HealthSouth converts bid up some 20 points on financials; trading sees post-holiday lull

By Ronda Fears

Nashville, July 7 - Mondays are usually slow and sometimes even more so after a long, holiday weekend. This week began very slowly, at least in terms of convertible trading. Also, while the new deal parade is still active, even that was at a much slower pace.

"It was really slow today," said a convertible dealer.

"There were people active in stocks, covering shorts et cetera, but flow in convertibles was pretty slow, typical for a Monday."

After the closing bell, Protein Design Labs Inc. launched a $200 million deal, with most of proceeds likely going to take out its 5.5% convertibles. The transaction is Tuesday's business. The announcement pushed up by three points the 5.5s, which were part of the early 2000 rush for capital by a slew of biotechs - many of which, like Protein Design Labs, are looking to refinance those bonds.

A couple of other small deals were in the mix as well.

Netease.com Inc. is pitching a $75 million overnighter while Indevus Pharmaceuticals Inc. is planning a tiny $50 million deal later this week.

During the session, though, there was only buzz about at least one good-sized deal getting launched after the close. So players were watching the stock rally, taking the few hours without a new deal entry to study the market for possible trades.

"Prices seem to be going up but the noise level went down," said F. Barry Nelson, a portfolio manager at Advent Capital Management.

"It's a pleasure to have a respite from the new deals and to be able to ponder aftermarket opportunities."

When pressed on what opportunities are catching his eye, Nelson agreed with most other market participants that the pickings are slim - even in the distressed field of names.

"Low short-term interest rates, a steep yield curve, stronger capital markets and an improving economy are conspiring to keep nominal interest rates low - except in cases of distress, and there aren't many remaining distressed companies that have neither gone under nor refinanced their way to health," Nelson said.

Speaking of health and distressed companies, HealthSouth Corp. was in the news Monday (Nelson did not mention HealthSouth though) as it presented financial projections for the next year or so to creditors and stockholders.

HealthSouth's turnaround management also presented a draft business plan, still aiming to keep the giant rehab hospital owner and operator, which also owns outpatient surgery centers, out of bankruptcy.

In over-the-counter activity, HealthSouth shares nearly doubled, closing up 99c to $1.89 with a whopping 57.6 million shares changing hands.

Traders reported seeing no actual trades in the HealthSouth 3.25% converts, but there was a new bid on the $350 million issue at around 80, which was up from the last trade last week in the 60s. And that, one convert trader said, was probably a low-ball bid, since the HealthSouth senior junk bonds, which are ranked pari passu with the converts, were trading in the neighborhood of 85 to 90.

A junk bond trader pegged the HealthSouth straight seniors up 4 points on the day to 87 bid, 89 offered.

The converts have made a huge comeback from the teens and single-digit bids immediately after the accounting scandal involving HealthSouth hit the tape, just two weeks before the bonds matured on April 1.

Bets on the converts may still be a long shot, however. Another convert trader said, perhaps with more than a hint of sarcasm: "They lied about the historical numbers but now they can forecast the future."

HealthSouth is expecting net revenue of $4.1 billion and free cash flow of $328 million over the next 12 months, said Bryan Marsal, the chief restructuring officer who came to HealthSouth from the turnaround specialist firm Alvarez & Marsal.

EBITDA is projected at $650 million, and Marsal said the company's cash position is "$345 million and growing," maybe reaching $500 million by the end of August.

The convert went into default in April after HealthSouth's banks froze its credit line amid the allegations of accounting fraud. The freeze also put the company's $3.3 billion debtload in jeopardy, as it put a moratorium on repaying interest as well as settling maturities.

Interim chairman Joel Gordon said if HealthSouth can forestall creditors for another 90-120 days, it has "a good chance to move forward and avoid a bankruptcy."

Other distressed converts in play were Calpine Corp. and Mirant Corp.

Calpine's converts were bumped about 1 point, a trader said, as holders are becoming more convinced that they will be getting some sort of exchange offer. Calpine shares closed up 55c, or 8.26%, to $7.21.

Mirant's converts, on the other hand, were shading down 1 to 1.5 points. Mirant shares ended off 6c, or 2.17%, to $2.70.

"I suspect there's more bank selling activity," the trader said, which gives convert holders - other debt holders, as well - reason to pause.

For the most part, convertible traders said players were avoiding any knee-jerk reactions to the big move in stocks, although most trading desks marked converts higher.

Most of the trading still centered on new paper in play, as a source of delta.

Crown Castle International Corp. and Level 3 Communications Inc. were the top new deals still making dramatic moves.

Crown Castle's 4% due 2010 added about 2.5 points to 115.25 bid, 116 offered, with the stock closing up 35, or 3.85%, to $9.45.

Level 3's new 2.875% convert gained about 3.25 points to 103.75 bid, 104.5 offered as the stock rose 21c, or 3.54%, to $6.15.

DoubleClick Inc.'s new convert rose in tandem with the tech party in stocks, traders said, and Nextel Partners Inc.'s new issue continued an upward march as the market anticipates the company may revisit the convert market soon.

Of those firmly on the calendar, the Protein Design Labs was another one coming with the proceeds in part earmarked to take out an old issue.

Protein Design Labs is pitching $200 million of 20-year convertible subordinated notes talked to yield 2.75% to 3.25% with a 30% to 35% initial conversion premium, with a portion of proceeds to redeem its 5.5% convertible due 2007 (CCC).

The 5.5s were quoted closing Monday up 3 points to 102.5 bid, 103 offered. The $150 million issue became callable Feb. 15, at accreted value. Protein Design Labs stock closed Monday up 47, or 3%, to $15.75.

Merrill Lynch convertible analysts put the new Protein Design Labs convert 1.87% cheap, at the midpoint of guidance, using a credit spread of 1,200 basis points over Treasuries and a 60% stock volatility.

Deutsche Bank Securities put it 6.88% cheap, at the midpoint of guidance, using a spread of 650 bps over Libor and 55% volatility.

Prior to speculation of the 5.5% bond getting called, Deutsche convert analysts noted it traded in the Libor plus 600-700 bps range. They also noted that since the company is using proceeds from this issue to collateralize the first three years of coupon payments, they added about 0.75 - 0.85 per bond to the valuation.

Indevus launched $50 million of five-year convertible senior notes talked to yield 5.25% to 5.75% with a 25% to 30% initial conversion premium, for Thursday's business after a full road show. Indevus shares closed Monday off 17c, or 2.72%, to $6.07.

Meanwhile, Netease.com was in the overnight Rule 144A market with $75 million of 20-year convertible subordinated notes talked to yield 0% with a 23% to 30% initial conversion premium. Netease shares closed Monday on the Nasdaq up $1.52, or 4%, to $39.15.

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