Biotech paper grabs attention as yield-hungry investors invade market

By Sara Rosenberg

New York, Nov. 10 - Yield-hungry investors have been entering the convertible market in the past week or two, making everything in the high-yield sector "to buy," especially biotechnology names, according to a trader.

For example, CuraGen Corp.'s 6% convertible is up about 3½ points over the last week, closing on Monday at 87 bid, 88 offered, according to the trader. According to a second trader the convertible closed at 85.84 bid, 87.84 offered, down 0.170 on the day. The stock closed at $6.14, down $0.219 or 3.44%.

Incyte Corp.'s 5.5% convertible is up about three to four points over the last week, closing on Monday at 87 bid, 88 offered, according to the first trader. According to a second trader, the convertible closed at 85.5 bid, 87.5 offered, unchanged on the day. The stock closed at $5.75, down $0.25 or 4.17%.

Abgenix Inc., valuation wise, is up about two points over the past week and a half, with its 3.5% convertible closing on Monday at 89 bid, 89½ offered, according to the first trader. According to a second trader, the convertible closed at 88.72 bid, 89.22 offered, down 1.03 points on the day. The stock closed at $11.51, down $0.85 or 6.88%.

"They've been gapping up points," the first trader added, regarding the biotech names.

Overall it was a pretty quiet day with not much trading activity taking place, according to market sources.

El Paso Corp.'s 0% convertible due 2021 was unchanged on the day, with not much activity reported on the name, following the release of third quarter numbers with the paper closing at 44.5 bid, 45.5 offered, according to a trader. The stock closed at $7.01, down $0.19 or 2.64%.

"They touched a little bit on the exchange offer for the mandatories but we haven't traded it at all," a sell-side source said. "The [earnings] call was kind of as expected. They're not making nay money but they're moving in the right direction trying to cut costs."

In October, the company initiated a tender offer to exchange common stock and cash for the 9% equity security units. If all units are tendered, this would result in a reduction of up to $575 million of balance sheet debt, an increase in shareholders equity of approximately $475 million, and a reduction in cash of up to $112 million.

Other recent company accomplishments include: raising third quarter cash flow from operations of $752 million, bringing year-to-date cash flow to $1.8 billion; reducing obligations senior to common by approximately $620 million during the third quarter and retiring approximately $775 million of obligations senior to common in October; eliminating through asset sales $710 million of non-recourse project and power plant restructuring debt that was consolidated on El Paso's balance sheet; selling a 9.9% general partner interest in GulfTerra Energy Partners LP to Goldman Sachs & Co. for $88 million; establishing a $500 million drilling venture with wholly owned subsidiaries of Lehman Brothers and Nabors Industries Ltd. that will result in an incremental $350 million of drilling activity over the next nine to 12 months; reducing exposure to fluctuations in the euro by entering into swap agreements in September that had the effect of replacing 250 million of euro-denominated fixed-rate debt with dollar-denominated floating rate debt; and making continued progress towards the liquidation of its trading portfolio.

For the quarter the company reported a net loss of $146 million, or $.24 per diluted share, compared with a net loss of $69 million, or $.12 per diluted share, in the third quarter of 2002. Adjusted for significant items, the company had a third quarter 2003 net loss of $6 million, or $.01 per diluted share, compared with net earnings of $54 million, or $.09 per diluted share, in the third quarter of 2002.

"We continued to show progress on debt reduction and liquidity in the quarter," said Doug Foshee, president and chief executive officer, in a news release. "In addition, we're on track to meet our asset sales goal for the year. Unfortunately, a good quarter in the pipeline and midstream areas was offset by disappointing results in E&P as we continue to rationalize this business. My first two months at El Paso confirm my belief that while we have significant challenges still ahead, our people and our core assets will allow us to restore the long-term earnings power of the company and restore our balance sheet."

As of Oct. 31, the Houston energy company has $1.6 billion of available cash and a $3 billion two-year credit facility, with $900 million drawn and $1 billion used for letters of credit.

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