Elan bonds swoon on problems with MS drug; restructured Rural/Metro deal prices

By Paul Deckelman and Paul A. Harris

New York, Feb. 28 - Elan Corp.'s bonds tumbled sharply Monday, after the Irish pharmaceuticals company and partner Biogen Idec Inc. announced that they are voluntarily suspending sales of their new multiple sclerosis drug Tysabri, after one patient who used it died and another developed a serious disease of the central nervous system.

On the upside, a news report that Pathmark Stores Inc. is in talks to sell the company sent the Carteret, N.J.-based supermarket operator's bonds up about two points on the session.

In primary market dealings, Rural/Metro Corp. priced a restructured bond offering and Gerresheimer Glas chimed in with a euro-denominated bond issue.

Elan "was about the only real news out there," a trader said, quoting its 7¼% notes due 2008 as having fallen from Friday's going-home level of 104.25 to as low as 86 bid, 88 offered right after the news about the voluntary Tysabri recall hit the tape.

"There may have even been a high 70s print, which was just a pickoff," he noted. However, the bulk of the trading went on in the high 80s, "bouncing around there for a while" before "slowly" moving up from their lows to finish at 92 bid.

He said there were "a lot of bonds being traded, a big volume on Trace," the Nasdaq bond tracking system. "It's a huge issue, $650 million, pretty liquid," he said. "We saw many tens of millions of these bonds being traded around."

At another desk, a market source looking at the fall in Elan's 7¾% notes due 2011 exclaimed "Whoa!" as he saw that the bonds nosedived to 87.5 bid from prior levels at 106, while the company's floating-rate notes due 2011 bottomed out at 85.5 bid, nearly 20 points below Friday's 104.5 price.

Elan shares sank $18.37, or more than 68%, to $8.53 on the New York Stock Exchange on Monday - the lowest the stock has been in more than a year, since 2003.

The first trader saw the reaction to the drug news as "knee-jerk." He said that Elan has "a lot of cash on the balance sheet. I don't think they have any immediate liquidity issues at all."

He allowed that Tysabri is an important produce for Elan, as well as for Biogen, and its loss could pose big problems for the company - which has spent tens of millions of dollars developing it - "medium to long-term. But in the short run, there aren't any worries about liquidity issues" connected to the drug's problems.

"And there's always the chance that they could market the drug somewhere down the road."

In fact, Elan's CEO, Kelly Martin, told reporters that the drug had been withdrawn just as a precaution and that the companies hoped to resume its marketing later this year.

Elan and Biogen said that they had suspended supplying and marketing the drug after consultation with the Food and Drug Administration, advising doctors to suspend prescribing the medication and suspending all clinical trial use of it.

The decision to withdraw the drug came after recent reports of two cases of serious effects among patients who used it along with an earlier Biogen Idec MS drug called Avonex in clinical trials.

One patient died and a second developed a suspected case of progressive multifocal leukoencephalopathy, a rare and frequently fatal disease of the central nervous system.

The first trader said that the problems with Tysabri - and another piece of bad news coming out of the pharmaceutical industry Monday, the cancellation of the proposed merger between Mylan Laboratorities Inc. and King Pharmaceuticals Inc. - failed to have much impact on other names in that sector, such as aaiPharma Inc., whose 11% notes due 2010 were down "maybe a half' at 71.75 bid, 72.75 offered, "but nothing dramatic."

Pathmark gains

Elsewhere, Pathmark's 8¾% notes due 2012 were seen having pushed up as high as 99.5 bid from prior levels around 96, before backing off those peak levels to finish at 98 bid, 99 offered.

The bonds were pushed up by a report in The New York Post that the company - a major supermarket operator in the New York area and elsewhere in the Northeast - was in talks to be sold to C&S Wholesale Grocers Inc.

The Post said exact terms of the deal were not known and that the talks could still fall through.

A trader, while quoting higher levels, said that he had not seen "a lot of activity."

Another trader pronounced the bonds "definitely higher" at 98.

A trader said that the news that Pathmark - which has been shopping itself around for some months - may have finally found an interested buyer, as well as the bigger retailing industry story Monday - Federated Department Stores' intent to buy May Department Stores Co. - sparked little consolidation frenzy among other sector names.

"I won't say that it was priced in," he began, "but they've been so strong, I don't see how much further [the bonds] can tighten unless some event happens to them specifically.

He quoted Saks' 7½% notes due 2010 unchanged on the day at 107.25 bid, 108.25 offered. JC Penney's 6 7/8% notes due 2015 were "pretty much unchanged" at 110 bid, 112 offered.

The trader saw little movement in Goodyear Tire & Rubber's bonds, despite the news that the Akron, Ohio-based tiremaking giant will sell its North American farm tire business to a unit of Titan international for $100 million.

"It was already priced in," he said, describing the lack of movement in the company's 7.857% notes due 2011, which were anchored at 103.75 bid, 104.75 offered.

Two new deals

Two issues priced on a comparatively quiet Monday in the high-yield primary market.

Rural/Metro Corp. completed a downsized $175 million two-part deal, shifting $15 million to its credit facility, and Gerresheimer Glas priced its €150 million of 10-year notes on top of inwardly revised price talk.

The two transactions had some market sources scratching their heads as the pricings left nothing in their wake, as far as deals that are expected to be priced during the present week. However those sources advised Prospect News to watch out for drive-bys during the first four sessions of March 2005.

And looking beyond the present week to the week of March 7, the forward calendar took on some heft Monday, climbing back over the $1 billion threshold as timing was revealed on a trio of deals.

Gerresheimer comes on top of revised talk

With sources in the investment banks on both sides of the Atlantic asserting that new euro-denominated deals are playing to warm receptions from investors, Düsseldorf, Germany-based glass and plastic packaging firm

Gerresheimer Glas priced its €150 million issue of 10-year senior notes (Caa1/B-) at par on Monday to yield 7 7/8%, on top of the revised 7 7/8% price talk.

Initially the JP Morgan and Credit Suisse First Boston-led acquisition deal had been talked at 8% to 8¼%.

Elsewhere Monday Rural/Metro Corp. downsized its two-part offering to $175 million from $190 million.

On the operating company-level, Rural/Metro Operating Co. LLC/Rural Metro (Delaware Inc.) priced a downsized $125 million of 10-year senior subordinated notes (Caa1/CCC+) at par to yield 9 7/8%, in the middle of the 9¾% to 10% price talk.

The issue was downsized from $140 million. The company concurrently increased its term loan B due 2011 by $15 million to $135 million from $120 million.

Meanwhile at the holding company-level Rural/Metro Corp. sold $93.5 million of 11-year senior discount notes (Caa2/CCC+) at 53.699 to yield 12¾%, right on top of price talk (275 basis points over the subordinated notes). The sale of the discount notes generated $50.209 million of proceeds.

Citigroup ran the books for the debt refinancing deal from the Scottsdale, Ariz., provider of emergency and non-emergency medical transportation, fire protection and other safety services.

In trading the new 9 7/8% notes due 2015 shot up to 102.5 bid, 103.5 offered, from their par issue price earlier in the session.

Calendar back above $1 billion

One sell-side source reported seeing bond prices weaken during Monday's session, as the Dow Jones Industrial Average gave up 75 points and change.

"There's nothing left on the forward calendar for this week," the official commented, adding that quick-to-market transactions will probably be seen during the remaining four sessions.

Later on Monday another sell-sider concurred that drive-by deals are likely to emerge during the first four sessions of March.

Nevertheless the forward calendar did take aboard a trio of deals.

Exide Technologies will start a roadshow Tuesday for its $350 million offering of eight-year non-call four senior notes (Caa1/B), which are expected to price next week.

Deutsche Bank Securities and Credit Suisse First Boston will be joint bookrunners for the deal, proceeds from which will be used to repay debt and provide the Lawrenceville, N.J., battery company with greater liquidity.

A roadshow also starts Tuesday for South Hackensack, N.J., plastic packing firm AEP Industries Inc.'s $175 million offering of eight-year non-call-four senior notes (confirmed B2/expected B).

The debt refinancing deal, via Merrill Lynch & Co., is expected to price on Friday, March 11.

And Delta Petroleum Corp. is also set to kick off its roadshow on Tuesday for $150 million of 10-year senior notes (B3/B) via JP Morgan and Citigroup.

Denver, Colo., oil and gas exploration and development company expects to price the debt refinancing deal on Thursday, March 10.

Thin calendar keeps investors involved, says Citi

According to Citigroup high-yield analyst John Fenn, the junk bond primary market continues to hang in there, despite such slings and arrows as outflows from high-yield mutual funds, stock market volatility and rising crude oil prices.

"The high-yield market continued to perform over the last week as investors were still putting money to work despite events occurring in the financial markets that might have indicated high yield would suffer," Fenn wrote in the Feb. 25 edition of Citigroup's U.S. fixed-income research organ, the Bond Market Weekly.

"Spreads were tighter by more than 10 basis point over the [previous] week without high yield doing much charging as Treasuries sold off going back to the [Feb. 18] PPI report for January.

"Even the technicals, which are still favorable for the market given the lack of supply, were weaker as the market saw another week of retail outflows with AMG Data reporting that high-yield mutual funds lost $218 million for the week ended February 23."

Explaining, the relative strength, Fenn said: "Certainly, the lack of issuance is keeping investors focused on the secondary market and the reported outflows do not appear to have diminished the appetite of investors for the market. With the market's tightening on the week, high yield clearly performed better than any of the other fixed income asset classes, which is very much symptomatic of the strength of high yield.

"There simply is not a lot of value available to investors in the market so we see no impetus for institutional investors to leave. High yield's lack of Treasury sensitivity certainly helps and the obviously low levels of defaults continue to provide investors with comfort.

"All of that said, as high yield continues to grind tighter, the home runs get tougher and tougher to identify. With default risk at a minimum, it is not necessarily a bad thing to look for incremental yield/spread trades and the perceived incremental risk-as long as one is not stretching for risk. Typically, the high-yield market will scoff at the investment-grade guys getting excited over 'pick 5' trades, but we are approaching the point in time when that mind-set becomes necessary."

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