113.25 bid, 114.25 offered.

Amgen was seeing more sellers, however, according to traders.

The drug company announced Monday that the U.S. Food and Drug Administration has approved once-weekly dosing of its rheumatoid arthritis drug Enbrel, which is currently administered in two 25 mg injections three or four days apart.

But traders said that failed to motivate any buyers ahead of its earnings on Tuesday.

"On swap, the Amgen converts were down probably 1 to 2 points," one buyside trader said. "The hedgies have been losing on this issue recently as the stock is still in a slump, so some people are getting out."

Merrill Lynch convertible analysts, in the latest hedge fund index report Monday, said Amgen was the worst performers for hedge funds over the past week, losing 0.9% on an absolute performance basis.

Amgen's 0% convert due 2032 was quoted Monday at 75.375 bid, 75.625 offered with the stock down $1.12, or 1.78%, to $61.89.

Amgen is scheduled to release earnings figures after the close Tuesday, with a conference call set for 5 p.m. ET.

Earnings for Amgen are widely expected to be sharply higher along with revenues, the trader said, but the stock is still well below the 52-week high of $72.37.

In Merrill's hedge fund index report, another loser was the Walt Disney Co. convertible. The best performers were the converts of Fort Motor Co. and General Motors Corp.

The Merrill Lynch convertible hedge fund index edged up a 0.2% for the week ended Oct. 16, taking the year to date return to 11.82% gross of fees, and was the eighth consecutive weekly gain.

The effects of rising interest rates, with the yield on the five-year Treasury increasing 24 basis points to 3.43%, was largely cancelled by a decrease in high yield spreads, said Yaw Debrah, head of U.S convertible research at Merrill, noting the Merrill Lynch high yield index decreased 35 bps to 463 bps.

Volatility was neutral for the most part over the course of the week, he said, although the VIX remained at the bottom of a seven-year trading range.

Thus, Debrah said convertible hedge fund performance largely came from a continuing richening of valuations in the overall convertible universe, with the cheapness of the Merrill Lynch convertible index decreasing to 0.02% from 0.16% the prior week.

A couple of traders Monday at small sellside boutiques said there was some hedge fund buying in Calpine's convertible bonds, and that was mostly attributed to the yield on those notes.

Calpine's 4% convertible due 2006 were up 1 point to 94.5 bid, 95.5 offered, one trader said. The stock closed up 4c, or 0.8%, to $5.01. The trader noted that Calpine's peers AES Corp. and Reliant Resources Inc. were weaker on junk bond desks.

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