Allergan new deal stumbles in the gray; Annaly offering seen as hedge play; Cell Therapeutics plans deal

By Kenneth Lim

Boston, April 6 - The convertible market had another slow session on Thursday, with the market focused on two new deals slated to price after the market closed.

"It was a fairly quiet day, but on the whole things came in a little," said a buy-side trader.

The proposed $700 million offering of 20-year convertible notes by Allergan Inc. was priced at the cheap end of talk after the market closed. Analysts and traders had described the deal as "aggressive," and the security was offered below par in the gray market.

"That deal is barely going to get done," the buy-side trader said.

Meanwhile, Annaly Mortgage Management Inc.'s proposed $100 million of perpetual preferred stock was seen as attractive for hedge investors but not outrights.

Cell Therapeutics Inc. also said Thursday that it is planning a $50 million to $100 million issue of convertible bonds as new debt or in exchange for its older bonds.

Also active on Thursday were the Incyte Corp. convertibles, which gained back about half a point outright in line with the stock, which lost about 40% on Monday earlier in the week on news that it is stopping developing its experimental HIV drug DCF due to safety concerns.

The Incyte 3.5% convertible due 2011 was seen changing hands at 74 versus a stock price of $3.65, while the 5.55 convertible due 2007 traded at 99.625 against the same stock price. Incyte stock (Nasdaq: INCY) closed at $3.80 on Thursday, up 4.11%.

Incyte is a Wilmington, Del.-based pharmaceutical company.

Lucent Technologies Inc.'s 7.75% convertible preferreds continued to hover around 1,032.5 against a stock price of $3.17, said a sell-side source. The preferreds are now trading more than 30 points above levels from last week before reports emerged that Lucent and Paris-based Alcatel were in merger talks. The two telecommunication equipment makers announced Sunday that Alcatel would acquire Lucent.

Analysts said investors were betting that the combined company would tender for the preferreds to avoid having to continue paying the high dividend.

Shares of Murray Hill, N.J.-based Lucent (NYSE: LU) closed at $3.20 on Thursday, up 3 cents or 0.95%.

King Pharmaceuticals Inc.'s newly issued 1.25% convertible due 2026 continued to stay healthy, trading at 100.75 versus a stock price of $17.50 on Thursday. The Bristol, Tenn.-based drug maker issued the convertibles at par two weeks ago. King Pharmaceuticals stock (NYSE: KG) closed at $17.54 on Thursday, up slightly by 1 cent or 0.06%.

Allergan deal fails to impress

Allergan priced its $700 million offering of 20-year convertible senior notes on the cheap end of talk late Thursday, a move many expected with the securities offered below par in the gray market.

The convertibles were offered at par, were priced at a coupon of 1.5% and an initial conversion premium of 20%, syndicate sources confirmed. Price talk guided for a coupon of 1% to 1.5% with an initial conversion premium of 20% to 25%.

There is an over-allotment option of $50 million.

Morgan Stanley, Bank of America and Citigroup were the bookrunners.

A sell-side trading source said the convertible was offered at 100.5 in the gray market on Thursday, but later in the day the offer price came down to 99.875. Allergan shares (NYSE: AGN) dropped $1.60, or 1.49%, to close at 105.55 on Thursday.

A sell-side convertible analyst said the new issue modeled at about 99.5 on the cheap end of talk with a credit spread of Libor plus 25 basis points and an implied volatility of 23.7%.

"It looks aggressive," the sellsider said of the price talk. "But if they manage to get it done that would bode well for the convertible market, because that means people will pay well for volatility."

A Connecticut-based analyst also felt the price talk was aggressive. The attractiveness of the convertible would depend on the volatility an investor assigned to the stock as well as the investor's view of the stock's prospects, the analyst said.

"It's an investment-grade company, so you're basically taking a bet on the stock," the analyst said.

But the analyst said the shares are already trading at about 29 times the average earnings per share estimate, and it is not clear if Allergan has any significant new products in the pipeline in the long term, the analyst said.

"My analysis shows the stock is already fairly valued," the analyst said.

Irvine, Calif.-based Allergan is a specialty pharmaceuticals manufacturer with products that treat ophthalmic, neurological, aesthetic and dermatological conditions. Allergan said it will use proceeds from the convertible and straight-bond offerings to redeem its outstanding zero-coupon convertible notes due 2022 and to repurchase $257 million of its common stock. It will also use the proceeds to pay for its acquisition of Inamed Corp. in March this year, including the repayment of an outstanding $825 million from a bridge loan for the acquisition.

The existing Allergan zero-coupon convertibles were marked at 120.31 bid, 120.43 offered against the closing stock price of $105.55 on Thursday at a major convertible shop.

Annaly deal seen as hedge play

Annaly Mortgage's planned $100 million of perpetual convertible preferred stock was seen as attractive for hedge players but not for outright investors, analysts said Thursday.

The preferreds were talked at a dividend of 5.75% to 6.25% with an initial conversion premium between 17.5% and 22.5%.

The preferreds are expected to be priced at $25 apiece, and the final terms are slated to be set on Thursday after the market closes. There is an over-allotment option of a further $15 million.

Merrill Lynch and Co. is the bookrunner of the off-the-shelf deal.

"I think a lot of hedge guys are going in, but outrights, a lot of investors are concerned that with the current short-term interest rate environment and the flat yield curve, the stock may still be under pressure for a while," said a buy-side analyst.

A sell-side analyst said the deal was "not the greatest structure in the world," highlighting that it was an issue of perpetual preferreds from a real estate investment trust that specializes in mortgage-backed securities and pays a common dividend of almost 3.7%.

"So your income advantage is only about 250 bps if the price is at the wide end," the sellsider said. The sellsider modeled the convertible at 25.75, or just under 3% cheap, at the cheap end of talk using a credit spread of Libor plus 425 bps and a volatility of 21%.

The sellsider said there was also concern about how well the stock would do, noting that recommendations from the Street were mainly holds and sells.

"It does break even in 4½ years, which is inside the five years of hard call protection, but that's only if it comes at the cheap end," the sellsider said. "I don't think people are going to be particularly interested in a speculative grade REIT, especially a mortgage REIT."

A Connecticut-based convertible analyst modeled the convertible 3% cheap at the midpoint of talk with a credit spread assumption of 525 bps over Treasuries and a volatility of 23%, noting that Annaly stock has yet to trade with volatility lower than the mid- to high-20s. Quipping that the convertible would be "terrible for an outright account," the analyst said outright investors would not be excited about investing in a "leveraged mortgage portfolio in an inverted yield curve environment."

"This is definitely more for hedgies than outrights," the analyst said. "It actually looks like a good setup for hedgies - yield advantage, vol, call protection are all there. No downside protection and iffy credit will keep outrights away."

Annaly is a New York-based real estate investment trust that invests mainly in mortgage-backed securities. It plans to use proceeds from the stock and convertible offerings to buy mortgage-backed securities, and then borrowing against the newly acquired securities to buy more mortgage-backed securities.

Annaly stock (NYSE: NLY) closed at $11.88 on Thursday, down 22 cents or 1.82%.

Annaly is also planning a concurrent offering of common stock worth $300 million plus a further $45 million for over-allotment.

Cell Therapeutics plans new deal

Cell Therapeutics said Thursday that it plans to sell or exchange between $50 million and $100 million of new convertible bonds. The company did not provide any terms or timings, but said the securities will be marketed to qualified institutional buyers and holders of its existing notes.

A sell-side analyst called the announcement "cryptic," and speculated that the company, which develops cancer treatments, is addressing the outstanding $85.5 million of 5.75% convertibles that become due in 2008.

"They're probably looking to refinance those," the analyst said.

Seattle-based Cell Therapeutics' 5.75% convertibles were not seen trading on Thursday. Their last reported trade on Trace was from March 10 at 61.66, when the stock closed at $1.88. The stock ended at $1.74 on Thursday, down by 20 cents or 10.31%.

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