Lonza issue emerges; Walter better as takeover anxiety eases; Interpublic holders to get windfall payment

By Ronda Fears

Nashville, June 28 - Convertible business picked up sharply Tuesday as the broader markets gained on the back of a huge drop in crude oil futures, but looming in the background was some trepidation about another interest rate hike widely anticipated from the Federal Reserve meeting midweek.

Transports took off as oil retraced record levels, with the August futures contract settling at $58.20 a barrel, off $2.34 for the day. Ford Motor Co. and General Motors Corp. convertibles gained anywhere from a dime to a half-point as the broader markets turned north on the move in oil.

Airline paper was marked sharply higher, with the convertibles of Northwest Air Lines Inc. leading the pack after it inked a wage concession package with union mechanics. But convertible traders said moves in airline bonds were largely driven by short-covering in the stocks, as there was virtually no traffic in the airline paper.

Drug and biotech convertibles got a shot in the arm, too, along with their underlying stocks, from Wyeth lifting its fiscal 2005 earnings per share guidance, but Wyeth itself saw little to no activity in its convertible floaters.

Primary activity was limited to the biotech and drug space, with CV Therapeutics Inc. at bat here in the United States and Swiss pharmaceuticals and chemicals concern Lonza Group AG launching a new issue in Europe.

Impax, Saks maneuvers a wave?

Recent default notices sent by Highbridge Capital Management to Impax Laboratories Inc. and Saks Inc. over their late filing of financial reports at the Securities and Exchange Commission has caught the attention of the convertible market as an interesting way to squeeze out some value in an otherwise lackluster market.

Whether it's a wave, or a trickle, in terms of the impact on the convertible market as a whole is yet to be seen. There are reportedly some 77 late filers that may be in technical default because they have yet to file financial reports with the SEC, but not all of those have convertibles. Plus, it takes a holder of 25% or more of an issue to force the default matter.

Impax Labs had to refinance the 1.25% convertibles in question, and did so by way of a private placement of 3.5% convertibles with Highbridge, a heavyweight hedge fund player in the convertible market. The maneuver has been referred to as an exchange without an exchange, since Highbridge essentially traded off the 1.25% bonds for new 3.5s.

"Highbridge, the buyer of the new Impax Lab bonds, is the same fund that sent a default notice to Saks a few weeks ago. They triggered a whole chain of events at Saks ... and they seem to have found a way to benefit from Impax's situation as well," said a sellside desk analyst.

"I was thinking this is a new way for big funds to make [money] in a boring market. Buy up the bonds of a non-filer, serve them with a default notice, and extract some sort of favorable outcome."

Interpublic ponies up 12.5 bps

Interpublic Group of Cos. Inc. is another late filer and on Tuesday - ahead of a June 30 deadline - said it will pay up another 12.5 basis points of interest to holders of its convertibles who consent to waivers because of the late filing. The New York advertising agency said it had procured waivers from its banks.

The company said it now aims to file its 10-K financial report at the SEC by Sept. 30.

In March, the company reached an agreement with holders of five public debt issues that it would pay another 12.5 bps of interest to holders if it had to delay its filing beyond June 30 to Sept. 30. The latest windfall for Interpublic bondholders is in addition to 25 bps already paid by the company because of the late filing.

Holders of convertibles in several late filers have said they are negotiating for a so-called "cash kiss," but one said Tuesday that, indeed, the Highbridge approach in the Impax Labs and Saks issues also was an interesting way to handle the matter.

"With any further pullback in these converts, accumulating a 25% position could make a great deal of sense," said a buysider holding a position in Ligand Pharmaceuticals Inc., yet another late-filer. Ligand has until July 29 to cure its situation.

Back to Interpublic, the company separately announced that its chief financial officer, Robert Thompson, has resigned and has been replaced from outside the company. The identity of his replacement, who is scheduled to begin at Interpublic on Aug. 1, was not revealed, however. Also, due to the negotiations to avoid a default on the debt issues, Interpublic said it expects a moderate drop in fiscal first-quarter revenue.

Lonza launches Swiss convertible

Lonza Group AG on Tuesday launched a CHF 330 million convertible talked with a coupon range of 1.25% to 1.625% and initial conversion premium of between 30% and 35%.

"It's good to see another mid-size deal. We had Capgemini the week before last, which did see some activity, albeit not likely to be very liquid - like the other Lonza" convertible issues, said a market source in London.

Credit Suisse First Boston and Deutsche Bank Securities are joint bookrunners of the deal, which was expected to price Tuesday or Wednesday, according to market sources.

The four-year bond may be increased by CHF 50 million, in addition to there being a CHF 50 million greenshoe available.

The Swiss pharmaceuticals and chemicals concern has earmarked proceeds to refinance debt due next year and for general purposes.

Lonza shares spent much of Tuesday's session in lower territory, but closed the day higher by CHF 0.30, or 0.43%, at CHF 69.80 in Europe.

Barclays: New Lonza attractive

The new Lonza convertible has an attractive valuation at the middle of indicative or better, Barclays Capital Markets convertible analysts said in a report Tuesday.

Analysts Luke Olsen, James Davies and Heather Beattie said in the report that they "recommend the new issue, particularly for outright investors, if it prices in the middle of the indicated range or better."

At the middle of guidance, the analysts said the convertible would be 0.45% cheap, using a credit spread of 65 bps and 18.5% stock volatility. They also plugged in a 2.1% average future common dividend yield and 75 bps stock borrow cost. They added that the high bond floor - around 96.2 on worst terms and 98.1 on best - would make it particularly attractive for outright investors if it prices in the middle of the indicated range or better.

The analysts pointed out that they penciled in a volatility assumption of 18.5%, noting that they see a potential risk of downward volatility pressure if EMS-Chemie issues further exchangeables or warrants into Lonza. EMS currently has a 19.5% stake in Lonza and has two existing out-of-the-money exchangeables into Lonza due July 2008, for CHF 300 million, and 2010, for CHF 350 million, which together cover roughly half of its stake. Last month, the analysts added, EMS' chief executive said that its stake in Lonza is financial and not long-term strategic.

Walter up as takeover fear eases

After a series of declines in recent weeks because of takeover worries, Walter Industries Inc. got a lift Tuesday as the Tampa, Fla.-based homebuilder moved with the broader markets.

Walter's 3.75% convertible due 2024 was quoted late in the day at 237.5 versus the stock at $40.60. Walter shares ended at $41.44, up 94 cents, or 2.32%.

The company's announced acquisition of Mueller Water Products Inc. for $1.91 billion last week largely helped allay fears that Walter itself was a ripe takeover target. In late May, a group of hedge funds with big holdings in Walter securities made a public splash of their opinion that breaking up the company made sense.

"They [Walter convertibles] came in over the past few months on takeover concerns. This [Mueller Water acquisition] makes them less of a target" because there are so many different business lines under the Walter umbrella, said a sellside market source.

Walter is a diversified company involved in financing and water transmission products and is a producer of metallurgical coal, in addition to building homes. Mueller is a supplier of water infrastructure and flow control products such as fire hydrants.

Of the total acquisition cost, Walter said it would assume $1.05 billion of Mueller debt and the remaining $860 million would be paid in cash. Walter also said the transaction is expected to add 20 to 24 cents per share to its income statement in the first full year.

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