Lehman jumps on speculation; King holds, Alpharma up on takeover bid; China Sunergy up on earnings

By Rebecca Melvin

New York, Aug. 22 - The convertible preferred stock of Lehman Brothers Holdings Inc. traded significantly higher Friday amid renewed speculation about a possible sale of some or all of the fourth-largest New York investment bank, market sources said.

Fannie Mae convertible preferreds also moved higher for a second consecutive day after plunging Wednesday even as uncertainty surrounding the government-sponsored enterprise remains high.

Both financial names were major features of a volatile trading week. Trading was generally slim, however, as the summer period looks to peak before its traditional conclusion in another week and a half.

News that Alpharma Inc. rejected a takeover bid from King Pharmaceuticals Inc. earlier this month didn't move those companies' convertible bonds dramatically. King was down by just 0.125 point on a hedged basis, although higher outright, and Alpharma was trading at a little discount to its make whole table.

China Sunergy Co. Inc.'s convertibles were indicated higher after the China-based solar company reported second-quarter profits that beat estimates, and Lazard Capital subsequently upgraded the American Depositary Shares to "buy" from "hold."

Another solar name, Yingli Green Energy Holding Co. Ltd. announced plans to construct a new solar power plant in Beijing, lifting its ADRs 16%, and its convertibles were also seen higher.

Several new convertible issues from the solar sector have come to market in 2008 including Energy Conversion Devices Inc., a U.S.-based maker of thin-film solar modules, and Trina Solar Ltd., another Chinese name in the space. Their convertibles were all called higher on Friday.

Lehman jumps on speculation

Lehman Brothers' 8.75% mandatory convertible preferreds jumped to 63 versus a share price of $15.75 on Friday, compared to 54 versus a share price of $13.10 on Thursday.

The older 7.25% Lehman preferreds traded at 62, compared to 53, versus the same share prices.

Lehman common stock (NYSE: LEH) jumped in early trading by as much as 16% but ended the session up by just 5% at $14.41.

Reports that a South Korea sovereign wealth fund might buy a piece or all of Lehman spurred higher trades. But it wasn't the first news that has been heard about possible investment from South Korea, and some considered the move overblown.

"Lehman was bid up; they're just bidding it up," a New York-based sellside trader said of the jump in the convertibles and shares.

A South Korean government official confirmed that Korea Development Bank has considered buying a stake in Lehman Brothers, but talks with the U.S. bank had not developed to the point of discussing details, according to reports.

Fannie Mae extends gains

Fannie Mae's 8.75% mandatory preferreds traded at 12.25 versus a share price of $4.85, and the market was later called 12.35 bid, 12.55 offered versus the same share price, compared to a close Thursday at 10.75 bid, 11.75 offered versus a share price of $4.40.

The older Fannie Mae 5.375% series 2004-1 convertible perpetual preferred was indicated to close at 27,200 versus $5.00 on Friday, compared to 24,977 versus a share price of $4.85 on Thursday.

Shares of the Washington, D.C.-based mortgage company (NYSE: FNM) closed up 3%, or 15 cents, at $5.00.

Those shares traded higher in very heavy volume - just as Lehman's did - even as questions regarding the debt of Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, continue to plague investors.

After the close, Moody's Investors Service cut the preferred stock ratings on both Fannie and Freddie to Baa3 from A1, citing continued market turmoil weighing on the companies ability to access capital.

King a little lower, Alpharma adds

King Pharmaceuticals' 1.25% convertible senior notes due 2026 were lower by about 0.125 point dollar neutral, trading at 85.75 versus a stock price of $12.00 on Friday, which compared to 82.5 versus a share price of $11.24 at the close Thursday.

Shares of the Bristol, Tenn., pharmaceutical company (NYSE: KG) closed up 95 cents, or 8.5%, at $12.19.

"King pretty much held with the news," a sellside source said.

King, which develops therapies and technologies primarily in cardiovascular and metabolics, neuroscience and acute-care settings, disclosed that Alpharma rejected its $1.43 billion takeover bid. But it said it remained optimistic that a deal will be worked out.

Its $33-a-share bid was a 37% premium to Thursday's closing price. Earlier this month, King reported second-quarter results that showed a 34% decline in net income as sales of its Altace blood-pressure drug were hurt by generic brands.

Alpharma produces pain treatments as well as medicines for livestock, and its new Flector Patch, a prescription patch for external pain, has done well.

Alpharma's 2.125% convertible senior notes due 2027 were not seen in trade but were said to be indicated about a point lower than the paper's make-whole chart, possibly reflecting carry and accrued in the trade right now, a sellsider said.

Another sellside source said, "Looks like an extra 5.22 shares assuming six-month completion." That would make parity versus the target price, or $33, stand at 118.44.

"Another way of looking at it is it added 17.22 points to the conversion value," he added.

Shares of the Bridgewater, N.J., company (NYSE: ALO) surged 44% to $34.50.

Solar names post gains

China Sunergy's 4.75% convertibles were indicated at 99 bid, 100 offered versus a share price of $11.00, a sellside source said, after news that the China-based solar company swung to a second-quarter profit that beat analysts' estimates.

Shares of the Nanjing, China-based company surged 18% to $11.72 in volume that was 10 times the three-month rolling average.

The small, $50 million convertible issue priced in June and isn't very liquid.

Nevertheless there are more than half a dozen viable solar convertible deals from which to choose if exposure to alternative energy is desired.

Of those, San Jose, Calif.-based SunPower Corp. is a favorite. "A) it's American, and B) it's an interesting technology and a high-end solution," a Connecticut-based sellside analyst said.

SunPower's 0.75% convertibles, priced in July 2007, were indicated up 2 points at 131, and its 1.25% convertibles were indicated up 3 points at 180.5, both versus a closing share price of $96.59, which was up 2.3% on the day.

Energy Conversion Devices, based in Michigan, saw its 3% convertibles due 2013 indicated at 108.275, up from 106.5 versus a share price (Nasdaq: ENER) of $79.38, that rose 3% on Friday.

Convertibles among the Chinese solar companies included Suntech Power Holdings Co. Ltd.'s 3% convertibles, JA Solar Holdings Co. Ltd.'s 4.5% convertibles, Trina Solar Ltd.'s 4% convertibles and Yingli's 0% convertibles due 2012.

"You start getting into all the Chinese undistinguished names. There's Suntech, which is bigger, and Yingli, which is more vertically integrated: they are building capacity. But I think there is going to be overcapacity, and a shake out ... they are going to be commoditized in my opinion," a sellside analyst said.

Still, there are signs of positive momentum brooding in the sector, according to a Goldman Sachs report published Aug. 1.

Goldman expects growing geographic diversity in Europe will compensate for potential demand softness in Spain, with robust 53% year-over-year demand growth for PV products in Europe (excluding Spain).

"We expect the growth momentum of Chinese solar players to continue with growing geographic diversity going forward. Furthermore, in light of the recent string of announced supply contracts by STP, TSL and SOLF, we believe Italy, France and Greece will be new centers of growth for the Chinese solar companies," the Goldman report stated.

Nevertheless, there are also looming margin risks from demand-driven supply tightness, according to the report.

In general it estimates upside second-quarter earnings across the board but mixed performance for the second half, and it maintains a recommendation of long Suntech Power and short Trina, with neutral ratings on JAS Solar, LDK Solar and SolarFun Power.

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