QLT convertible on swap loses about 2.5 points on Atrix buy; Four Seasons launches, fades

By Ronda Fears

Nashville, June 14 - The convertible market was slow to get back to business after the three-day weekend, with players on edge about interest rates even though the next Federal Reserve meeting is about two weeks away. Traders said the market continued to cheapen Monday but lacked flow.

In addition to weak stocks, Treasury yields backed up Monday due to widespread interest rate concerns.

"Cash is king right now," said a sellside convertible trader. "Lots of people are just sitting on their hands, holding cash right now."

Canadian hotel chain Four Seasons Hotels Inc. tossed a quick-sale deal onto the table, aiming to tap convertible investors for $200 million, but otherwise issuance buzz remained quiet. Several buyside traders said, as well, that the new Four Seasons convertible was nowhere to be seen in the gray market before pricing after the close.

Providian Financial Corp. still was catching some bids in the wake of the shockwaves of concern about takeover protection throughout the market, traders said. Because of specific language regarding an all-cash takeover, the Providian 2.75% convertibles - not the 4% issue as mentioned previously - has been finding some buyers.

Mandalay Resort Group, whose takeover bid from MGM Mirage stirred the market chaos last week, was stirred again as MGM upped its bid to $7.9 billion from $7.65 billion, or to $71 a share from $68. Both bids include the assumption of $2.8 billion in debt, including the Mandalay convertible floater, which traders said was weaker by a half point or so Monday.

QLT off on Atrix Labs merger

Vancouver-based QLT Inc. announced a friendly $855 million cash-and-stock offer for peer biotech firm Atrix Laboratories Inc. on Monday, collapsing its stock and convertibles on worries about dilution. Once upon a time, Atrix Labs also had a convertible in play, but that issue was taken out of circulation in 2002.

The QLT 3% convertible due 2023, depending on what delta hedge a holder had it set up, came in anywhere from 0.75 point to 2.5 points on swap. On an outright basis, the bonds were quoted down 17.5 points, in tandem with the 16.5% drop in the stock.

QLT shares fell $3.48 to close Monday at $17.55. Conversely, Atrix Labs stock shot up $3.37, or 12%, to $31.39.

Shareholders of Atrix, based in Fort Collins, Colo., will get one QLT share and $14.61 in cash for each of their shares - a premium of about 27% over the closing price Thursday. The cash portion comes to about $315.5 million, and QLT said it will issue about 24 million new shares, including options.

"The partial cash component [of the purchase price] mitigates the loss, but it's still painful," said a buyside convertible trader at a hedge fund in New Jersey.

QLT said that in addition to a strong balance sheet with $300 million in cash, the combined company expects annual revenue growth of 15% to 20%. On a cash earnings per share basis, excluding the amortization of acquired intangibles, the transaction is expected to be accretive in 2006 and thereafter at a targeted annual growth rate of 20% to 25%.

"This transaction will accelerate both companies' strategic initiatives and creates a ... company with multiple partnered commercial and near commercial products, a strong and diverse revenue base, a robust pipeline and the financial resources to grow faster and create sustainable shareholder value beyond what either company might have achieved independently," said Paul Hastings, chief executive of QLT.

Atrix has a rich pipeline of excellent products and unique drug delivery platforms, Hastings added, noting the company has received FDA approvals for three new drug applications in the past two years.

The combined product portfolio will include two successfully marketed and partnered products - Visudyne for blindness and Eligard for prostate cancer - as well as growing revenues from the dermatology business in collaboration with Sandoz.

David R. Bethune, chief executive of Atrix Labs, said QLT has the financial and human resources necessary to accelerate the development of Atrix's pipeline.

Four Seasons quiet in gray

Early Monday, Four Seasons Hotels began booking orders for a $200 million offering of 20-year convertible notes talked to yield 1.625% to 2.125% with a 28% to 32% initial conversion premium for pricing after the market close. But buyside traders said they did not see any activity in the issue in the gray market.

A sellside convertible analyst put the new Four Seasons convertible 1.3% cheap at the middle of guidance, using a credit spread of 150 basis points over Treasuries and a 25% stock volatility.

A buyside source also noted that there is a premium make-whole provision in the event of a "fundamental change." Otherwise, the designated event put is payable at par in limited voting shares, cash or a combination of stock and cash.

The Four Seasons 0% convertible due 2029 (BB+/Ba1) - a $650 million face amount issue callable and putable in September at 32.873 - dropped back to the put/call price Monday from a closing level Thursday at 34 bid, 34.5 offered with Four Seasons shares at $58.20.

In pre-market action Monday, Four Seasons shares were seen down $20.22, or 34.74%, to $37.98. But the stock opened at $58.20 and during the course of the session lost $3.09 on heavy volume to close down 5.31% at $55.11. About 1.77 million shares changed hands, compared with the three-month running average of 171,272 shares.

CenterPoint off, Calpine up

Power plays were mixed, albeit amidst thin trading volume, traders said. But one sellside trader noted that CenterPoint Energy Inc.'s convertibles were for sale while Calpine Corp. was better bid.

CenterPoint bonds were getting sold, the trader said, on a Merrill Lynch credit analyst's report late last week to the effect that the market had underestimated the potential negative impact of a rate case in which the analyst estimated regulatory approval for stranded costs could be reduced substantially.

The CenterPoint convertibles were quoted off about 1 point each with the 3.75% issue at 109.75 bid, 110 offered and the 2.875% issue at 103.5 bid, 103.75 offered. CenterPoint shares closed down 12 cents, or 1.11%, to $10.67.

Meanwhile, Calpine was higher after the refinancing of two power projects that will put some cash in the independent power producer's pockets, the trader said.

Calpine just placed new term loans to refinance the projects and about $160 million will be returned to the company for general corporate purposes. In addition, Calpine said $40 million in cash and $55 million in letters of credit will be returned to it as the result of the elimination of certain reserves and letters of credit associated with the original non-recourse project financings.

The Calpine 4.75% convertibles were quoted up about 1 point at 78 bid, 78.75 offered, while the stock closed up a nickel, or 1.27% to $3.98.

Delta issues shaky but higher

Delta Air Lines Inc. convertibles were higher Monday, but traders said the issues still strongly reflect a market view that a bankruptcy is imminent.

Meanwhile, Delta chief executive Gerald Grinstein is scheduled to make a presentation at the Merrill Lynch Global Transportation Conference at 8 a.m. ET on Wednesday.

Both Delta convertibles gained ground Monday as the stock gained 8 cents, or 1.38%, to close at $5.89. Virtually the field of airline paper was lower, however, in the lackluster session.

Delta's 2.875% converts ended at 56, a sellside trader said, up from 55.5 last Thursday, and the 8% converts rose to 49 from 48 last Thursday.

"The 2 7/8 [converts] were holding up because convert arbs still considered it an arbitrage," the trader said. "They have dropped recently to adjust for the fact that they are just another senior piece of paper; conversion in a bankruptcy has zero value.

"The stock still acts like the company will survive, while the 32% yield to the June 2008 put is telling you distressed investors think Delta will file for bankruptcy shortly. The 8% is my favorite piece of this puzzle."

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