CP Ships, Sovereign on tap early Thursday; El Paso, Primus beaten down; Corixa eyed in biotech rally

By Ronda Fears

Nashville, Feb. 18 - Convertible players didn't blink much as a result of the dip in stocks, dealers said. Rather, many were looking for buying opportunities from any downdraft, banking that it will be brief. Thus, the market was said to still be better bid, overall.

"There were a lot of wireless names getting trampled, especially the rural wireless carriers like Western Wireless," a dealer said.

Rural wireless carriers like Western Wireless Corp. were pummeled, the trader said, because they are seen getting squeezed out of the national or global picture by the big cell phone companies, particularly in the wake of the $41 billion Cingular Wireless merger with AT&T Wireless Services Inc. inked earlier this week.

Some telecom issues were just caught in the fallout, a buyside market source said, such as Primus Telecommunications Group Inc., which is a smaller telecom services provider but not a rural wireless carrier. Thus, some players were looking at the decline as a possible opportunity to buy.

El Paso Corp. was pounded, too, in the wake of announcing its $1 billion charge to fourth quarter results, chiefly due to having to write down its oil and gas reserves. That sparked a downgrade to the credit by Standard & Poor's, and Moody's put El Paso's ratings on review for possible downgrade.

Elan Corp. plc and Biogen Idec skyrocketed on news that they may be able to begin the regulatory process to market a multiple sclerosis drug this summer, a year ahead of schedule. That sparked fresh looks at several biotech and drug names, like Corixa Corp.

Sovereign, CP Ships afloat

In the primary market there were three deals to consider, totaling more than $1 billion. The deals include two overnighters launched after Wednesday's close for pricing before Thursday's open.

Sovereign Bancorp Inc. was pitching $700 million of 30-year convertible preferreds talked to yield 3.875% to 4.375% with a 35% to 40% initial conversion premium. Lehman Brothers is sole bookrunner of the overnight transaction.

Sovereign is in the midst of an acquisition, which will only require a cash outlay of about $240 million. The company, however, is considered a prime takeover target itself, according to market buzz. The chatter, which puts Royal Bank of Scotland as the suitor, goes back to last summer and has fueled a sharp rise in Sovereign's securities.

Sovereign's 8.75% convertible trust preferred has risen in tandem with the stock, although both ended slightly off Wednesday.

Sovereign's 8.75% convertible ended off 0.15, or 0.5%, to 27.51. The shares closed off 3 cents to $22.72, but in after hours trading dropped 91 cents, or 4%, due to the convertible offering.

CP Ships Ltd. was marketing $175 million of 20-year convertible notes in the overnight Rule 144A market with price talk for a yield of 3.75% to 4.25% with a 32.5% to 37.5% initial conversion premium.

Those two overnighters follow Fisher Scientific International Inc.'s $300 million offering after Wednesday's close.

Fisher on tap with repeater

There was no gray market for Fisher's proposed new issue, buyside sources said, which is no surprise since that has been the case with new issues recently seen with indicative terms at about fair value.

Fisher was returning to tap convertible investors for the second time in seven months and sold $300 million of 20-year convertible notes at 3.25%, up 50% - at the cheap end of yield talk for a 2.75% to 3.25% coupon and at the middle of premium guidance for 47.5% to 52.5%.

The new Fisher convertible was put at fair value at the midpoint of guidance by one source, which was modeling it with a credit spread of 175 basis points over Libor, or 225 basis points over Treasuries, and 23% volatility.

Lehman Brothers analysts put it 0.67% cheap at the middle of price talk, using 240 basis points over Treasuries and 26% volatility.

Merrill Lynch analysts put it 0.5% rich at the midpoint of guidance, using 310 basis points over Treasuries and 27% volatility.

In July, Fisher sold $250 million of 20.25-year convertibles at par to yield 2.5% with a 36% initial conversion premium - at the cheap end of guidance.

Fisher shares dropped $2.02, or 3.63%, to $53.60 as arbitrageurs took positions.

Standard & Poor's rated the new Fisher convertible at B+ with a negative outlook, and Moody's assigned a B2 rating with a stable outlook.

Proceeds from the convertible will provide Fisher the bulk of financing needed to acquire two privately held companies, Oxoid Group Holdings Ltd. and Dharmacon Inc., for about $410 million. S&P said these purchases will stretch Fisher's financial measures, pushing total debt to EBITDA to about 4.2 times, which was cause for revising the outlook to negative. At the same time, however, S&P said it believes Fisher will move to rapidly reduce debt.

Moody's said it believes the Oxoid and Dharmacon acquisitions will complement Fisher's recent acquisition of Perbio. Supporting the ratings is a strong and improving financial performance, bolstered by substantial recurring revenues, Moody's said. The ratings are constrained by a larger-than-anticipated level of debt financed acquisitions, intermittent restructuring charges and negative tangible net worth.

Doubters stage El Paso selloff

El Paso Corp.'s stock fell on heavy volume after the company announced a $1 billion charge in the fourth quarter to account for a 41% reduction in its proven reserves estimate, which was more than expected. The stock was hit by sell recommendations and that in turn pressured the converts, which also saw heavy selling.

One dealer said there was "mounting doubt" about El Paso hurdling obstacles as it struggles to achieve some lofty targets in its reorganization plan by 2006.

El Paso's 0% convertible bonds due 2021 fell 1.25 points to 46.125 bid, 46.625 offered.

El Paso's 9% mandatory convertible plunged 3.69 points to 29 bid, 29.25 offered.

El Paso shares plummeted $1.55, or 17.59%, to $7.26.

S&P cut El Paso's senior ratings, including its convertible bonds, to CCC+ from B- and convertible preferred rating to CCC- from CCC, with the outlook remaining negative.

The revision to proved reserves amounts to more than 40% of El Paso's reserve base, S&P said, and the resulting ceiling test writedown is greater than what had been expected. While there is no immediate cash flow impact, S&P said it suggests that future production and cash flow could be weakened in 2005 and beyond.

Moody's put El Paso's ratings, including convertible bonds at Caa1 and convertible preferreds at Caa3, on review for possible downgrade. Moody's said the event raises concerns about the direction of future production, which has been in decline for some time, and the degree of asset and cash flow coverage that reserves provide to creditors.

Primus victim of rural fallout

Some telecom issues were caught in the fallout as rural wireless carriers like Western Wireless were blasted Wednesday, a buyside market source said. Primus Telecom, which is a smaller telecom services provider but not a rural wireless carrier, was a prime example.

Western Wireless, based in Bellevue, Wash., was the truest member of the rural wireless carrier group that was hit in the convertible market. The Western Wireless 4.625% convertible due 2023 dropped about 5 points to 192.5 bid, 193.5 offered as the stock lost 77 cents, or 2.89%, to $25.91.

But the fallout scraped a couple of other convertible issues, like Primus.

Primus Telecom's 3.75% convertible due 2010 fell nearly 10 points on an 11.5% plunge in the stock.

The convertible was quoted closing at 115 bid, 116.25 offered. Primus Telecom shares ended down 93 cents to $7.16.

Rural wireless carriers were pummeled, a dealer said, because they are seen possibly being erased by the global expanse of the big cell phone companies.

"There is a fear that these rural wireless carriers could just go away," with the bigger carriers not even bothering to make an acquisition, the trader said.

Ptek Holdings Inc. was another name mentioned in the smaller telecom group. Ptek, based in Atlanta, provides wireless messaging and web conferencing services. The Ptek 5% convertible due 2008 was quoted down 1 point to 174.75 bid, 175.75 offered with the stock losing 13 cents, or 1.27%, to $10.07.

Drug money enticing to buyers

Biotechs are back in rally mode, and convertible players were scouring the pack of biotech converts for opportunity. Elan and Biogen Idec were high-profile gainers Wednesday, but Corixa also was mentioned heading north as it garnered new interest.

Elan was one of the most heavily traded stocks on the New York Stock Exchange after it announced Wednesday in a joint statement with Biogen Idec that they plan to apply midyear for U.S. Food and Drug Administration approval to market Antegren, a treatment for multiple sclerosis - a full year ahead of schedule.

Elan's 6.5% convertible due 2008 - issued in November and already deep in the money - soared more than 30 points to 187.25 while the stock climbed $13, or 34%, to $11.80.

The old Idec zero-coupon converts also were sharply higher, with the 2019 issue at 215 bid and the 2032 issue adding 1.75 points to 62.5 bid, 63.25 offered. Biogen Idec shares gained $8.97, or 20.27%, to $53.23.

Pretty much the entire group of biotech convertibles were higher, but dealers said buyers were pretty choosy since a good portion of those issues also are deep in the money.

Hence, Corixa was getting some fresh interest as it is one that is not overly expensive.

The Corixa 4.25% convertible due 2008 was quoted up 1.375 points to 98.875 bid as the stock gained a dime, or 1.64%, to $6.20.

"They ended the last quarter with about $200 million in cash, they've got $100 million in debt [the convert] and a $350 million market cap," a market source said. "I really like this one."

GlaxoSmithKline plc is the powerhouse drug name behind Corixa, having invested more than $100 million in the Corixa's lead drug, Bexxar, to treat lymphoma, and that lends some credibility to the venture plus some comfort for other investors.

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