Human Genome up 1.5 in gray on tighter talk; Calpine, American Financial issues up; Lions Gate emerges

By Ronda Fears

Nashville, Sept. 28 - New paper from American Financial Realty Trust and Calpine Corp. bounced after breaking to trade Tuesday while the new Human Genome Sciences Inc. deal on tap at the close was bid up in the gray market - with tighter guidance to boot - and Lion's Gate Entertainment Corp. was peddling a small overnighter.

With the $725 million of new paper in circulation and another $400 million coming this week at least, traders said secondary activity picked up and the direction improved to trading mostly sideways from a decidedly negative bent in recent sessions as oil prices surged.

Crude futures spiked again Tuesday, surpassing the $50 a barrel mark during the session but coming off that high to settle up 26 cents at $49.90. Traders said the convertible market mirrored stocks, seemingly shrugging off the oil factor.

Even some of the airline paper and other issues beaten down by the run up in fuel costs were better bid, traders said.

"The worst of it [crude oil prices] is surely over," said a sellside trader. "Now that we've passed the psychological $50 a barrel mark, either we adjust to a new reality or OPEC or the other world powers step in" and take measures to bring oil prices down.

Downtrodden Delta Air Lines Inc.'s converts got a bounce as the troubled air carrier announced wage cuts and other cost-saving measures. The 8s were seen up 0.75 point to 32.75 bid and the 2.875s up 2 to 3 points to 33.75 bid. Delta's junk bonds, however, dropped on the news, with the short-dated 7.7s seen losing 2 points to 45 bid.

It was a bittersweet tidbit of news from AtheroGenics Inc. The company reported positive trial results for its drug candidate intended to treat cholesterol and plaque that clog heart arteries, which could be its first commercial product.

AtheroGenics shares skyrocketed to nearly $42 before backtracking to close at $38, which was still a 64% spike from Monday's close. The 4.5% convertible shot up nearly 90 points but on swap it came in from about 23 points over parity to 15 points over, as hedge fund players were pained by getting caught in a short squeeze on the stock.

Not so much of the small AtheroGenics $100 million convert traded, but, as a buyside trader put it: "The shorts are exhausted and it will take several more days to cover those positions."

Human Genome talk squeezed

Before the books closed on Human Genome Sciences' new $200 million convertible, guidance was revised on the issue to put the yield at 2.25% - the tight end of the indicative range for a 2.25% to 2.75% coupon - and the initial conversion premium was moved aggressively outside the pre-market range of between 30% and 35% to 40%.

Still, a buyside trader last saw the issue bid 1.5 points over issue price in the gray market, and that was after the price talk had been changed.

The seven-year non-callable convertible subordinated notes were launched after Monday's close, with proceeds earmarked to repurchase its existing convertibles. The Human Genome Sciences 3.75% convertible due 2007 was seen Tuesday ending up 3 points to 97 bid, 98 offered.

Human Genome Sciences shares closed Tuesday off by $1.255, or 10.15%, to $11.105.

Lions Gate overnighter on tap

After the closing bell, Lions Gate Entertainment Corp. launched an overnight offering of $125 million of 20-year convertible notes talked to yield 2.375% to 3.125% with a 36.5% initial conversion premium.

SG Cowen & Co. is sole bookrunner of the Rule 144A issue. SG Cowen also ran the books on the company's tiny $50 million 4.875% convertible due 2010 that was sold last December.

The Santa Monica, Calif., motion picture production company said proceeds would be used to repay its U.S. dollar bank revolver and term loan, and possibly to fund any future acquisitions.

Lions Gate shares closed Tuesday up 9 cents, or 1.03%, to $8.79. In after-hours trading, the stock was seen down 34 cents, or 3.87%, shortly after the news of the convertible offering emerged, but found support and was later seen up a penny to $8.80.

Calpine issue gains out of gate

Despite controversy before pricing, Calpine's new $608.3 million proceeds convertible shot up out of the gate, adding 3 points for outright buyers and 6.75 points on swap. The 10-year unsecured notes were sold at 83.9 to yield 7.15% with a 17.46% initial conversion premium - at the cheaper end of guidance for an initial conversion premium of 17.5% to 21.7% on the discount price.

At par, the conversion premium was 40%, and the issue pays a 6.0% cash coupon in years one and two, then from years six through maturity. Interest accrues during years three, four and five. The issue was effectively sold on swap, as Calpine entered into a stock loan agreement for 89 million shares with Deutsche Bank Securities, sole bookrunner on the convertible sale.

The San Jose, Calif.-based independent power producer also on Tuesday sold $785 million of Rule 144A 10-year secured junk bonds, a day behind the original schedule, pricing them at 99.212 to yield 9.75% and those were seen lower in the immediate aftermarket at 98.5 bid, 98.75 offered.

Calpine shares ended Tuesday down 13 cents, or 4.14%, to $3.01.

Without the stock loan transaction, buyside sources said it was a tough borrow on the stock. There had been considerable hubbub regarding the mechanics of the trade for arbs if they did not clear through Deutsche, but nothing further was mentioned Tuesday amid other new deals breaking to trade or launching.

American add-on repriced at 97

American Financial Realty Trust's add-on priced cheap, too, and then was reoffered even below the discounted price.

The Jenkintown, Pa.-based REIT sold the $125 million add-on to its 4.375% convertible due 2024 via sole bookrunner Deutsche Bank Securities with an issue price of 97.25 plus accrued interest, for a yield of 5.026%. The issue, however, was reoffered by Deutsche at 97 plus accrued interest.

The Rule 144A add-on priced at the cheap end of guidance for an offer price of 97.25 to 97.5

In June, the REIT sold the original $300 million issue at par with a 4.375% coupon and 27% initial conversion premium and joint bookrunners Deutsche Bank Securities and Banc of America Securities reoffered it at 98.

The add-on gained ground to close at 97.75 bid, 98.25 offered, and the original 4.375s dropped about 1.25 points to the same level.

American Financial Realty shares closed Tuesday off 3 cents, or 0.22%, to $13.87.

AtheroGenics news bittersweet

While good news about AtheroGenics was splayed all over the newswires, a buyside trader said the astronomical run up in the stock - 64% - caught convert arbs in a painful short squeeze.

Another buyside source said his firm's healthcare analyst was bullish on AtheroGenics before it surged. But such a sharp move was apparently unforeseen.

While the surge in AtheroGenics stock was dramatic, it had fallen back from a 73.5% gain seen in after-hours trading on Monday just after the news hit the tape and an intraday high Tuesday of nearly $42.

The shares ended Tuesday up $14.84 to $38, but reached $41.93 during one point of the session.

After Monday's close, Atlanta-based AtheroGenics said results from a Phase II clinical trial results were positive for its drug candidate, AGI-1067 - proposed to treat atherosclerosis, a hardening of the arterial walls caused by the build-up of cholesterol and plaque. AtheroGenics is currently enrolling patients in a Phase III clinical study and, if approved, it would be the company's first commercial drug.

The convertible's move was more bittersweet in relation to the stock, traders said.

AtheroGenics issue faltered a bit

The AtheroGenics convert faltered a bit, one sellside trader suggested, because of concerns about the small biotech firm now getting scouted as a potential takeover candidate. Another said it richened but the market's hesitation was related to specifics in the bond indenture.

AtheroGenics' 4.5% convertible due 2008 added nearly 90 points Tuesday to 263 bid, 265 offered, or 15 points over parity, after closing around 23.5 points over parity on Monday.

"People weren't really sure how to value it [the 4.5% convert] because there is no takeover protection, but it's non-callable through 2008, for the life of the bond," said one sellside trader.

"This is just a Phase II trial, but this could put them on the map. Still, it's just one drug. What really happened today is that the market just brought the value of the stock up to where they think it should be if there's a $1 billion to $2 billion market for the drug."

The market cap on the stock at the close Tuesday was $1.41 billion. With the $100 million convertible, he pointed out the value would match the mid-point of the estimated sales for the drug.

The pain was from convert arbs having to cover short positions, and the buyside trader pointed out that some 28 million shares of AtheroGenics stock traded Tuesday versus the running average of 647,404. He also noted that terms on the convert richened to a 1.7% current yield and 6% conversion premium on Tuesday's levels from about 2.5%, up 16% on Monday's levels.

Disney slides on Euro Disney

Walt Disney Co. converts were said to be about 0.75 point easier Tuesday on news that Euro Disney had sealed a restructuring plan in which Walt Disney, which holds a 39% stake in the French theme park counterpart, would waive some royalties. Also pressuring the issue was ongoing contention among Disney board members over the company's top executive post.

Disney's 2.125% convertible slipped to 103.5 bid, 103.625 offered, off about 0.75 point, a sellside trader said, while the stock dropped 57 cents, or 2.46%, to $22.60.

While many believed the dissention among the Disney board of directors over the chief executive post was calming down, Reuters was reporting late Tuesday that dissident shareholder Roy Disney was prepared to run an alternate slate of directors if the board did not carry out its plan to find a successor to current CEO Michael Eisner, who has announced he will step down in two years when his contract expires.

The board had announced a plan last week to hire an independent firm to conduct a talent search for a new CEO of the entertainment giant.

Euro Disney on Tuesday said it had inked a unanimous restructuring agreement with creditors, preventing it from a bankruptcy to ease its €2.2 billion debtload.

The plan includes a €250 million euro capital increase and a €150 million credit line from Disney, waivers on some royalties for use of the Walt Disney characters, plus other concessions from Disney.

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