Brocade convertibles move lower on call; Amylin gains outright but seen lower on a hedged basis

By Rebecca Melvin

Princeton, N.J., Aug. 23 - The convertibles of Brocade Communications Systems Inc. sold off Tuesday on a call that actually forestalled redemption of all the outstanding notes for a year.

Meanwhile, the stock and convertibles of Amylin Pharmaceuticals Inc. rose on an outright basis, along with the stock of partners Alkermes Inc. and Eli Lilly & Co., a day after positive mid-stage clinical study results for a long-acting type 2 diabetes treatment.

Medtronic Inc. convertibles traded higher after the company announced the introduction of an improved cardiac lead, and XMSR Satellite Radio Holdings Inc. traded mostly flat after news of new market share in Suzuki automobiles.

But the market overall was "deadly quiet," with traders saying that Tuesday's session beat the previous one - a summer Monday - in terms of inactivity.

Call pressures Brocade

Brocade's 2% convertibles traded in after the company announced that it would call all the notes outstanding of the issue, but not until Aug. 22, 2006.

In connection with the uncommon call, the San Jose, Calif.-based networked storage company deposited $276.1 million in interest-bearing U.S. Treasury securities into an account of the trustee to cover interest, principal and call premium related on the notes until the redemption. But those funds will remain on the company's balance sheet as restricted securities.

"They found a loophole in the indenture that allows them to put money away for a year," said a sellside trader in New York.

The move circumvents a declaration of default on the notes, which would have happened Aug. 23, the company said, because it wouldn't be able to meet a deadline that day to file its fiscal second-quarter 10-Q. The trustee for the holders gave notice on June 24 of a potential default unless the filings were made in 60 days.

If such an event occurred, $279.7 million in principal and accrued interest would have become immediately due and payable.

The 2% convertibles, which mature in 16 months, traded down about a point to 98 bid, 99.25 offered from a level near par or slightly above.

The notes were callable as of January 2005 at a call price of 100.8, and investors in general suspected the company was going to get rid of the debt, a New York-based sellside analyst said.

During its second quarter ended April 30, the company bought back $69.2 million face value of the subordinated notes at 96% of par. Previous buybacks had also occurred. The amount of the issue when it priced on Dec. 18, 2001 was $550 million. Meanwhile, maturity for the issue is Jan. 1, 2007.

On Tuesday, Brocade said it expects to record a loss on investments of $4.7 million in the quarter ending Oct. 29 due to "the disposition of certain short-term and long-term investments that was necessary to deposit the funds with the trustee."

Amylin bonds lower on hedged basis

The convertibles of Amylin rose on an outright basis, but were "in a little" on a dollar neutral basis, one trader said.

"The stock was up, but on a full delta hedge, people lost a little money. But most were outright or light hedge [holders]," he said.

Amylin shares zoomed up 27.5% by midday, after the San Diego, Calif.-based drugmaker announced late Monday positive preliminary results of a mid-stage clinical trial of its long-lasting diabetes drug.

The results showed that 12 of 14 patients taking the experimental drug known as Byetta long-acting release met the study's goals of maintaining blood sugar levels over 15 weeks. Patients receiving the placebo didn't achieve the goal.

The long-acting release version of the drug, which drug delivery-company Alkermes Inc. helped develop, allows type 2 diabetics to inject themselves only once a week rather than twice a day.

Following the release of the clinical data, Wachovia Securities and Bear Stearns upgraded Amylin to "outperform" from "market perform." The Wachovia analyst predicted Byetta LAR would be on the market by 2009.

Amylin's 2.25% and 2.5% convertibles were heavily traded, moving up 12 points to 13 points outright. The 2.25s due 2008 traded at 105.75, and the 2.50 due 2011 traded at 102.125.

Amylin shares surged $6.07, or 27.68%, to $28.00.

Amylin partner Alkermes saw its shares jump $1.84, or 11.62%, to $17.67, but its credit remained "stuck," traders said, having run up already on call and redemption expectations.

Meanwhile, Eli Lilly and Co., a third partner, saw its stock gain $1.01, or 1.92%, to $53.72.

Alkermes and Lilly pretty much were ignored by credit players, traders said. The Alkermes bonds were stuck at 129 on Tuesday with no trades seen, and among the various Lilly bond issues a sellside trader said the only activity of any note was in the 2.9% issue due 2008 with a 0.875-point drop to 96.5.

New cardiac lead lifts Medtronic

Meanwhile news from Minneapolis-based Medtronic Inc., a medical appliances and equipment company, saw its convertibles and stock trade higher after the company announced Tuesday that it has introduced in U.S. markets the SelectSecure cardiac lead, which allows doctors to place catheter-delivered pacing in selective sites of the right heart.

Medtronic's 1.25% convertible traded at 101 versus a stock price of $55.60. The company's stock closed Tuesday up 67 cents, or 1.21%, at $56.25.

New market for XM Satellite

The convertibles of XM Satellite Radio traded mostly flat on Tuesday when the company announced that XM Radio will be offered in certain models of Suzuki cars.

Beginning in mid September, the company's Suzuki Grand Vitara and Suzuki XL-7 sport utility vehicles will arrive XM-ready at U.S. dealerships. The XMSR hardware will be available as a dealer-installed option for $399, plus installation.

"Suzuki is experiencing strong sales growth this year, and XM Satellite Radio will only boost that appeal," said Tom Carney, director of sales and marketing for American Suzuki Motor Corp.

XM Satellite's 1.75% convertible due 2009 traded early at 92, versus a stock price of $33.50. Later it traded at 91. The shares closed off a cent at $33.42.

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