Primus plummets again; Charter up a touch; Ivax deal surfaces; TOP Tankers sweetens terms

By Ronda Fears

Nashville, May 3 - The convertibles primary market at least showed signs of life following the quarter-point hike in interest rates from the Federal Reserve on Tuesday, which came as no big surprise to the markets, but there were signs of a struggle in peddling deals.

Ivax Corp. launched an overnighter that was talked to be reoffered below par, while TOP Tankers Inc. sweetened terms on its deal ahead of pricing anticipated after Wednesday's close.

"It's not surprising that it's tough on the sellside, with the terms we are seeing. It's ridiculous, really," said a portfolio manager at a large outright fund based in New York. "They [convertible sales staff] should be ashamed to put this stuff, with these terms, on the table."

Ivax terms tough to swallow

Early reactions to Ivax Corp.'s overnighter reflected frustration with the terms, despite a liking to the drug sector.

The Miami-based generic drugmaker was in the overnight Rule 144A market with $350 million of 20-year convertible notes carrying a 1.5% coupon and an 18% initial conversion premium that was talked to be reoffered at 99 to 100 by bookrunner Merrill Lynch.

"I can buy the old ones [at] 1.75%, up 15%. Why would I buy these?" commented one market source, who is very bullish on the drug sector.

Another source, as well as another fan of the biotech and drug sectors, said he thought the deal would have to be sweetened at least to match the older Ivax convertibles.

In December, Ivax sold a 1.875%, up 31.5% convertible that was reoffered at 98.5 by bookrunner UBS Investment Bank. In March 2004, the company sold a 1.5%, up 26% convertible at par via UBS. The 1.875s are trading roughly with terms of a yield to maturity of 1.5%, up 16%, and the 1.5s with a yield to put of roughly 1.75%, up 22%.

A sellside source said the popularity of the drug sector will make the deal a magnet, although he acknowledged that the terms on the new deal were tight.

Last week, Ivax reported that first-quarter earnings, which exceeded its expectations, gave it greater optimism about 2005 profits. The company now expects 2005 earnings to reach the upper end of its previously issued earnings per share range of 76 cents to 86 cents, and confirmed its 2006 forecast for earnings per share of $1.35 to $1.55.

Additionally, Ivax said it believes it will be successful in gaining a six-month exclusivity period for marketing a generic version of Zocor, the cholesterol drug developed by Merck & Co. Inc., which the company said could increase 2006 earnings per share by $1.45.

Ivax shares closed Tuesday at $19.26, up 2 cents on the day.

TOP Tankers sweetens terms

Athens-based shipping firm TOP Tankers Inc.'s $300 million perpetual convertible preferred was sweetened Tuesday, bumping the dividend to 5.875% to 6.0% from 5.625% to 5.875% and the initial conversion premium to 30% to 32.5% from a range of 32.5% to 37.5%.

In addition to the put option in year five, puts were added in years 10 and 15.

Oil shipping is another hot sector right now, with crude futures remaining at historically high levels, but market sources said resistance to the TOP Tankers deal were centered on dividend and takeover protections.

With a high 5.4% common stock dividend yield, one source said there are concerns about the thresholds on the dividend protection. Plus, he added, there is concern that the company, which he said is largely held by insiders consisting of the Greek founding family, might be taken private.

The issue is effectively being sold on swap, as the company also said that it has been advised that Kingdom Holdings, one of its shareholders, intends to purchase about $20 million of TOP Tankers common shares from purchasers of the convertible. Also, the company said it plans to use about $50 million of proceeds to repurchase stock.

TOP Tankers said it would use proceeds to fund vessel acquisitions and the stock buyback. Last week, the company reported first-quarter net income of $19.1 million, or $0.69 per share, compared with net income of $1.24 million, or $0.21 per share, for first-quarter 2004. Net income excludes compensation from the delayed delivery date of five Suezmax tankers acquired with proceeds of a follow-on offering in November, which would have boosted net income to $25.87 million, or $0.93 per share.

Primus 3.75s plunge into teens

Primus Telecom was slammed again Tuesday after posting whopping losses and warning of further revenue shortfalls.

The Primus 3.75% convertibles plunged into the teens, a trader said, before bouncing back to settle the day with a bid of 25. That issue had fallen into the 30s on Monday along with the Primus 5.75% convertibles. The 5.75s were active again Tuesday, but remained steady in the 30s neighborhood.

"It was interesting that the longer-dated 3.75s of '10 traded lower," the trader said. "The 5.75s, which mature in '07, will go to par if there is a turnaround. But 'if' is indeed a big word. Time is going to tell."

More typical would be for the shorter dated paper of a company deemed in trouble financially to trade lower than the longer dated issues, on the thinking that the company would have more time to iron out its troubles before the longer maturity dates come around.

Primus shares recovered somewhat from losing nearly half their value Monday after the earnings report, adding back 13 cents on Tuesday, or 16.88%, to close at 90 cents.

Primus largely blamed its weak operating results for first quarter on greater-than-expected sequential revenue erosion in it high-margin core long-distance and dial-up ISP businesses, as well as severe revenue declines in its European prepaid services business.

While Primus management stressed that the company's priority is to establish a route to be free cash flow positive in 2006.

Charter issues up, still for sale

Charter Communications Inc.'s convertibles traded "a touch" higher Tuesday on comments from the company after reporting first-quarter results, but traders said the paper was still very much for sale.

The 5.875% convertible was quoted at 58 bid, 60 offered and with little activity during the session Tuesday. Charter shares gained 3 cents on the day, or 2.8%, to close Tuesday at $1.10.

In addition to the results, Charter said in a Securities and Exchange Commission filing that it will be paying another 25 basis points of interest because it has not registered the bonds. According to the SEC filing, the step up started on April 21, the deadline for registering the securities, and that will bump up to 50 bps on July 20 if the notes have not been registered by then.

St. Louis-based Charter, controlled by Microsoft co-founder Paul Allen, reported a net loss of $353 million, or $1.16 a share, wider than the net loss of $294 million, or $1.00 a share, in first-quarter 2004, with revenue up 5% to $1.27 billion.

"Competitive pressure continues to be significant," said Mike Lovett, Charter's new chief operating officer, in a conference call. "We feel like the value that we have created with our bundling [of two or more services], particularly where we have our VoIP [voice over internet protocol] footprint ... and targeting to specific segments, has really been to a great degree part of our success early on."

Charter asked about asset sales

While comments from Charter executives were upbeat, they were grilled about the company's liquidity position.

Charter said it ended first quarter with $1.2 billion of bank facilities available and $32 million of cash. Debt stood at $18.9 billion. The company said its liquidity position is good through 2005 but acknowledged that it may not be sufficient for 2006.

"They were peppered with questions about what they would sell, in the way of asset sales, to no avail," said a sellside trader. "That would definitely ease the concerns about the '06 maturities. Meanwhile, this stuff is still for sale, in a big way."

Charter said it continues to explore financing transactions but none are currently planned.

GM, Ford skid on sales data

General Motors Corp. and Ford Motor Co. on Tuesday reported lower April sales, particularly in sport utility vehicles and pick-up trucks, with gasoline prices remaining high. Conversely, Toyota Motor Corp. and Nissan Motor Co. posted double-digit increases in U.S. sales.

GM, the top worldwide automaker, said total vehicle sales fell 7.7%, underscored by a 17.2% drop in truck and SUV sales while car sales rose 7.9%. Number two automaker Ford said total sales fell 5.1%, with SUV and truck sales off 6.4%.

Convertibles of both automakers were mixed, while the stocks were higher despite the sales data.

GM's $25 convertible bonds are still essentially stalled as holders await news on the fate of GM's common stock dividend, which is expected in a matter of days. The 6.25% issue was off slightly, while the 5.25% and 4.5% issues were up slightly. GM shares rose 41 cents, or 1.51%, to $27.57.

Some onlookers think GM will slash its dividend to make a statement to credit rating agencies considering lowering its debt into junk territory; others argue that the company will forego that route, since it would net the company very little additional savings, and instead pressure union workers for concessions.

"We like the short dated [4.5s], which really wouldn't move if the dividend were cut," a sellside source said. "A dividend cut in half to $1/year would increase the value of the [6.25%] convert by around 1point."

Ford's 6.5% convertible preferred lost 0.125 point on the day to 39.25 while the stock rose 22 cents, or 2.39%, to close at $9.44.

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