Electronic Arts convertibles gain on hedge; CACI, WebMD bid higher; Dendreon disappoints

By Rebecca Melvin

New York, May 9 - The convertible bond market was still up strongly on Thursday even though the sizzle came out of stocks. A strong bid was supported by short supply of convertible paper and the prospect of looming maturities and other redemptions in the next six weeks, market players said.

"The last few days have been a bid fest," an East Coast-based buysider said. "Everything is up, up and away. Everything you look at in the morning is up 0.5 point, 1 point or 2 points by the end of the day."

A second trader, based in New York, concurred, saying that convertibles really "popped" on Wednesday, with many moves disproportionately higher on the convert side than on the stock side.

Electronic Arts Inc. added on an outright basis and improved on a hedged basis by about 0.5 point in active trade on Thursday. It was the second day of action inspired by the Redwood City, Calif.-based video game publisher's quarterly results, which included a fiscal fourth-quarter loss but better-than-expected guidance for full-year results.

CACI International Inc.'s convertibles were mentioned as putting in an outsized gain on the convertible side compared to shares of the Arlington, Va.-based information technology and professional services provider.

WebMD Corp.'s convertibles were also better after the Elmwood Park, N.J.-based provider of online medical information reported better-than-expected quarterly results late Tuesday and announced that its chief executive Cavan Redmond is stepping down.

But Dendreon Corp.'s convertibles dropped on Thursday after the Seattle-based biotechnology company's quarterly report revealed weak sales of its premier Provenge prostate drug. The report was followed by a downgrade by Stifel to "sell" from "hold."

Other names mentioned as notching improvements this week included Volcano Corp., Illumina Inc. and Salesforce.com Inc.

Not all the improvements in convertibles corresponded with matching stock gains. For example, Illumina shares have been on a tear higher this week, but Volcano shares are lower.

Investors are scouring even global markets, a trader said, reporting an extra early start Thursday as overseas action preceded trading in U.S. markets. "The only way to keep up with the equity markets is to be in it. You've got to be in it to win it," he said.

But it wasn't only the equity market that was floating all boats; the convertible market's supply issue was propping up pricing. "New issues are scarce and Salesforce is going away, NetApp Inc. is going away," he said.

"Almost every semi balanced name in this market is better bid," a buysider said. "There is something like $20 billion redeeming from the market in the next month and half. People are desperate."

Meanwhile, stocks ebbed after a string of record making gains and despite positive jobless claims data. The S&P stock index was down 5.59 points, or 0.3%, at 1,627.10; snapping a five-day streak of record highs. The Dow Jones industrial average slipped 23.66 points, or 0.2%, to 15,081.46, and the Nasdaq stock index was down 1.16 points at 3,412.11.

Applications for unemployment insurance decreased by 4,000 to 323,000 in the week ended May 4, the fewest since January 2008, Labor Department figures showed. The four-week average declined to 336,750, the lowest level since November 2007.

Electronic Arts up on hedge

Electronic Arts' 0.75% convertible senior notes due 2016 were seen better at about 102.5 versus the closing price of underlying shares at $21.64, which was up 8 cents on the day.

That was up about 0.5 point on a hedged basis, using a delta of about 30%, a trader said.

The improvement in active volume was on the heels of an in line move on Wednesday - although pricing was better Wednesday on an outright basis on a surge in shares.

The company reported fourth-quarter earnings that missed expectations, but guided higher for fiscal 2014.

For full-year 2014, earnings are now expected to be $1.20 per share, which is a dime better than estimates, on revenue of $4 billion.

CACI, WebMD gain

CACI's 2.125% convertibles due 2014 traded on swap at about 117.125 versus an underlying share price of about $60.50. Shares were lower on Thursday after a bump up Wednesday.

But a trader called the move "random."

"It was 0.5 point better, which is above and beyond where it should have been," the trader said.

Meanwhile, WebMD traded thinly on Thursday after jumping up a couple of points on Wednesday.

WebMD's 2.5% convertibles due 2018 traded up 2 points to 95.75 on higher shares of the Elmwood Park, N.J.-based provider of health information services.

"The stock was up, but the bonds shouldn't have moved as much as they did," the trader said.

For the first quarter, WebMD swung to a net profit of 17 cents per share, compared to a loss of 22 cents per share in the year-earlier period. Revenue was $112.8 million, which was higher compared to the year-earlier period of $106.9 million. Analysts on average had expected a loss of 2 cents per share on revenue of $106.9 million.

Dendreon drops

Dendreon's 2.875% convertibles due 2016 slumped to 70 in trading Thursday, which was down about 9 points from 78.5 bid, 79.5 offered previously, a New York-based trader said.

Although the bonds trade on an outright basis, they moved in conjunction with shares that fell 71 cents, or 15%, to $4.03.

Dendreon, which makes therapeutics to treat cancer, reported quarterly results that missed analysts' estimates.

"It's always a disappointment; it's a perpetual story," a trader said of Dendreon.

The company reported a narrower fiscal first-quarter loss of $72 million, or 48 cents a share, which was better compared to a loss of $103.9 million, or 70 cents, in the year-earlier quarter.

But revenue fell 18% to $67.6 million, from $82.1 million in the year-earlier period. Analysts expected sales of $79.7 million.

Looking ahead, the company said that second-quarter sales will grow to the mid $70 million range and that the fourth quarter will be stronger.

Provenge, which received regulatory approval for the treatment of prostate cancer in April 2010, faces increased competition from drugs such as Johnson & Johnson's Zytiga, which was recently approved for pre-chemotherapy use, and Medivation Inc.'s enzalutamide drug.

Mentioned in this article:

Dendreon Corp. Nasdaq: DNDN

Electronic Arts Inc. NYSE: EA

CACI International Inc. Nasdaq: CACI

WebMD Corp. Nasdaq: WBMD

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