Protein Design Labs sweetened, sinks; Huntsman hotly pursued; Allergan, Sepracor off, Saks up

By Ronda Fears

Nashville, Feb. 9 - Convertibles took cue from stocks and on whole basically went south Wednesday, and onlookers continued to comment on the migratory trend of convertible arbitrageurs pulling up stake to pursue more profitable horizons.

At bat after the closing bell was Huntsman Corp., and the convertible was said to be a hot item although no when-issued market was spotted.

Yet, Protein Design Labs Inc. had trouble with its new deal, even after ponying up a bit more yield. There had been some chatter pre-market that bookrunner Goldman Sachs & Co. would reoffer it below par, but that did not happen, and the issue broke with a bid of 99.75 that drifted lower throughout the session.

Elsewhere in the secondary market, other biotechs stood out as particular weak spots, traders said.

Allergan Inc. was lower on disappointing results for a dry eye treatment being developed with partner Inspire Pharmaceuticals Inc., and Sepracor Corp.'s older convertibles were lower amid rumors of an all-cash takeover by Merck & Co. Inc., although such a merger was thought by one fund manger to be "debatable, at best."

There were a few issues moving north, too.

Fannie Mae's convertible was seen ticking up with the stock in a positive reaction to headlines out of Washington that U.S. lawmakers on Wednesday urged tougher regulations and oversight for the mortgage giant's accounting practices.

Hewlett-Packard Co.'s convertibles see-sawed on news that chief executive Carly Fiorina had been forced out by the board after a nearly six-year stint at the helm of the computer hardware giant, marked by her push for the 2002 merger with Compaq Computer Corp. That merger ultimately became her downfall as board members and critics argued Compaq was a drag on Hewlett-Packard results. Initially, the reaction in the convertible community was negative, but by day's end the Hewlett-Packard convert was up by about 1 point at 57 bid.

Saks Inc. gained, too, as investors cheered speculation that the retailer was contemplating a split of its upscale apparel stores and other mid-priced department stores.

Huntsman mirroring Celanese

Huntsman is not only similar to Celanese Corp. as part of the chemical sector and by issuing its convertible alongside an IPO, but the market's reaction to the transactions - weaker as to the stock portion but stout on the convert.

"The Huntsman equity is pretty well subscribed," said a sellside source in the convertible market, "and the convert is way over-subscribed."

Huntsman's $250 million three-year mandatory convertible is talked at a 5.0% to 5.5% dividend and 18% to 22% initial conversion premium. It is scheduled to price alongside the Salt Lake City-based chemical company's IPO of 55.7 million shares of common stock with an estimated range of $21 to $23 a share.

Fulcrum Global Partners analyst Frank J. Mitsch said in a note to clients Wednesday that Huntsman's stock may be discounted in the IPO to the neighborhood of $19 although he valued the stock at about $21. Amid chatter of that nature, convertible market sources said Huntsman's convert offering is likely to get upsized.

All would be déjà vu to the Celanese pricing in mid-January.

As rumored beforehand, the Celanese convertible was upsized to $240 million from $200 million and final terms came at the mid-point of yield talk but aggressively outside premium guidance while, also as expected, the German chemical concern's IPO by majority stockholder Blackstone Group was accomplished at $16 a share, versus the expected range of $19 to $21.

Also as with the Celanese convertible, sellside sources said outright, or even dedicated equity funds, are the biggest players in the Huntsman issue.

Protein Design settles at 99.25 bid

Protein Design Labs' new convertible was nowhere to be seen in the immediate aftermarket, much as with the case of it showing no gray market action before pricing. Despite sweetening the coupon and talk of it being reoffered below par, dealers said it was not trading well, or at all.

"Sellside analysts had it 2 points rich or something like that and we worked it up at least 3.25 points rich, at par, at the cheap end [of price talk], so we passed on it," said a convertible fund manager, who said he used a credit spread of 475 basis points over Treasuries, compared with a 400 basis points over Treasuries and 300 basis points over Libor used by sellside analysts.

The $250 million of seven-year convertible notes were printed with a 2.0% coupon and 30% initial conversion premium - wide of yield guidance for a 1.25% to 1.75% coupon and at the cheap end of premium talk of 30% to 35%.

The first look on the issue early Wednesday showed a bid of 99.75 and that never improved, with the issue quoted by a sellside trader at the close at 99.25 bid, 99.75 offered. Protein Design Labs shares ended Wednesday off 16 cents, or 0.88%, at $18.06.

"My thought - in addition to the new issue looking pretty rich based on the price talk - is that this thing has not really traded here (we were involved in the deal) AT ALL," a sellside market source said.

Sellside analysts put the new Protein Design Labs convertible anywhere from around roughly fair value to 2% to 3% rich, at the midpoint of original price talk.

Sepracor takeover 'a pill'

Sepracor getting taken over by the likes of Merck was hashed and rehashed, traders on both sides of the market said, and in the end it served at least to rein in Sepracor's older convertibles that have none of the new-fangled takeover protection language.

While the genesis of the rumors seemed to be at sellside trading desks, several buyside traders were talking about it.

"That's a pretty big pill to swallow," one buyside trader said.

Another suggested the event would be disastrous for all four Sepracor convertibles, saying, "If they are taken over for cash, if that happens, as for the converts, forget it!"

A couple of sellside sources said the downdraft in Sepracor stock on Wednesday would suggest the market had batted down the chatter but also might indicate some holders trying to make a move ahead of the news in order to avoid taxable gains that would surely be associated with a cash takeover.

Sepracor shares on Wednesday lost $1.14, or 1.91%, to close at $58.68, but dealers pointed out that volume in the stock was very low. Sepracor's older zero-coupon convertibles were described as coming in 1 to 2 points on the speculation, while its new 0% convertible - which has a takeover provision - slipped just a half-point to 106.25 bid, 106.75 offered.

"I have not heard anything. But I think the news out of Merck is what is so terrifying!" said a convertible fund manager, specifically noting the Big Pharma concern's loss of revenues from Vioxx and Fosamax getting withdrawn from drugstore shelves. "Seems to me MRK could ill afford to actually buy anyone."

Capitulation? Ha!

Noise about capitulation in the convertible market on recent so-called cheapening was bashed Wednesday by a convertible hedge fund manager. As one measure, Merrill Lynch reported that in the first week of February its convertible index went from being 0.19% cheap to 0.4% cheap.

"Capitulation? Ha!" he said in a conversation with Prospect News.

"When you see a PDLI price with a 2% coupon and they're using a [credit] spread of 300 basis points over Libor, then you are NOT seeing capitulation! That's ridiculous! This is a triple-C credit, for God's sake."

This manager has already sold out of a lot of convertible positions, he said, and is focusing on risk or merger arbitrage instead. His impression of heavy redemptions in the convertible market also echo chatter on several of the big convertible trading desks.

"There is a lot of risk and we are not being paid for it in convertibles right now," he said. "People have forgotten what it's like to price risky credits. Unfortunately, it takes some debacle for reality to sink in."

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