MeriStar dives on buyout news; QLT gains despite wider losses; Amgen strong

By Kenneth Lim

Boston, Feb. 22 - MeriStar Hospitality Corp. convertible bonds plunged about 17 points on Wednesday after as investors reacted to the potential loss of their option value a day after a planned buyout was announced. Meanwhile, QLT Inc. convertibles rose about half a point despite wider fourth-quarter losses at the drug maker and guidance for poorer sales of a key drug. Amgen Inc.'s new convertibles continued to nudge up and stay active a week after they were first issued.

The Street was also abuzz with talk that the utilities sector is getting ready for a new round of hybrid financing after reports emerged that cited banking and market sources. And a convertibles strategist for independent research firm Credit Derivatives Research says the market is in two minds when it comes to credit and default risk.

MeriStar plunges on Blackstone buyout

MeriStar (NYSE: MHX) saw its 9.5% convertible due 2010 open on Wednesday at about 121 points then drop to 104 over the day while its stock rose 6 cents, or 0.58%, to $10.34, said a buy-side trader.

"Investors were reacting to the buyout [by private equity firm Blackstone Group]," the trader said.

Bethesda, Md.-based MeriStar said on Tuesday that it had agreed to be acquired by a unit of Blackstone for $2.6 billion in cash, or $10.45 per share. That represents a 20% premium over the stock's closing price on Nov. 10, 2005, which was when reports were first published regarding a potential acquisition of MeriStar, the United States' third-largest hotel real estate investment trust.

But with the convertible previously trading more than 20 points above par, the market value of the security was much more than its change-of-control redemption value of about 102.65 - and with the company going private, any option value attached to the bonds is wiped out as well, an analyst pointed out. But, as an alternative, because the bonds are non-callable for life and mature only in 2010, bondholders who do not redeem the bonds can still collect the coupon up to maturity.

Also on Wednesday, Moody's Investors Service said it had placed the MeriStar convertible bond's Caa1 rating under review for a possible downgrade. The ratings agency said it was concerned that MeriStar's capital structure would be more highly leveraged and contain a significant amount of secured debt after the acquisition. Besides the debt structure, Moody's said it will also consider the ultimate capitalization of MeriStar in its review.

MeriStar's senior unsecured debt, rated B2, was also put on review.

The Blackstone unit involved in the deal has a commitment of $800 million in equity financing from the parent group, while three banks have committed to $1.9 billion in secured debt.

MeriStar will be seeking shareholder approval for the buyout, and plans to complete the deal in the second quarter of the year. The trust has a portfolio of more than 50 upscale hotels and resorts in the United States, with brands that include Hilton, Sheraton, Marriott, Ritz-Carlton, Westin, Doubletree and Radisson. MeriStar also announced at the start of February another sale of nine hotels and one golf and tennis club to Blackstone, but that sale will not be affected by the acquisition.

QLT gains despite poor data

Vancouver, B.C.-based QLT saw its 3% convertible bond due 2023 gain about half a point outright in line with the stock despite reporting wider losses in the fourth quarter and guiding for flat sales of the drug Visudyne.

A buy-side trading source said the convertible was about 90.625 bid against a $7 stock late Wednesday, while another buy-sider saw 89 bid earlier in the day. A major trading desk marked the security at 89.09 bid, 90.09 offered versus the closing stock price of $7.17, from 88.42 bid, 89.42 offered against Tuesday's closing stock price of $6.69.

QLT (Nasdaq: QLTI) stock ended Wednesday up 48 cents, or 7.17%.

QLT said before the market opened that its fourth-quarter loss grew to $370.4 million, or $4.04 per share, from $221.1 million, or $2.62 per share, largely due to restructuring costs and a $410.5 million impairment charge from the acquisition of Atrix Laboratories Inc.

Before unusual items, earnings per share were 11 cents a share, in line with analysts' estimates.

Sales of QLT's Visudyne, which treats age-related macular degeneration, fell 14% to $107.2 million in the fourth quarter, but worldwide sales of the drug for all of 2005 increased 7.9% to reach $483.8 million. The company is also projecting that sales of Visudyne will be between $370 million and $400 million in 2006. QLT's other main drug, Eligard, is also the subject of a lawsuit trying to suspend sales of the cancer drug until May.

An analyst said he was puzzled by the gains in QLT's securities prices.

"Maybe the guidance was better than the Street's expectations," he said.

Amgen's new bonds gain further

A week after they made their debut, biotech giant Amgen's new convertible bonds continued to stay strong on Wednesday, inching up about half a point to stay more than three points above par.

"They're still doing fairly OK," said a buy-side trader.

The biotech giant's 0.125% convertibles due 2011 were marked at 103.67 bid, 103.77 asked against the $75.08 closing stock at another trading desk. The 0.375% convertibles due 2013 were 103.92 bid, 104.02 asked against the same stock price.

An older tranche of zero-coupon convertibles due 2032 were marked at 76.12 bid, 76.24 asked.

Amgen (Nasdaq: AMGN) stock ended the day up by 55 cents, or 0.74%.

Amgen, the world's largest biotech company, offered those convertible bonds last week to raise proceeds of about $5 billion, of which about $3 billion has been earmarked for a stock buyback program.

Utilities could seek hybrid financing

Utility companies could be gearing up for a new round of hybrid financing to fund share buybacks, according to a report from Power Finance and Risk that cites bankers and market sources.

Asked about the report, a utilities analyst said she was not surprised that the sector would be seeking funds.

"It makes sense," she said. "We expect to see consolidation in this sector."

Utilities companies have reverted to a "back-to-basics" strategy of focusing on their core businesses, which means that the companies now "have a tendency to want to grow even though there's no organic growth," the analyst said.

While the analyst had not heard of any convertible deals, she said that the result of the consolidation is "likely the mid-sized utilities will be the ones that will be picked off."

The Power Finance and Risk report cited UBS Securities managing director Walter Huse saying $3 billion to $4 billion in deals could be done over the next couple of months. In December 2005, Lehman Brothers also indicated that it could be bringing about $3 billion of deals to the market.

Spreads, default risk don't match: analyst

Tim Backshall, chief credit derivatives strategist at independent research firm Credit Derivatives Research, said credit spreads have tightened over the past month even though the risks of default have increased.

"One of the things that I've found quite interesting is that in the U.S. both investment grade and high yield spreads have been tightening, which seems to run in the face of the increased LBO [leveraged buyout] risk," he said.

Backshall, whose firm is launching a new credit derivatives research service in March, said that as spreads tighten, the market usually expects term structures of debt instruments to flatten. And that happened over the past six months, but in the last month "we've seen curves go flat to a little bit steeper," he said.

He said his firm has also noticed that that the debt market has a weekly cycle, with liquidity highest on Tuesdays and Wednesdays. That means investors looking to make big transactions should hold off if they can until the middle of the week to make their move, he said.

Backshall was speaking in the run-up to the official launch of his firm's new online research service at www.creditresearch.com. Citing a $12 trillion global market for credit derivatives, he said the service targets both veterans of credit default swaps like hedge funds and banks, as well as more traditional asset managers who are exploring credit derivatives for the first time. Credit derivatives has a percentage of the overall debt market has been increasing over the past years, he said, and asset managers are increasingly beginning to take them into consideration.

Backshall said the subscription-based research will make specific recommendations on trading positions and quantify details like liquidity and risk.

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