Human Genome, American Financial deals emerge; new Calpine issue quiet; AtheroGenics soars after-hours

By Ronda Fears

Nashville, Sept. 27 - New deals began to crop up Monday but market sources said they were still wary of a bumper yield for the autumn harvest period. After the close, American Financial Realty Trust and Human Genome Science Inc. returned to tap convertible investors, while Calpine Corp. was at bat with another convertible. Also this week, McMoRan Exploration Co. is bringing a small deal.

"We're finally seeing some deals, but then not really. Most of what we've been seeing is a new deal to take out an old issue, so, yeah, there's an element of fresh paper but the market is still shrinking," said a convertible fund manager in New York. "As for issuance, even if there was a slew from now until the end of the year, which is doubtful, we're not going to come close to last year's level."

Through Friday, convertible issuance thus far in 2004 amounted to $38.3 billion, paltry in comparison to the $79 billion of new issues for the same period in 2003.

In secondary dealings, action was brisk but lingering in negative territory as a fresh high for crude oil futures pressured the markets, traders said. Crude settled up 76 cents to $49.64 a barrel and was seen topping $50 in after-hours electronic trading.

On the rise in fuel prices, airlines continued to lose ground although traders said they did not see a lot of Delta Air Lines Corp. paper move. A small amount of Northwest Airlines Corp. 7.625% convertibles saw some two-way traffic with the issue off about 1 point at 66.

Devon Energy Corp.'s issues linked to ChevronTexaco Corp. and Amerada Hess Corp. were among energy issues fetching bids on the gain in oil prices, which market sources noted was helping fuel interest in McMoRan Exploration's new deal, too.

In addition to the new deals after the close, AtheroGenics Inc. stock skyrocketed on late-day news of positive trial results for the company's potential heart treatment, which could be its first commercial product.

American Financial add-on

In an overnight transaction, American Financial Realty launched an add-on of $125 million to its 4.375% convertible bond due 2024 via sole bookrunner Deutsche Bank Securities Inc. with an offer price talked in a range of 97.25 to 97.5, plus accrued interest.

The conversion price on the add-on issue will be the same as the original issue, $17.84.

At the reoffer range, the add-on convertible would have a yield to put of 4.966% to 5.026% and a conversion premium of 24.82% to 25.14% versus the closing price for American Financial Realty shares Monday of $13.90.

Final terms are expected before the issue breaks to trade Tuesday.

The Jenkintown, Pa.-based real estate investment trust sold the original $300 million issue on June 23 with a 27% initial conversion premium. Joint bookrunners Deutsche Bank Securities and Banc of America Securities reoffered it at 98.

American Financial Realty Trust is a self-administered, self-managed REIT focused on acquiring and leasing properties occupied by financial institutions.

Human Genome returns, too

Human Genome Sciences also was returning to tap convertible investors. The biotech concern launched after Monday's close $200 million of seven-year non-callable convertible subordinated notes talked to yield 2.25% to 2.75% with a 30% to 35% initial conversion premium.

Pricing was scheduled for after the market close Tuesday.

Rockville, Md.-based Human Genome Sciences earmarked proceeds to repurchase its existing convertibles - a 5% issue due 2007 and a 3.75% issue due 2007.

The 5s on Monday were quoted up 1 point to 99 bid, 100 offered and the 3.75s flat at 94 bid, 95 offered.

Human Genome Sciences shares on Monday lost 31 cents, or 2.45%, to close at $12.36. In after-hours trading the stock was seen down another 67 cents, or 5.42%.

Calpine issue quietly at bat

After the closing bell, Calpine was at bat with its new $600 million discount convertible, but buyside market sources said there was still no gray market for it and some admitted lingering confusion over the particulars of the deal while others blatantly admitted they were just "skittish" on Calpine credit.

"I'm still trying to figure it [the new Calpine convertible] out," said a convertible fund manager, involved in both arbitrage and outright strategies, on the West Coast. "I'm hearing that you can only indicate [an order] for $20 million, or nothing! It's being pitched as a total return swap."

The 10-year convertible senior unsecured non-callable notes will have a 6% coupon and are talked to price at 83.9 for a 7.15% yield. The initial conversion premium is talked at 40% to 45% at par, or 17.5% to 21.7% at the discounted price.

Through a stock loan agreement with Deutsche Bank Securities Inc., sole bookrunner of the new convertible, the issue will effectively be sold on swap. But, buyside sources said the mechanics of trading the new issue have not been clarified, particularly for holders who do not clear trades through the Deutsche desk.

Valuations on the new issue vary widely, partly due to the gapping coupon payments and also due to a disparity in credit spread views. Sellside market sources away from the Deutsche desk put the new Calpine convertible worth anywhere from 107, using a credit spread of 850 basis points over Treasuries and a 50% stock volatility, to the low 80s, using a credit spread of 1,500 basis points and 45% volatility.

"Anything wider than 500 [bps] off these days is just sort of out there in the ether," a sellside analyst said in reference to the credit assumptions on Calpine.

Another buyside source said he had been "looking to get back in greys [pre-market new issues], but I'm still skittish." Besides, he added, "There's no look [when-issued bids] yet in the converts; you can't borrow the stock."

Calpine junk deal delayed

Final terms on Calpine were not expected to be broadcast until Tuesday morning, and sources in the high-yield market were telling Prospect News that the San Jose, Calif., independent power producer's planned $785 million junk bond pricing would be pushed back to Tuesday from Monday.

Meanwhile, during the session Monday, indicative terms put the 10-year junk bond yielding 9.5% to 9.75%.

Merrill Lynch is bookrunner on the junk bond deal.

At the same time of the convertible offering, Calpine said it will use cash on hand to repurchase $266 million of its existing 4.75% convertibles from Deutsche Bank.

With the convertible proceeds, Calpine said it would call its 5.75% High Tides I convertible preferreds and 5.5% High Tides II convertible preferreds, leaving only the 5% High Tides III outstanding.

Proceeds from the junk bond deal are earmarked to repurchase debt, too.

The convertible market and credit analysts had been widely anticipating Calpine to refinance the High Tides, which total around $1 billion. The Is and IIs convertible preferred issues traded sideways Monday, both ending unchanged with the 5.75s at 50 and the 5.5s at 49.9375.

The 5% High Tides III convertible preferred issue gained 0.625 point to 47.375. Calpine's 4.75% convertible notes, however, dropped another point to 71.75 bid; two weeks ago, the 4.75s were trading up in the 85 area.

Calpine shares closed Monday down 14 cents, or 4.27%, to close at $3.14.

AtheroGenics up after-hours

After Monday's close, Atlanta-based AtheroGenics said results from a Phase II clinical trial for its heart drug candidate were encouraging, and its stock skyrocketed in after-hours trading by 73.5%. Before the news, its stock ended lower and the AtheroGenics convertible moved in tandem.

AtheroGenics' drug candidate, AGI-1067, is proposed to treat atherosclerosis, a hardening of the arterial walls caused by the build-up of cholesterol and plaque. AtheroGenics said it is enrolling patients in a Phase III clinical study for the drug.

If approved, it would be the company's first on the market.

At the market close, however, AtheroGenics shares dropped alongside the Nasdaq biotech index, which was off 1.85%, as well as the broader market.

The shares ended at $23.16, off 43 cents on the day, or 1.82%. In after-hours trading, the stock was last seen up $17.02, or 73.5%.

AtheroGenics' 4.5% convertible due 2008 moved with the stock, ending Monday lower by about 2.375 points to around 23.375 points over parity.

Allied Waste dumped again

There has been some consideration to picking up Allied Waste Industries Inc.'s convertibles on recent weakness, market sources have been saying for the past week or so. Rather, the dumping continues.

"We've had some lookers but no takers," said a sellside convert trader.

On Monday, the Allied Waste 4.25% convertible notes due 2034 lost another half-point or so, he said, to 87 bid, 88 offered. The Allied Waste 6.25% mandatory due 2006 plunged 0.875 point to 50.

Allied Waste shares ended lower by a dime, or 1.14%, to $8.69.

"When I looked at the company [Allied Waste] about a week ago I thought that the convert was still trading too tight given flat year-over-year EPS, relatively thin coverage numbers - fixed charge coverage of around 1 times - a high debt/cap of 76% and negative tangible book value," another market source said.

"At that time, the converts were about 350 bps over [Treasuries]," he added, noting that at Monday's levels, the spread widened to 400 basis points.

The Allied Waste convertibles have been cheapening since the garbage hauler on Sept. 14 gave the market a second warning in as many months that operating income would not meet expectations. At that time, Allied Waste reduced its outlook for 2004 operating income by about 3% to 4%, which followed a 3% to 4% cut to its outlook for operating income in late July.

Also on the warning, last week Standard & Poor's revised its outlook for Allied Waste credit to stable from positive. As a result of the weaker results, S&P said progress in debt reduction and improvement to key credit protection measures will now be more gradual than anticipated.

PMA Capital polls holders

Another market source confirmed Monday that PMA Capital Corp. has polled holders of its convertible in contemplation of an exchange offer.

"PMA has sent a letter to bondholders stating 'PMACA is considering making a proposal to holders of its 4.25% convertible deb. due 2033' asking them if they are QIBs [qualified institutional buyers]," the source said.

The source said it is believed that an exchange offer will be proposed in order to effect a conversion ratio closer to the current trading levels of common.

"The stock should fly afterwards. It trades at 50% of book value now," the source said. "The bonds have a September 2006 put at par. The company needs to address the put now in order to get an upgrade to A- in order to grow their workers comp business again."

PMA shares closed Monday up a dime, or 1.35%, to $7.50. The conversion price on the 4.25% issue is $16.37, for a conversion ratio of 61.0948.

The PMA Capital convertible has already moved sharply higher in anticipation of such an event, adding at least 45 points over the past week.

On Aug. 6, A.M. Best Co. maintained the review status of the financial strength ratings of B++ (very good) of the PMA Insurance Group but revised the implication to developing from negative. At the same time, however, A.M. Best downgraded the financial strength rating to B+ (very good) from B++ of PMA Capital Insurance Co., the company's reinsurance arm, and kept it under negative review.

A.M. Best upgraded the debt ratings of PMA Capital's convertibles to BB from BB- in August, as well.

On Sept. 13, Moody's confirmed PMA Capital's ratings, including the convertible at B3, with a developing outlook. In the same rating action, Moody's affirmed the insurance financial strength rating of PMA Capital Insurance Co. at B1 and the insurance financial strength ratings of The PMA Insurance Group companies at Ba1, with the outlooks changed to developing from negative.

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