New paper mixed with thin trading; Lincare, Apria lose on Medicare reform worries

By Ronda Fears

Nashville, Nov. 21 - It was a slow session Friday, and after a busy week of new deals many players headed home early, some even around noon. One trader noted that the upgrade to the terrorism alert around midday pretty much put a cap on what little activity had been going on anyway.

"This morning the new issues were very busy, but it was a mixed bag in terms of market reaction," said a dealer.

"At this point, it's so quiet, I'll just shut it down."

Another buyside trader who passed on most of the week's calendar noted that he had little incentive to participate in the new deals, since his fund is fully invested, which would mean something would have to be sold to buy new paper.

"These new deals do not do anything to enhance returns," the hedge fund trader said.

"We're trading around, so if something cheapens we'll look at how we could get in, but mostly we just want to lock in profits right now."

Many buyside sources marveled at Kulicke & Soffa Industries Inc., a CCC+ credit, managing to issue a convertible with a 0.5% coupon. There were plenty of buyers, though, and a good deal were outright convertible funds, particularly those in a strategy looking for high equity exposure.

Kulicke & Soffa's overnighter priced at the wide end of price talk and then was reoffered at 98 by sole bookrunner Deutsche Bank Securities, according to buyside sources. The chipmaker sold $185 million of five-year convertibles, non-callable, with a 0.5% handle, up 27%.

First, the new Kulicke convertible opened at 97.5 bid, according to a buyside trader, then bounced back. Deutsche closed it at 99.375, 100 offered. The stock ended down 70 cents, or 4.36%, to $15.36.

New deals remained the trading focus Friday, however, but traders also mentioned that both Lincare Holdings Inc. shares were hit hard and Apria Healthcare Group Inc. suffered another blow from ongoing concerns about Medicare reform that would cut payments for services like theirs - respiratory therapy.

On Friday, Wachovia Securities downgraded Lincare Holdings to underperform from market perform, saying Medicare cuts are worse than expected. Wachovia said the developments could significantly hurt Apria Healthcare's earnings, too, but left the stock rated at market perform.

Lincare Holdings took a deep wound to the stock, with the shares plunging $6.12, or 15.64%, to $33. The Lincare Holdings convertible fell 5 dollar points, traders said, ending the day marked at 99 bid, 100 offered.

Apria Healthcare shares also dropped Friday, in sympathy with Lincare Holdings, but had already taken a tough blow on Tuesday when Legg Mason downgraded the stock for the same reasons. Apria Healthcare shares closed Friday down another $2.55, or 8.93%, to $26. On Tuesday the stock lost $2.44. The Apria Healthcare 3.375% convertible due 2033 dropped another 2.75 dollar points, pegged at the session close Friday at 109.25 bid, 109.75 offered.

Traders said, however, there was not a lot of activity in the Lincare Holdings or Apria Healthcare convertibles.

Concern with service providers centers around proposed changes to Medicare benefits that while having the potential to boost revenues for prescription drug companies, would trim back payments for many healthcare services.

S&P equity analyst Frank Connelly, who has a hold on both Lincare Holdings and Apria Healthcare stock, said in a report that the risk to respiratory drug sales is offset by the benefits of continued strong demand for in-home oxygen services, at least near term. S&P expects the stocks to be volatile until the proposed legislation is settled. However, S&P thinks long-term growth remains intact.

Back to the primary market, Land America Financial Group Inc.'s small $100 million of 30-year converts, non-callable for seven years, which sold at 3.125%, up 28.7%, gained in the immediate aftermarket.

Traders on the buyside, though, were speculating that a good deal of the Land America converts would be traded around next week, then will hardly ever be seen.

JPMorgan, bookrunner on the Land America deal, closed the new issue at 102 bid, 102.375 offered. The underlying stock ended off 66 cents, or 1.33%, to $49.

Actuant Corp.'s new convertible from earlier this month also got a nice pop, traders said, from an S&P credit report plus a bigger buyback of its 13% notes than originally expected. S&P rated the new 2% convert at B+, with a stable outlook.

"They have taken out something like half of that 13% issue, so their interest expense has been chopped down quite a bit," a dealer said.

"The space is a bit difficult, as a supplier to the automotive industry, but the credit picture looks better and better. This does offer some coupon to clip, more than some of the recent deals we've seen."

Actuant said Friday it has repurchased an additional $34 million of its 13% senior subordinated notes due 2009 at a premium on the open market. This brings the total 13% notes repurchased since Aug. 31 to $49 million. Following the repurchases, $61 million of the notes remain outstanding.

Activity in other new paper injected into the market this week cooled somewhat, though.

Millennium Chemicals Inc.'s 4%, up 42%, edged up 0.6875 point to 108.0625 point, with the stock closing up 11 cents, or 1.11%, to $10.02.

Yellow Corp.'s new 3.375%, up 50.7%, convert slipped 0.0375 point to 103 bid, 103.5 offered, while the underlying shares lost 50 cents, or 1.62%, to $30.27.

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