L-3's new convertibles take market focus, Northwest Airlines gains; FTI deal prices after close

By Rebecca Melvin

Princeton, N.J., July 28 - Convertible players sold Weatherford International Inc. bonds in response to call for redemption and watched the paper of generic drugmaker Par Pharmaceuticals Cos. Inc. trade amid disappointing quarterly results. But most activity in the market Thursday was focused on the large new issue from L-3 Communications Holdings Inc.

Some airlines' convertibles also traded a little higher on speculation that Northwest Airlines Inc. will be able to reach agreement with its unions sooner than expected.

Meanwhile, final pricing of a smaller deal from FTI Consulting Inc. was revealed after the bell.

L-3 is focus of trading activity

The new 3.0% convertible contingent debt securities from L-3 Communications priced at par and immediately traded up in the after market to 102.125 bid, 102.25 offered.

The issue, with a 31% initial conversion premium, was seen as cheap. However, the defense contractor's upsized $600 million of 30-year bonds priced at the expensive end of coupon talk of 3.0% to 3.5% and close to the cheap end of talk for the initial conversion premium of between 30% to 35%.

Joint bookrunners on the Rule 144A deal were Lehman Brothers, Bear, Stearns and Credit Suisse First Boston.

There was a gray market on the issue ahead of pricing at the 101 level.

The deal was upsized from $500 million and included a $100 million greenshoe.

New York-based L-3 Communications sold the convertibles alongside $1 billion of 6.375% straight junk bonds due 2015 to help fund its acquisition of The Titan Corp. a security communications company based in San Diego, Calif.

Some players flipped their allocation as soon as it traded up to what they considered fair value, but there were a number of outright buyers as well.

"It was very busy. There was a lot of volume. People were getting out of their allocations, but there were buyers too," said a New York-based sellside trader.

The new 3s traded up to as high as 102.50, and remained in the 102.25 bid, 102.50 range throughout the session, sources said.

Shares of L-3 were up 86 cents, or 1.1%, to $78.96.

FTI Consulting is up next

FTI Consulting priced an upsized $150 million of seven-year convertible securities to yield 3.75% with an initial conversion premium of 30%.

Pricing came richer than coupon talk of 3.875% to 4.125% and at the middle of talk for an initial conversion premium of 27.50% to 32.50%.

It was still seen as cheap, according to one buyside source, using a credit spread of 650 basis points over Libor and volatility of 25%.

Goldman Sachs and Banc of America Securities are joint bookrunners of the deal.

The seven-year convertible notes are part of a $300 million offering of long-term debt, with a concurrent offering of $175 million of senior notes due 2012.

The deal was upsized from $125 million. But now there is no $25 million greenshoe.

The Annapolis, Md.-based management services company plans to use proceeds to repay existing term loan debt, repurchase common shares and for general corporate purposes, including potential acquisitions.

FTI also plans to use a portion of the net proceeds to repurchase at least $100 million of common shares in connection with the offerings.

The company also said it may use a portion of the cash proceeds to enter into a convertible bond hedge and separate written call transactions with the initial purchasers to reduce potential dilution upon conversion of the convertible notes.

Weatherford calls 0% convertibles

Selling of Weatherford's 0% convertibles due 2020 sent the paper down as much as a point after the company announced a call. But the decrease wasn't as large as expected.

The Houston-based oil services company announced early Thursday that it would call for redemption on August 29 all outstanding 0% convertible senior debentures, which have an expected aggregate redemption price of about $578 million.

Weatherford intends to fund the redemption of the debentures with cash on hand and borrowings under its revolving credit agreement.

The call price on the issue is 63.97. On Thursday, the issue traded at 65 and at 65.25, down from 65.88 and 66 on Wednesday.

"It has time to get down to the call price," a sellside analyst in New York said, admitting that he would have expected the convertible to drop closer to parity.

Diamond Offshore climbs a point

The convertibles of Diamond Offshore Drilling Inc. traded higher by about a point, in line with a 1.5% climb in its share price after the Houston-based oil and gas drilling and exploration company was upgraded to "outperform" from "market perform" by Friedman Billings Ramsey.

The company on Wednesday reported results amid higher day rates and rig utilization across its fleet that reflected strength in worldwide offshore drilling markets.

The 1.5% convertibles due 2031 traded at 126.976 bid, 127.226 offered, compared to 125.951 bid, 126.201 offered on Wednesday. Shares of Diamond Offshore closed Thursday up 85 cents, or 1.5%, to $57.82.

Par Pharma weaker amid earnings woes

The convertibles of Par Pharmaceutical Cos. edged lower as its underlying stock tumbled after the generic drugmaker swung to a loss on weaker sales of some of its core drugs and cited increased competition in generic drugs.

The Woodcliff Lake, N.J.-based company said Thursday its second-quarter net loss was $600,000, or 2 cents a share, compared to profit of $29.9 million, or 85 cents a share, in the year earlier period.

The result included a one-time loss of $5.2 million from an investment in Advancis Pharmaceutical Corp., another drug company.

Excluding special items, the company would have earned 13 cents per share. But that level was still well below the 35 cents a share that analysts were expecting.

Revenue fell 45% to $117 million from the prior year's $212.5 million. Sales of its versions of generic Paxil and Prozac were down due to competition from other generic drugmakers.

Also First Albany downgraded the company to "neutral" from "strong buy."

The 2.875% convertible traded in about 0.25 point to 0.50 point at 79 bid, 79 offered.

Par Pharmaceuticals stock tumbled $3.79, or 13.54%, to $24.21.

"It's considered a busted convert which means that it won't really trade with the stock. But missing the earnings reflects the overall trend of consolidation in the industry, which is making it harder for smaller players to compete," a New York-based sellside analyst said, citing the merger linkup announced earlier this week between IVAX Corp. and generic heavyweight Teva Pharmaceutical Industries Ltd.

When the paper was issued, the underlying stock was in the mid $60s, and it carries a 35% conversion premium, the source said.

Northwest Airlines moves higher

The convertibles of Northwest Airlines gained a point or two in active trading amid positive sentiment that the carrier can negotiate favorable terms with its unions, a Connecticut-based sellside trader said.

The convertibles of Delta Air Lines Inc. edged down just slightly, as its shares fell over renewed concerns related to the airline's ability to avoid bankruptcy.

Northwest's 7.625% convertible due 2023 traded at 42.257 bid, 42.745 offered, while the carrier's 6.625% issue was at 45 bid, 46 offered.

Meanwhile, Delta's 8% convertible due 2023 was at 35.2 bid, 35.8 offered, compared to trades Wednesday at 35.4 bid, 35.9 offered.

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