Convertibles market trades mostly lower, but some energy issues climb with oil prices

By Rebecca Melvin

Princeton, N.J., June 23 - Convertible bonds were mostly lower Thursday, with paper in the airline sector and General Motors Corp. under pressure. And CV Therapeutics Inc. saw its convertibles slip after the biopharmaceutical company launched a new issue Wednesday.

But several energy sector issues traded higher, and a pair of Calpine Corp. convertibles marked notable gains. Meanwhile, the shares of Devon Energy Corp. jumped upward, helping support its 0% convertible ahead of the Oklahoma City-based energy company's call of the issue on Friday.

Trading was characterized as "steady" by one New York sellside trader, who said that "large sizes" of General Motors' $25 bonds traded at slightly lower prices.

Reckson Associates Realty Corp.'s 4% convertible was steady at 98.5 on the second day of trading after it priced; and a couple of upcoming issues, including Evergreen Solar Inc.'s $75 million convertible deal, expected to price after the close Thursday, attracted mild interest.

"It looks cheap," one New York-based sellside analyst said of the Evergreen issue. "But there's no stock borrow available."

Market participants also cited a lack of stock borrow for the new issue launched by CV Therapeutics. But the $100 million of convertibles talked to yield 3.25% to 3.75% with an initial conversion premium of 20% to 25% was seen as cheap, several sources said.

"It's a known name, and there's a full road show," a New York-based sellside trader said of the CV Therapeutics deal. "But borrow is an issue."

A Connecticut-based buyside source said of the CV Therapeutics deal, "It looks pretty good. I think it's quite cheap by multiple points." The same source said he hadn't looked at the Evergreen Solar deal.

GM, Ford slip again

The convertible paper of automakers Ford Motor Co. and General Motors slipped Thursday and their shares edged lower for a second day after Dearborn, Mich.-based Ford late Tuesday reduced its full-year profit outlook again - the second time in two months - and announced cuts of 1,700 management workers on top of 1,000 cuts already announced.

No news was seen from GM, except for further speculation about whether the Detroit-based company is going to be able to negotiate successfully reductions in its employee health care costs any time soon.

GM executives have targeted health care as a top opportunity for cost cutting. But a labor contract remains in place until 2007, and winning major changes in the middle of it could be difficult. But recently GM has said it had hoped for agreements by the end of this month.

GM's 5.25% convertible bonds closed down 0.29, or 1.55%, at 18.43 on Thursday. The 6.25% convertible lost 0.37, or 1.66%, to 21.90. And the 4.5s closed down 0.04 at 24.14. GM shares lost 99 cents, or 2.84%, to $33.93.

Ford's 6.25% convertible preferreds were down 0.72, or 1.7%, to 42.90. Its share price shed 28 cents, or 2.6%, to close at $10.40.

CV Therapeutics sags

CV Therapeutics' 2.75% convertible due 2012 collapsed 9 points, while the biopharmaceutical company's 4.75% convertible remained little changed, according to one New York-sellside shop.

Shares of the Palo Alto, Calif.-based company tumbled $1.69, or 7.4%, to $21.25 after it announced after the close Wednesday that it will offer to sell 6 million shares in a public offering, along with the $100 million of convertible senior subordinated notes due 2013.

Energy issues strengthen

Among the few gainers in convertibles Thursday were energy names, including Amerada Hess Corp., Arch Coal Inc., Duke Energy Corp., and Halliburton Co. The stocks of these companies were also up, each by about 1.5%, except for Duke, which was only up 0.7%, as oil prices continued a record climb.

Crude oil for August delivery surged 2.3% to close at $59.42 a barrel in New York. Earlier in the session, crude prices touched $60.00 amid speculation that demand for fuel will strain producers of grades that are suitable for gasoline, diesel and heating oil.

Amerada Hess's 7% preferreds gained nearly 1.5 points to 93.561 bid, 93.711 offered, compared with a close Wednesday of 92.157 bid, 92.307, one New York sellside shop reported.

Halliburton's 3.125% convertible due 2023 was up more than a point-and-a-half at 138.504 bid, 139.004, compared to Wednesday's price of 136.742 bid, 137.242 offered.

Duke Energy's 1.75% convertible due 2023 was up to 124.807 bid, 125.307 offered, compared with 123.959 bid, 124.459 offered. And Arch Coal's 5% preferreds lifted to 131.53 bid, 131.68 offered, from the 129 plus level.

Meanwhile, airline convertibles edged lower, as the issuer's stocks sagged, due to the high oil prices. Higher oil promises to boost fuel costs for the carriers and hurt their bottom lines.

Among those that slipped by a point or two were AMR Corp.'s 4.25% convertibles due 2023 and the company's 4.25% convertibles due 2024, and Continental Airlines Inc.'s 4.5% and 5% convertibles.

Devon up ahead of call

Devon Energy's 0% convertible due 2020 added a little as its shares surged ahead of the issue's call Friday.

"The stock is up big because a lot of people were kind of short. Now they may be trying to unwind positions ahead of the call," a New York-based sellside desk analyst said.

The Oklahoma City-based independent energy company said it has plenty of cash on hand to allow it to call for redemption its zero coupon convertible debentures at the earliest date.

The redemption date is June 27, and holders have until Friday to convert to stock or present them for cash settlement on the redemption date.

Devon will pay $562.32 per debenture, reflecting the issue price plus accrued interest as of the redemption date. With 760,000 debentures outstanding, the total redemption amounts to $427 million. This is equivalent to $48.82 per share of Devon common stock.

"Having more than $2 billion of cash available enables us to call these debentures at the earliest possible date," Brian J. Jennings, the company's senior vice president and chief financial officer, said in a news release. "We also plan to retire about $500 million of additional 2005 debt maturing later in the year."

Devon 0% convertibles closed up more than half a point to 59.50, the desk analyst said. Devon Energy shares gained $2.14, or 4.3%, to $51.74.

Calpine sees lift

Two Calpine convertible issues gained Thursday and its straight bonds turned up late in the trading day, a Connecticut-based trader said.

The late lift was attributed to the San Jose, Calif.-based company's announcement late afternoon Thursday that it had closed its $650 million of contingent convertible bonds due 2015. The company had already announced that it intended to close the issue and use proceeds to redeem its High Tides III securities and repurchase debt.

The notes will pay interest at a rate of 7.75% and will be convertible into cash and into shares of Calpine common stock at a price of $4.00 per share, which represents a 29% premium over the New York Stock Exchange closing price of $3.10 on June 17.

Calpine expects to use $402.5 million of the net proceeds from the convertible notes offering toward the redemption in full of its High Tides III preferred securities. The company will use the remaining net proceeds to repurchase a portion of the outstanding principal amount of its 8½% senior unsecured notes due 2011.

Goldman, Sachs & Co. is the sole manager of the offering.

Calpine's 4.75% convertibles traded up 1.5 points to 74 on Thursday, compared with trades Wednesday at 72.50. Its 6% convertible climbed 5.25 points to 98.75, compared with 93.50 on Wednesday.

Biotech market may warm up

While the IPO and debt markets have not been all that friendly this year to biotechnology names, the convertible market has traditionally welcomed issuers from the sector. Many biotech convertible issuers have a string of issues in play, such as CV Therapeutics. It comes on the heels of Invitrogen Inc. bringing its fifth convert to market last week.

Some convertible market pros hope for a hot summer in terms of convertible issuance, as well. Thus far, the biotech convert deals have been met warmly by investors, the banker types say.

"Since the secondary market has stabilized and fund flows redemptions, at least for June 30, seem to be manageable, it is not surprising that investors would step up and look for paper with strong future growth dynamics and the biotechs seems to be a solid fit," said Richard Ng-Yow, co-head of convertible origination at UBS Investment Bank. "The IVGN and CVTX deals could well signal a trend to many more of these companies receiving favorable reception in the convertible market."

Buyside market sources said the CV Therapeutics and Invitrogen deals had to be structured smartly to sell, however. One noted that Invitrogen's newest convert had its first put scheduled a year ahead of the nearest put on its existing issues; another noted that CV Therapeutics is collateralizing coupon payments for three years.

Xoma spin turns heads, heads up

With a new collaboration strategy at Xoma Ltd. the story is getting more attention and with Wells Fargo Securities picking up coverage at a buy rating on Thursday the stock was up 5% midday before trailing off with the broader markets. The Berkeley, Calif., biotech concern also has a convertible that is considered an equity surrogate with a conversion premium in the neighborhood of 6%, and moving on a delta of roughly 90%, that rose in tandem with the stock.

Xoma shares on Thursday added 7 cents, or 3.93%, to settle at $1.85, which a couple of traders attributed to short covering. The 6.5% convertible due 2012 was quoted at 100 bid, 102 offered with the stock at $1.78. Hedged on a 90% delta, a sellside trader explained that every nickel move in the stock would move the bond 2.5 points. He added that the stock borrow is freeing up, too.

The business model of Xoma depends heavily on collaboration and earlier this year the company tweaked it to limit capital outlays even further by only developing products up to Phase I studies and then licensing products to partners, with milestones and royalties coming in as programs advance to later clinical stage development. Previously, Xoma worked through Phase II studies, which are more costly than Phase I.

Another way Xoma collaborates is by manufacturing biologics for other companies, as it shows excess manufacturing capacity after Genentech Inc. took over psoriasis treatment Raptiva production. Xoma develops antibodies for treatments of cancer, immunological and inflammatory diseases and disorders.

Xoma also has collaboration agreements with Zephyr Sciences; Millennium Pharmaceuticals and Chiron, among others, but the Genentech deal is a cornerstone as the company works toward its stated goal of becoming profitable by 2008.

In February, Xoma sold the $60 million convertible and, with a cash burn rate of about $40 million in 2005, estimates that it now has sufficient cash resources through at least the end of 2008.

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