Duane Reade brings new deal in new structure; Biotechs, drugs higher on short covering

By Ronda Fears

Nashville, Tenn., April 10 - With volatility starting to pick up and a healthy move in stocks, convertibles gained ground and saw a healthier flow on Wednesday. A small new issue was being pitched for pricing after the close from Duane Reade Inc. with a new structure but onlookers say several fundamental improvements will be needed before much uptick in issuance is expected.

"We're beginning to see volatility tick up and that is getting a few of the hedgies off ground zero and into the market again. That makes us happy too," said the head trader at a major investment bank.

"There was some buying in a few biotech and drug names. There were some positive comments out on those groups, but a good deal of the gains was due to the stock movement, and that was in large part because of short covering on the back of some pretty deep plunges in the stocks over the past few weeks."

Deutsche Bank Securities had a report out on generic drug converts and of those mentioned traders said King Pharmaceuticals saw some buying. The King Pharma 2.75% due 2021 gained 2.875 to 97.5 bid, 97.75 offered with the stock up $1.61 to $34.02.

Biotechs saw a bigger move collectively, however, after likewise having deeper declines recently.

JPMorgan had a paper out earlier this week highlighting several biotech names for buying. Of several mentioned, traders said Invitrogen saw some buying on Wednesday. The Invitrogen 5.5% due 2007 added 1.375 to 85.75 bid, 86.75 offered with the underlying stock up $1.55 to $32.55.

Also higher in the biotech area on buying were MedImmune, Genzyme and Protein Design Labs.

The MedImmune 5.25% due 2008 rose 2.625 to 92.375 bid, 93.375 offered as the stock gained $2.17 to $37.75. Genzyme's 3% due 2021 added 1.875 to 94 bid, 94.5 offered with the stock up $2.31 to $42.98. PDLI's 5.5% due 2007 gained 3 to 84.5 bid, 85.5 offered while the stock closed $1.38 higher to $16.47.

Also higher were a few oil production and defense names on a so-called "war premium," traders said.

Northrop Grumman's 7.25% mandatory convertible due 2004 added 3 points to 125.875 as the stock rose $2.90 to $117.65.

St. Mary Land & Exploration's new 5.25% due 2022 was up 1 point to 111 bid, 112 offered with the stock up 33c to $22.09.

Other new paper was mixed, traders said.

"It was sort of choppy for the new issues that have recently come out, probably mostly due to liquidity in some of those names drying up," said one trader.

"It was really sloppy for semiconductors, too."

Software names were having a rough go of it, too, mostly bucking the upward trend of the markets.

Siebel Systems was said to be falling amid a sell-off in response to a Bloomberg story that quoted the software company as saying it expects something like 100 to 200 firms to close this year due to weak software demand. On that, Siebel's 5.5% due 2006 was marked down 5.5 points to 126 as the stock lost $2.12 to $25.44.

Manugistics also came under pressure, with the 5% due 2007 dropping 1.5 points to 80.375 bid, 80.875 offered as that stock closed down 95c to $17.43.

Telecoms and telecom equipment makers also declined to participate in the party, and no one really expects much of a rebound there soon. Lucent's new 7.75% convertible preferred dropped 2.625 points to 84.25 bid, 84.75 offered with the stock down 15c to $4.03.

"Telcos just keep hitting new lows, and we aren't seeing that get much better," said a convertible trader at one of the major investment banks.

"No one's even willing to buy on weakness in that group. It's just too iffy."

Several financial issues continue to gain ground, but Merrill Lynch & Co. was still ticking lower as the New York Attorney General's office expanded its order for investment banks to disclose conflicts of interest between analysts and investment bankers. Now the list includes Goldman Sachs & Co., Morgan Stanley, Credit Suisse First Boston, Salomon Smith Barney, Bear Stearns & Co., Lehman Brothers, UBS Warburg and Lazard Freres.

The Merrill Lynch convertible floater due 2032 was down 0.875 to 100.375 bid, 100.625 offered and the 0% convertible note due 2031 was off by 0.125 to 51 bid, 51.125 offered as the underlying stock fell $1.17 to $50.92.

Lehman's convertible floater due 2022 was quoted flat at 101.375 bid, 101.625 offered with the stock up 26c to $63.16.

The Jardine Matheson 4.75% convertible due 2007, which converts into JPMorgan shares, was quoted off 0.125 to 95.125 bid, 96.125 offered as the underlying stock slipped 15c to $35.04.

Other financials gained, however.

PMI Group's 2.5% due 2021 gained 1.125 to 114.875 bid, 115.25 offered as the stock added $1.41 to $82.76. The AmerUs 2% convertible OCEANs due 2032 added 1.5 to 113 bid, 113.75 offered while the stock gained 64c to $39.19. Radian Group Inc.'s 2.25% due 2022 rose 1.75 to 111.25 bid, 111.75 offered with the stock up $1.72 to $54.03.

While market pros are not extremely optimistic about a sharp uptick in new issues, or at least any big new deals, most say there will continue to be a few small deals trickle into the market.

Duane Reade was pitching a new deal with a new structure on Wednesday.

The CATZ convertibles, or cash-to-zero convertibles, are rated Ba3 by Moody's and BB- by S&P.

The 20-year Rule 144A issue, for $110 million in proceeds, is offered at a discount price with a cash coupon of 2.1478% for the first five years, thereafter with a 0% coupon, for a yield to maturity of 3.75%. The initial conversion premium is expected between 22.5% and 27.5%.

Dueane Reade shares closed down $1.95 to $31.80.

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