Nuveen deals surface; Ligand off on drug data; AIG buyers emerge; Delta lower amid deal mumbling

By Ronda Fears

Nashville, March 28 - In a relatively quiet session following the long holiday weekend, traders said the convertibles market was feeling a bit firmer overall although there were several stand-out losers. A nice-sized deal popped up that is linked to Nuveen Investments Inc., but nothing more than more noise was heard in the way of a new convertible from Delta Air Lines Inc. The Atlanta-based airline, however, filed a $500 million shelf registration late Monday.

"It has been pretty quiet here today," one desk analyst said. "A lot of people [are] out after the Easter holiday, and the European markets [are] closed."

Biotechnology and drug issues were mostly lower, with Ligand Pharmaceuticals Inc. taking the brunt of the beating as it announced disappointing trial results for a new lung cancer drug. Generic drugmakers were higher, though, as Teva Pharmaceutical Industries Ltd. received tentative approval in the United States to market a generic form of Eli Lilly Co.'s antipsychotic drug Zyprexa. Ivax Corp. was up on that news, too, in addition to comments from a conference call hosted by Merrill Lynch to discuss the generic Zocor exclusivity matter.

Commodities, including crude oil, eased Monday, and in reaction several oil issues were higher. But Temple-Inland Inc. was hammered on news from last week just before the three-day weekend that Carl Icahn does not intend to seek board representation, which put a wrench in speculation about restructuring at the paper conglomerate. That, in turn led to several downgrades in the stock, and the convertible reacted dramatically.

The Temple-Inland 7.5% mandatory due May 17, 2005 shed 5 points as the stock plunged, ending Monday at 58.5 bid, 58.75 offered. The stock closed at $73.45, losing $6.38 on the day, or 8%.

Among oil issues, the Loews exchangeable into Diamond Offshore Drilling Inc. edged up along with both Schlumberger Ltd. convertibles.

Calpine Corp. and Dynegy Inc., however, fell in what one sellside trader translated as a sector shift out of utilities. He put Calpine's 4.75s lower by 2.5 points to 69.5 bid, 70 offered while another sellside trader said it dropped more like 3.5 points to 68.5 bid, 69.5 offered. Calpine's 6% convertible was pegged at 85 bid, 86 offered, down about 2.25 points. Calpine shares closed at $2.82, off by 8 cents, or 2.76%. Dynegy's 4.75% convertible was quoted down 2.5 points to 120 bid, 121 offered with the stock down 13 cents, or 3.3%, at $3.81.

Back to the plus side, there was buying seen on recent weakness in American International Group Inc. as a dozen or more executives at the insurance firm were subpoenaed by federal regulators.

Nuveen deals set for April 6

Firmly added to the calendar, but for next week, was a $700 million mandatory linked to the money manager Nuveen Investments Inc. Ahead of a week-long roadshow, Morgan Stanley & Co. and Merrill Lynch & Co. launched the two-tranche issue of exchangeable notes for April 6 business.

Merrill is offering in tranche one 2.5-year notes talked to yield 6.25% to 6.75% with a conversion premium set at 20%. Morgan is offering in tranche two 3.5-year notes talked to yield 5.75% to 6.25%, also up 20%.

This is part of The St. Paul Travelers Cos. Inc.'s divestiture of its 78% equity stake in Nuveen to raise fresh cash, which was announced after the markets closed for the holiday. Nuveen shares closed Thursday at $38.00, but were coming under heavy pressure Monday on the launch of the convertible.

Nuveen shares on Monday lost $2.92, or 7.68%, to close at $35.08.

St. Paul is selling 39.6 million Nuveen shares in a secondary public offering, and Nuveen is buying back $600 million of stock from St. Paul. Then, St. Paul is selling the remaining 13.5 million shares in forward sale agreements to Merrill and Morgan, which is the stock underlying the exchangeable.

As part of the secondary public offering, Nuveen announced guidance Friday for first quarter. Based on assets under management of $119 billion at the end of February, Nuveen forecast first-quarter revenues of about $135 million and earnings of between 42 cents and 44 cents per share.

Ligand throttled by trial data

The latest casualty to the market's seemingly no-tolerance stance toward disappointing drug results was Ligand, which announced Monday that its development drug Targretin failed to meet expectations in lung cancer trials.

"The convert was caught in a Catch 22, you might say. The 10% premium was what everybody liked about it, but that's what killed it when the stock got crushed, too," said a sellside trader.

Ligand's 6% convertible due 2007 plunged about 37 points outright to 112 bid, 113 offered, he said, but "obviously didn't do that bad dollar-neutral." The trader also pointed out that the issue becomes callable this November at about 102.5.

Ligand shares plunged $2.35 on the day, or 28.55%, to close Monday at $5.88.

Ligand said that while Targretin failed to meet primary or secondary endpoints in two Phase III trials for front-line non-small cell lung cancer in combination therapy with standard chemotherapy; endpoints were for improved overall survival and projected two-year survival. The company also said it will continue to analyze the data and plans to make a detailed scientific presentation later, noting that several additional trials are being conducted to further assess the role of Targretin in combination with different chemotherapy regimens.

Ligand Pharmaceuticals has at least five other drugs that have received regulatory approval in the United States or Europe and collects royalties from alliances with other drug companies.

AIG widening entices buyers

Convertible players took heed of several analysts suggesting a buy on AIG due to recent weakness, particularly its credit spreads blowing out severely last week, even as news emerged Monday that the SEC had subpoenaed as many as a dozen executives at AIG.

AIG's mandatories traded up about 0.5 point to 95 on the stronger underlying stock, one sellside source said, and the zeros were even up, albeit very slightly. AIG shares added $1.41 on the day, or 2.54%, to end at $57.02.

Merrill Lynch analysts had plugged the stock as a buy, saying AIG's filing of its annual report at the SEC should act as a catalyst for the shares and could help reduce some of the uncertainty surrounding the story.

Spreads on AIG credit also widened sharply last week, which provided another window. According to Merrill Lynch data, the five-year credit default swaps blew out by 20 basis points, or a whopping 91%, last week, and its straight bonds widened by 10 to 15 bps as well.

CreditSights analyst Rob Haines said in a report Monday that while the loss of AIG's triple-A rating is "a significant event for AIG, we do not expect the company to fall out of the AA ratings bracket. Moreover, we do not believe that the recent developments will materially damage AIG's competitive position."

Granted, AIG's mounting legal and accounting woes appear to be far more pervasive than originally thought and may spur the company to sever all ties with its longtime chairman Maurice "Hank" Greenberg, and downgrades are likely for its credit and insurance ratings, Haines said, but its longer-term outlook is very favorable. Late Monday afternoon, The Wall Street Journal was reporting that AIG's board was close to ousting Greenberg as its non-executive chairman.

"At current levels we believe investors should use any additional spread widening as a buying opportunity. Even if AIG is downgraded by all of the agencies to AA status, its current spreads still compare favorably to those of other insurers," Haines said.

"Moreover, we would attribute some of the volatility in AIG debt to broader concern regarding inflation and corporate contagion from the deterioration of General Motors."

GM ride still rocky; Ford rises

General Motors Corp. bonds were still riding roughshod on the markets and seeing a rocky performance as some issues continued to rebound while others retreated Monday with the stock.

GM's 4.5% convertibles rose slightly to 23.5 while the 5.25s dropped about 0.125 point to 19 and the 6.25s lost around 0.375 point to 21.37. GM shares reversed from the gain ahead of the three-day weekend, losing 93 cents on Monday, or 3.17%, to close at $28.37.

Ford Motor Co. sort of was along for the rough ride, as its stock dipped while its convertibles continued to find buyers. The Ford 6.5% convertible trust preferred edged up 0.125 point to 46.125, but the stock slipped 7 cents, or 0.62%, to close Monday at $11.22.

Delta gets no lift on deal noise

The only thing solidly new on the Delta Air Lines front in the way of plans for another debt offering was a $500 million shelf filing late Monday. But as the company has inserted the idea of another convertible, of which the market had been speculating for around three months now, sources among the ranks of origination desks said there was some heavy competition to get the business amid a slow new issue calendar.

"We're hearing it is a competitive bid and very, very hotly contested, but we're not involved," said one source, obviously from outside the process. "Of course, one of those guys at the top of the league tables will be the most likely to get it, right?"

Buyside reactions to a new deal from Delta remain mixed, with some sources simply groaning at the thought of a third Delta convertible. A few, however, were cautiously excited about the prospect, asserting that Delta will not go away and this would be an excellent way to get a fresh position in a turnaround story.

In the end, the telling from the existing Delta converts leaned to a negative response. The 8% issue was off about a quarter-point to the 42 bid, 43 offered area and the 2.875% issue lost about a half-point to the 39.5 bid, 40 offered neighborhood, a sellside trader said. Delta shares closed down 9 cents, or 2.21%, at $3.98.

On Friday, while the markets were closed, S&P revised its watch for Delta credit (CC) downward to developing from positive, expressing elevated liquidity concerns in light of further escalation in fuel prices, which S&P said "is the greatest obstacle to reducing losses rapidly enough to avert a liquidity crunch."

Delta CEO Gerald Grinstein suggested last week at a Goldman Sachs conference that a new convertible offering would help the Atlanta-based airline with its lingering liquidity shrinkage.

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