QLT gains as competing drug approval seen risky; Gap, apparel issues off; Delta steady

By Ronda Fears

Nashville, Aug. 26 - With biotech and drug issues finding interest from buyers on recent weakness in that sector, plus selective credit spread widening in spots, QLT Inc. shot up in the convertibles market. The reason for the move: a competing eye treatment from Eyetech Pharmaceuticals Inc. is seen at risk of not getting U.S. Food and Drug Administration panel approval on Friday.

The convertibles market overall, however, was tracking along at a sluggish pace as many players were out on summer vacations just ahead of the back-to-school schedules and the Labor Day holiday.

"I think people in the convert world did okay when the stock market fell earlier in the month as vol [volatility] picked up a bit and gave everyone a chance to trade some stocks," said a hedge fund manager in New York. "Right now, as you can imagine, it's very, very quiet."

On weak expectations for back-to-school sales, particularly apparel sales, several retail issues were again lower. Holders were shedding Gap Inc., Saks Inc., J.C. Penney Co. Inc., Casual Male Retail Group Inc. and Charming Shoppes Inc. - all of which lost a point or more.

Capital markets sources say that at least the primary side of the market will indeed pick up as soon as the Labor Day holiday is past.

"It is indeed miserably slow [and] it is highly likely to be this slow for the next two weeks," said a sellside market source. But, he added, "On the margin, one gets the sense that risk appetite is up a wee bit."

AMR Corp., parent of American Airlines Inc., warned that higher-than-expected fuel expenses will erode earnings, and most onlookers expect all the airlines to follow suit, so airline paper was softer for the most part. Yet, the sellside market source said there was some buying interest in airline paper Thursday and Wednesday on the continued decline in oil prices.

Delta Air Line Inc.'s convertibles, however, were in a holding pattern, or steady, as the airline passed out a list of eight questions and answers to equipment trust securities holders who are being asked to agree to consent waivers that would allow the company to begin debt exchanges and/or repurchases.

QLT competition questionable

Vancouver-based QLT has just one commercial product, Visudyne, a photosensitizer used to treat the wet form of age-related macular degeneration, which could face competition down the road from therapies in development by Genentech Inc. and others. Meanwhile, a potential rival treatment for the so-called wet AMD could come from New York-based Eyetech, which has a treatment that will be considered by an FDA panel on Friday.

QLT's Visudyne is the only approved treatment for wet AMD currently and is marketed with Novartis AG.

Eyetech, with Pfizer Inc., has a drug called Macugen.

"Eyetech's product, Macugen, is being reviewed Friday. I think the chatter is there is more risk of non-approval than had been anticipated, so QLT Inc.'s notes and stock got better," said a buyside market source. "I still really like QLTI on a relative value basis, so I took the mark up but did not trade any."

Those skeptical of Macugen's panned review, however, were looking to sell into the strength, a sellside trader said.

"All the articles I read today looked like Macugen was a sure thing, which would not be good for QLT," he said.

The QLT 3% convertible due 2023 gained 4.25 points on the speculation about Macugen's fate. It was quoted at 126.375 bid, 126.875 offered with the stock up 97 cents, or 5.86%, to end the session at $17.52.

Delta convertibles stay steady

Delta's convertibles were holding steady in the mid- to high-30s, traders said, as the airline distributed eight questions and answers to equipment trust certificate and pass-through certificate holders.

A committee of senior secured creditors demanded more information on the company's restructuring plans before giving any consents, which was why the company came up with the Q&A forms.

"Right now, everyone is just sitting still," said a sellside trader.

Credit analysts were saying that to hang on to Delta paper one must be willing to negotiate the restructuring, as the company cannot continue long as it presently is, or be ready to lose some of their investment in a bankruptcy.

"Worries about whether the carrier can fund debt maturities and pension payments of near $2 billion over the next year are irrelevant if it doesn't have the cash to operate," pointed out GimmeCredit bond analyst Kimberly Noland in a report Thursday.

"A purchase of the unsecured longer bonds in the mid-20s could yield nice profits even if that debt is restructured, but the investment is only for those willing to lose half their money if Delta ends up in bankruptcy."

Delta's 2.875% convertible due 2024 was specifically mentioned in the GimmeCredit report.

Delta Q&As enlightening

The questions Delta included in the materials, as well as its answers, did shed some light on the situation, and seems to suggest that its success looks better than previously, a buyside market source said.

"I read that they only need consent from a handful of the ETC, PTC holders because apparently some of the ETC and PTC issues don't have the specific language restricting a restructuring," he said, referring to No. 4 on Delta's Q&A form. "Also, the fact that Delta will not be able to vote [any consents] should make the transaction more acceptable to the holders."

(1) Why has Delta initiated a consent solicitation? Delta's answer, essentially, was that it would remove restrictions to a successful out-of-court restructuring.

(2) What are the consequences if the necessary consents are not obtained? Delta's answer, in essence, was that if it fails then its ability to include that debt in possible future restructuring steps would be seriously limited, which "Delta does not believe that result would be in the best interests of the holders."

(3) Why were the contractual restrictions originally included? Delta said, in part, that it believes the restrictions were included at the request of the owner participants in the related leveraged lease transactions.

(4) Why are certain ETCs and PTCs not included in the consent solicitation? Delta said a number of series of ETCs and PTCs do not contain contractual restrictions.

(5) Will the consent process modify the voting provisions or the economic terms? No, Delta said.

(6) Will Delta be able to vote any ETCs or PTCs that it owns? No, Delta said, neither Delta nor any of its affiliates will be able to vote any ETCs or PTCs that it owns.

(7) Is the waiver of the record date and other procedural requirements a change for purposes of the consent solicitation only or a permanent change to the underlying documents? Delta said the waiver of the record date and other procedural requirements is only for purposes of the consent solicitation.

(8) Will holders who consent be obligated to participate in any future offer that Delta may make? No, Delta said.

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