Airtran, Northwest lead airline convertibles lower; autos sink; Chiron, Phar Pharma gain

By Rebecca Melvin

Princeton, N.J., Sept.1 - Convertible bonds appeared to trade in line with sector moves in the stock markets on Thursday, with many airlines and auto bonds down 2 or 3 points, while many energy names gained, in moves related to the aftermath of Hurricane Katrina and concerns about energy prices and supply.

Several biotechnology convertibles, including those of Chiron Corp. and Par Pharmaceuticals Cos. Inc., also gained as stocks lifted.

Traders declined to attribute "moderate trading activity - considering the time of year" to sector moves.

"There's been a lot of specific news driving up activity," a New York-based convertibles trader said.

Nevertheless, airline paper, including Delta Air Lines Inc., Northwest Airlines Corp., Airtran Holdings Inc. and AMR Corp., moved lower in trade Thursday as did their stocks.

The convertibles of Airtran, which is the second biggest operator to the now decimated Gulfport/Biloxi airport, according to a CreditSights report, lost 4 to 6 points. Northwest's 6.625% convertible traded at 43.5, down from a level of more than 50 on Monday.

The convertible bonds of General Motor Corp. and Ford Motor Co. also moved lower after disappointing August sales data.

Airlines reel in Katrina aftermath

Airline investors were rattled not only by spiraling fuel costs and supply problems but by fresh revelations about what Katrina's devastation means for operations for several airlines.

Orlando, Fla.-based regional carrier AirTran Airways, a subsidiary of AirTran Holdings, said Thursday that due to the severity of Hurricane Katrina's aftermath, it has suspended service to Gulfport/Biloxi, Miss., and New Orleans, La., through Sept. 7, and passengers holding tickets for travel to Gulfport/Biloxi or New Orleans from Sept. 8 through Oct. 31 have the option of rebooking travel to another AirTran destination within the southeast United States.

Airtran is the second largest operator into Gulfport/Biloxi, with 29% market share, just behind Delta, with 30%.

Airtran also reported Thursday that it completed a financing agreement with Royal Bank of Scotland for up to $354 million to fund aircraft deposits and provide permanent financing for Boeing 737-700 deliveries in 2006 and 2007.

A news release from the carrier reported August traffic rose 37.3% from the year-ago period to 1.03 billion revenue passenger miles. Load factor, or the percentage of a plane filled with passengers, rose 3.9% to 76.3%; and capacity rose 30.4% to 1.35 billion available seat miles.

The new data was cold comfort to investors. Airtran's 7% convertibles due 2023 slumped 4 points to 6 points Thursday to 114.5 bid, 115 offered, down from about 119.5 on Wednesday.

The company's stock sank 55 cents, or 5.3%, to $9.78.

In terms of the New Orleans airport, Southwest Airlines Co., which doesn't have any convertible debt, has the largest market share, with 31%, and providing slightly less than 2% of Southwest's total passengers, CreditSights analysts said in a research note Thursday.

Delta is second with 13%, and American and Continental are third and fourth, with 12% and 11%, respectively, CreditSights said.

"The problem for all these airlines is that this traffic is destination oriented and cannot be replaced," the analysts said.

"Katrina dealt a body blow to the airline industry at a time when it was already staggering from financial distress," the analysts said.

The price spike in jet kerosene could pressure Delta into bankruptcy and the unions at Northwest into accepting wage concessions, they said.

Katrina has pushed aviation fuel prices to all time highs and created supply disruptions, in part because the energy hub that it hit generates the greatest supply of jet fuel in the United States.

Oil imports are expected to relieve supply disruptions eventually, but spot shortages are causing flight cancellations.

In New York, jet kerosene is $2.32 per gallon compared to prices under $1.00 seen during much of 2003.

In the New York area, supply comes from refineries in New Jersey or Philadelphia, the Colonial Pipeline from Texas/Louisiana; barges up the Intracoastal Waterway and through tanker imports.

Katrina effectively cut out the core of this network, and this situation will continue until power is restored and the refineries and pipelines come back on line in Louisiana and Mississippi, CreditSights said.

Northwest Airlines' 6.625% convertibles traded at 43.50, compared to a level of more than 50 on Monday. And its 7.625% convertibles traded at 36.75, compared to a recent level of 43 bid, 44 offered. Its shares dropped $1.06, or 21%, to $3.97.

Delta's 8% convertibles traded at 15, down from recent levels of 17.

Weak sales punish Ford, GM

The convertibles of Ford and GM were lower as those underlying stocks reacted Thursday after the companies posted weak U.S. sales for August despite continuing employee discount programs.

Investors were also reacting to a new threshold of $3 per gallon gasoline reached at gas pumps, and uncertainty about how high oil prices, and thereby gasoline prices, which were spiking prior to Katrina, will climb.

August U.S. vehicle sales at GM were down nearly 17% percent from the same month a year ago. Ford and the Chrysler unit of Germany's DaimlerChrysler said their sales rose 3% and 1%, respectively, which wasn't as high as expected.

The sales data reverses last month's trend when employee discount sales in July boosted GM sales 19%.

GM's $25 bonds with a 6.25% coupon suffered the most, down 0.46 point, or 2.15%, to 20.96. The 5.25% bonds were down 0.28 point, or 1.5%, to 18.55; albeit in very light volume. And the 4.50s slipped 0.02 point to 24.12 points.

GM shares dropped $1.22, or 3.6%, to $32.97.

Ford preferred shares lost 0.48 point, or 1.23%, to 38.40, versus a stock price of $9.73, which was down 24 cents, or 2.4%.

Chiron bid a ploy to cash out?

Chiron convertibles jumped and its shares zoomed after Swiss pharmaceutical giant Novartis AG offered $40 a share in cash to take over the Emeryville, Calif.-based biotechnology company.

Chiron bonds gained on expectations of a par put getting triggered by the acquisition.

The 1.625% issue rose to 98.625 on Thursday from 93.5 on Wednesday, a gain of 5.125 points for outright holders and a gain of 3.375 points for convertible arbitrageurs.

The 2.75% issue rose to about the same amount as its sister issue, up about 0.50 to 1 point, according to one trader. But another source said it marked a 3.25-point rise for outright holders, but a 0.375-point loss for convert arbs.

Given the all cash nature of the Novartis offer and assuming Chiron's acceptance, the analysts said the change-of-control puts on both convertibles are likely to be triggered, sources said.

For the 1.625% issue - which has no takeover protection but a standard change-of-control put feature - at Wednesday's price of 93.5, Lehman Brothers convertible analysts said that if the put is exercised, the estimated upside for outright investors is around 6.5 points. For hedged investors, upside is estimated at around 4.71 points on an 18% hedge.

The 2.75% issue has takeover protection in the form of a premium make-whole payment upon conversion or repurchase associated with a change in control, but with a stock price threshold of $44.84. Thus, unless the stock runs up to $44.84 the premium make-whole payment is moot.

Novartis already owns 42.2% of Chiron and is now offering $40 per share for the remaining shares it doesn't already have. The offers represents about a 10% premium to Chiron's closing stock price of $36.44 Wednesday on the Nasdaq Stock Market.

A buyside analyst said Novartis' bid might just be a fishing expedition.

"A 10% premium is peanuts compared to the [M&A] deals we've been seeing, so you have to wonder if Novartis maybe just wants to start a bidding war with the idea they will just cash out in the end," the analyst said. "Maybe they [Novartis] have their eye on some other acquisition and this is a means to pad their cash coffers."

Chiron shares closed up by $6.49, or 17.8%, on Thursday to $42.93.

Marketing pact lifts Par Pharma

The 2.875% convertibles of Par Pharma gained 1 to 1.5 point on Thursday after the generic drug maker said licensing partner Amide Pharmaceutical Inc. received final regulatory approval to market the generic version of Organon's depression treatment, Remeron SolTab.

Under the licensing agreement, Amide will make, market, sell and distribute the drug and Par will receive royalties.

The news follows word Monday that Par Pharma received final approval from the Food and Drug Administration to sell a generic version of Bristol-Myers Squibb Co.'s Questran Powder and Questran Light Powder for Oral Suspension, which are used to treat primary hypercholesterolemia.

The 2.875s traded at 83.25, compared to 81.5 bid, 82 offered on Thursday. Its shares closed up 32 cents, or 1.3%, to $24.49.

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