New Amgen convertibles lift in active trade; Cephalon rises on guidance, Delta Air Lines weakens

By Rebecca Melvin

Princeton, N.J., Feb. 15 - Amgen Inc. convertibles were the market's focus Wednesday, with plenty of paper to go around after a deal worth $5 billion in two tranches was released into secondary trading.

"Amgen was where the action was," a New York-based hedge fund trader said. Volume and pricing of both tranches was similar, but volume of the B tranche, which has a seven-year term, was somewhat heavier than that of the A tranche, which was five-year paper, the hedge fund trader said.

It may have been because the Bs had a slightly higher coupon, the trader said. However, a New York-based sellsider said that activity in both tranches was fairly well matched.

On a dollar neutral basis, the Amgen Bs, or 0.375% convertibles, closed at 101.625 bid, 101.75 offered, according to one syndicate source. Its underlying shares (Nasdaq: AMGN) closed up 1.45%.

The convertibles of Cephalon Inc. were also higher in line with its shares after the Frazer, Pa.-based biotechnology company posted lower profit but a better forecast late Tuesday and later enjoyed an equity upgrade from Jefferies & Co.

Delta Air Lines Inc. was also mentioned in trade on Wednesday with its 8% convertibles a little softer at 22 bid, 22.75 offered, a trader said. The Delta convertibles as well as others "in the junk end of the market had been soft in the last couple of days," he said, adding that there were more sellers than buyers in the high-yield and distressed debt markets in general.

Other convertible names in trade included Omnicare Inc., Pixelworks Inc., JetBlue Airways Corp., Citadel Broadcasting Corp. and Lucent Technologies Inc.

The Chinese gaming company Shanda Interactive Entertainment Ltd. was also attracting the eye of some hedge funds on reports that Cisco Systems Inc. had purchased a large stake in the company, but Cisco said the number of shares it owns hasn't changed.

Among international convertible deals on Wednesday were STMicroelectronics NV's $927.7 million of 10-year 0% convertible bonds, which priced to yield 1.5% with an initial conversion premium of 30%, and Ranbaxy Laboratories Ltd.'s $440 million of 0% coupon convertibles that priced at par to yield 4.8%, with an initial conversion premium of 60%. The Indian convertibles bonds were reoffered at 99.

Amgen deal rises from issue price

During the session, traders were making a market at around 100.5 to a little higher on swap for the new Amgen convertibles, a New York-based syndicate source said. But the price was higher on a dollar-neutral basis at 100.5 bid, 100.625 offered at the close for the five-year paper, which has a coupon of 0.125%, and 101.625 bid, 101.75 offered for the seven-year paper, which has a coupon of 0.375%.

Both tranches opened Wednesday at 100.42 bid, 100.48 offered, according to a syndicate source, who put the close of the issues at 101.5 bid, 101.625 offered on the five-year paper, and 101.563 bid, 101.688 offered on the seven-year paper.

"It traded a lot this morning and settled down in the afternoon," a New York-based sellside shop desk analyst said of the Amgen deal. "They were at tight spreads this morning, like a five cent bid, ask spread."

The deal, at $5 billion divided equally between two tranches, was huge, tying for first place in size with Ford Motor Co.'s 6.5% convertible trust preferreds issued in 2002.

"The deal was so big a lot of people bought more than they really intended to hold outright, so there was flipping," the desk analyst said. "It was a good deal from the company's standpoint, enabling them to keep a lot of cash on hand. And from a credit standpoint it doesn't do much to change things."

Some rumblings that Amgen's credit is weaker now that the company is levering up were strongly contested by a couple of convertible sources. "For this company, that's nothing," one buysider said. Another source said: "I don't buy that. The credit is solid. It's an A credit."

The older Amgen 0% convertibles due 2032 traded little changed at about 75.50. But that issue had come in about 0.75 point when the new deal was announced, a trader said.

The Thousand Oaks, Calif.-based biotech upsized the deal from an original $4 billion offering. It plans to use $3 billion of the proceeds to repurchase shares. The remaining proceeds will be used for general purposes and for hedging transactions, which could raise the effective premium to 50% from the company's point of view.

The premiums of both issues are so low, sources said, that it's "highly likely" that they will end up in the money, and then people will just convert out.

"Stock was above the conversion price a month or six weeks ago. It was above $80 and that's the conversion price. But there are also some contingent features in the issue. But at maturity, whether it's five years or seven years. It's likely to be stock. The company just bought back stock for five years or seven years," a desk analyst said.

Amgen shares jumped $1.04, or 1.45%, to $72.97 in extremely heavy volume of 94.9 million shares, compared with the average three-month running volume of 8.43 million.

Cephalon gains, in line, on guidance

The actively traded convertibles of Cephalon gained Wednesday a day after the biotech company raised its guidance for 2006 by $200 million as it reported sales for 2005 that rose 18% amid acquisition and collaborations in its oncology business.

Earnings for the company's fourth quarter were lower, however, on acquisition-related charges.

The company recently settled patent disputes related to its top-selling drug Provigil, which is a treatment for the sleep disorder narcolepsy. Those settlements with four generic drug makers ensure that Cephalon will likely have five more years of protection for Provigil before it faces competition from cheaper generic versions of the drug.

Fourth-quarter sales of Provigil were up 6% from the year-earlier quarter, while total sales were $322.9 million, up 15%.

Jefferies & Co. responded to the earnings report and guidance by upgrading the company's equity to "buy" from "hold."

But even with this news, trading of its convertibles was not a main feature of the day. "It was mostly Amgen, but the 2% [Cephalon convertibles] were up in line," a Connecticut-based trader who is focused on biotech names said.

At about midsession, when the underlying shares were up about $1.25, the 0% A tranche convertibles traded at 129 versus a share price of $73, which was higher by about 2 points from Tuesday.

The Cephalon 0% B tranche convertibles traded at 134.5, versus the same $73 share price, and the 2% convertibles traded at 166.5.

Cephalon shares closed higher than that at $74.12, up $2.37, or 3.3%.

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