AmerisourceBergen gains 2 points in spite of headlines; Charter soars on exchanges

By Ronda Fears

Nashville, Sept. 19 - In an unusual trading frenzy for a Friday, at least early in the day, convertible traders said Charter Communications Inc. converts soared on new exchanges for the two issues. The market was overall described as higher despite the weakness in stocks, and even AmerisourceBergen Corp. ended the day on higher ground in the face of a negative news article.

Volume slid sharply after noon, traders said, but the morning was "frantic."

"It was very busy this morning, then all of a sudden it died," said one trader.

"The flow just really dried up this afternoon. There were some indications showing up but live markets were hard to come by."

AmerisourceBergen spent the morning responding to a Wall Street Journal story that said the drug company was the subject of investigations by the Food and Drug Administration and Federal Bureau of Investigation.

Early on, the AmerisourceBergen convert "was all over the map," one trader said.

The 5% issue due 2007 - which has been trending lower on concern about the common dividend pressuring returns on the convertible - was lower early Friday but it rebounded strongly and was closed out at 119.875 bid, 120.625 offered. That was about 2 points better on a dollar-neutral basis, traders said.

A press release from the company hit the tape, followed by a conference call, both before noon.

"The [WSJ] article implies that AmerisourceBergen somehow participated in an illegal scheme to garner rebates from manufacturers, multiple times on the same product," said R. David Yost, chief executive of AmerisourceBergen.

"Such inference is absolutely not true, as will undoubtedly be demonstrated in a thorough investigation."

The company said that although it has had no contact from the government regarding such an investigation since the spring of 2001, the article probably refers to an investigation in which a customer illegally resold merchandise bought from AmerisourceBergen.

Prior to any government contact, AmerisourceBergen said it independently concluded that the customer in question demonstrated suspicious behavior and, thus, discontinued doing business with the account in February 2000.

After being contacted by the government, the company said it cooperated fully with the government and will continue to do so.

The company said in a statement, "At no time did AmerisourceBergen knowingly sell pharmaceutical products to a customer who resold discount priced pharmaceuticals in violation of agreements with manufacturers to purchase the pharmaceuticals solely for its own use.

"Also, at no time did AmerisourceBergen knowingly purchase pharmaceuticals that had been illegally resold."

Standard & Poor's said issues surrounding the possible ongoing investigation are not expected to have an impact on the BB+ credit rating or positive outlook at this time.

AmerisourceBergen continues to generate solid profitability and credit measures, S&P said, noting the company's operating margin rose for the June quarter and EBITDA coverage was about 6x.

The stock also took a wild ride during the session - losing as much as $3.50 at one point - but AmerisourceBergen shares closed down just $1.82, or 3.21%, to $54.83.

Charter's converts were the big winners of the session, however, and provided a considerable source of liquidity for an otherwise slow day.

After abandoning a $1.7 billion junk bond deal about a month ago, along with a tender for the converts and some straight debt (since the proceeds were key to the tender), the company Friday said it had completed an exchange with a "handful" of big holders for $609 million face amount of the 4.75% and 5.75% converts.

Charter said the exchange allowed it to remove 44% of its convertibles - $132 million of the 5.75% due 2005 and $477 million of the 4.75% due 2006 - at a price of around 85. (See story on page 1 for full details.)

Charter's CCH II subsidiary issued a total of $1.6 billion of the new notes, which will fund the exchange for the convertibles plus an exchange of $1.3 billion principal amount of senior notes.

Carl Vogel, president and chief executive of Charter, said on a conference call that it was clear from the junk bond road show that there was great interest in the exchanges, but he also said the St. Louis broadband company has no current plans for further exchanges or bond issues.

"We believe that, with the asset sales and this particular transaction and what we can do from a business point of view, we will have a number of different options to handle those [remaining 4.75% and 5.75%] convertibles as they become due," Vogel said.

But the convertible market is not anticipating a new issue, traders said.

Conceding the company paid a much higher interest rate for the new bonds than on the debt it replaced, Vogel said: "Yeah, we had to pay a lot more vis a vis the convertibles but the market was telling us those convert maturities were a problem."

There was great two-way activity in the Charter convertibles, traders said, with buyers speculating that issues might go to par on hopes of early redemptions and sellers glad to get out at level near or above the exchange prices.

"The bonds have had such a run-up, people were happy to take their profits," especially those that got in when they were in the 60s or 70s, said one dealer.

"There's still some underlying risk," that Charter may have trouble down the road in taking the remaining convertibles out, he added, but the bets seemed to be leaning that the issues would go to par.

Charter's 5.75s closed at 89.5 bid, 90.5 offered, up 5.5 points on the day; the 4.75s were up 4 points on the day to 85 bid, 86 offered.

Charter chares ended up 22c, or 4.67%, to $4.93.

Dealers said more high yield and outright convertible accounts were getting out of Charter, with convert arbs picking up more of the paper.

Hedge fund guys were also snapping up more AirTran Holdings Inc.'s 7% converts, figuring the credit picture would benefit as a result of the additional capital fetched from the company's plan to make a stock offering.

On Friday, AirTran said it plans to sell 8.65 million shares of common stock, with proceeds earmarked to redeem $35 million of its 11.27% senior secured notes and warrants for 1 million shares of stock held by Boeing Capital Loan Corp., working capital and other expenses.

The AirTran converts closed at 188.375 bid, 189.375 offered, with the stock off 83c, or 4.69%, to $16.88.

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