Deal flow seen improving after election; Durect eyed; Delta 8s ease; Ivax off again

By Ronda Fears

Nashville, Nov. 2 - With the U.S. presidential election over except for the potential, or feared, legal actions, traders said the convertible market was again quiet but more hopeful that new deal flow would pick up for the remainder of the year.

"Once the elections are over, I think we'll see a pretty nice stream of deals from now through the end of the year," said a capital markets source at one of the busier convertible underwriting shops.

The prospect of a close presidential election and a repeat of the 2000 court battle sparked a late sell-off in stocks, but the major indexes closed little changed, as did bonds, and in convertibles traders remarked instead about some spotty buying taking place.

A good deal of chatter, however, involved new deals, or the lack thereof.

"I'd like to see some deals come post-election," said a desk analyst at a big sellside shop. "Regardless of who wins, a major overhanging issue will be removed, so we can hopefully get back to business - even if we do have to pay higher dividend taxes, higher capital gains taxes and higher income taxes."

It may still end up a negative net issuance year, though. A Merrill Lynch report Tuesday showed that in October, due to negative net new issuance of $2.9 billion, the total market value decreased to $284.5 billion from $286.5 billion month over month. Merrill tracked $1.8 billion of new issues against $4.6 billion in redemptions in October, bringing year-to-date redemptions to $48.6 billion for total negative net new issuance thus far of $12.8 billion.

Durect convertible finds interest

The Durect Corp. convertible has caught the eye of a yield-seeking market source Tuesday, who referred to the 6.25% bond due 2008 as "scrumptious."

Trading at 94 bid, 96 offered with the underlying stock at $1.95, he noted it has a yield to maturity of 7.864%, a 53% conversion premium and a 6.58% current yield.

The biotechnology concern just "took another drug [Saber] into Phase 2, reported a slightly better quarter" in which it lowered its cash burn rate, the source said.

Durect has four products in various clinical trial stages or anticipated to enter clinical trials by year-end - a transdermal sufentanil patch, oral Oradur-based oxycodone, injectible Saber-based post-operative pain depot and implantable Durin-based Alzheimer's Disease product. On Oct. 25, Durect announced the initiation of a Phase II clinical study for the Saber post-operative pain treatment.

For third quarter, Durect reported a net loss of $7.3 million, or 14 cents a share, versus a loss of $6.4 million, or 13 cents a share, in third quarter 2003.

At Sept. 30, Durect said it had cash and investments of $69.3 million.

For fourth quarter the company expects a net loss of $7 million to $8 million, or 14 to 16 cents a share. The company is projecting total cash burn for 2004 at $23 million to $25 million.

Ivax 1.5s falls again

Ivax Corp.'s 1.5% convertible plunged Tuesday, a day after it was pounded following third quarter results that missed analysts' expectations, which one trader said prompted at least six downgrades to the underlying stock.

The convertible dropped to 91.5 bid on Tuesday while the stock lost 48 cents, or 3.45%, to $13.42, hitting a split-adjusted new 52-week low. There was a 5-for-4 stock split that took effect Aug. 24.

For third quarter, Ivax posted earnings of $44.4 million, or 17 cents a share, up from profits of $21.6 million, or 9 cents a share, in third quarter 2003, but short of analysts' projections for $53.6 million, or 21 cents a share. Revenues were short of the market's expectations of $467.3 million, too, at $439.1 million, although that was up from $360.6 million a year before.

"All the drug stocks have sold off, because people think [Democratic presidential candidate U.S. Sen. John Kerry of Massachusetts] Kerry would be bad for big Pharma," a sellside trader said. "But, really, he should be good for Ivax, because Ivax sells generics, which save money."

Dynegy 4.75s add 0.25 point

Dynegy Inc. doesn't look the same as it did a year ago - after selling more than $600 million in assets, including Illinois Power last month - and it now is buying Sithe Energies Inc. from Exelon Corp. for $135 million in cash and the assumption of $919 million in non-recourse project debt. Credit analysts like the asset purchase for its cash flow but say there is still risk abounding at Dynegy.

"Although Dynegy is making progress, its credit measures remain weak," said Kimberly Noland, bond analyst at GimmeCredit, noting that even improved EBITDA and interest coverage still don't put the company into positive free cash flow territory.

Some Dynegy bonds have tightened pretty sharply over the past year, she said, and are probably around fair value so it might be smart to let go of the unsecured debt given ongoing challenges ahead. But, she added, holders might fare better by waiting to see if any good news on the tolling agreements related to Sithe produce additional support for bond prices.

Standard & Poor's affirmed Dynegy's B ratings, with a negative outlook, on the acquisition news. Although it expands Dynegy's presence in the Northeast U.S., S&P said it remains concerned about Dynegy's ability to generate a stable cash flow stream given risks associated with ongoing merchant energy business and plans to reduce overall debt. Dynegy had about $4.7 billion of debt as of June 30.

Dynegy's 4.75% convertible due 2023 was quoted Tuesday up 0.25 point to 145 bid, 146 offered. The stock gained a penny to close at $4.85.

Delta 8s off, 2.875s up

Delta Air Lines Inc.'s convertibles moved on short covering that pushed the 2.875% issue up about a quarter-point and the 8% issue lower by about a quarter-point, traders said. Traffic in the paper remained a bit slow, traders said, but one commented that "more traditional convert players seem to be getting back in."

Delta shares gained 13 cents, or 2.34%, to $5.68.

CreditSights analysts Roger King and Glenn Reynolds said in a report Tuesday that Delta's restructuring puzzle pieces are starting to come together, but three key data points are still missing to gauge both short- and long-term risk - the pending bond exchange offer, under-funded pension liabilities of $5.7 billion, and details about its new operational plan.

"Delta has been silent so far on the bond exchange offer, which is becoming the linchpin of an out-of-court restructuring," the analysts said. "Mathematically, it is topologically impossible to get all the restructuring pieces to interlock simultaneously. Practically though, the pilot agreement, American Express' mileage prepayment, the 7.70 extension, and probably the rumored GECC loan all depend on a successful bond exchange offer."

"Saving that to last invites a certain level of extortion that could scuttle what is now a tenuous deal. Details of the pension agreement also remain out of investors' view. How Delta plans to deal with the under-funding will weigh heavily not only on the long term viability of its reengineered business plan, but the rest of the airline industry and other industrial distressed defined benefit pension plans."

So far, tenders running short

Holders of various Delta paper also have been complaining about the airline's silence on how the bond exchange offer is going, especially since an early tender incentive offer expired a week ago. The overall exchange offer expires Nov. 18.

Long after the market closed Tuesday, Delta announced some preliminary results that seem to explain why it has been quiet - participation thus far for most of the $1.65 billion of bonds involved are well below the company's target.

As far as the short-term securities involved, Delta said around $252 million of the pass-through certificates have been tendered, exceeding the minimum conditions.

But, Delta said in the news release, "the amount of securities in the other classes tendered to date is substantially below the minimum tender conditions."

The airline also noted that in the event that the exchange offer is consummated only with respect to the short-term pass-through certificates, the collateral reserved for the other classes of notes will be available to meet other liquidity needs.

DoubleClick, Allied Waste off

Elsewhere in secondary dealings, market sources said DoubleClick Inc.'s convertible lost another quarter-point to 92.5 bid following news that it hired Lazard Freres & Co. to explore strategic alternatives such as selling all or part of the company or a restructuring, among other possibilities.

Allied Waste Industries Inc.'s 6.25% mandatory due 2006 also was lower by about 0.125 point to 48.375.

AmerisourceBergen Corp. convertibles were active Tuesday, too, a market source said.

"The company reported a disappointing quarter, but the bonds have strengthened since management made it pretty clear on their conference call that they will call the bonds, but only to force conversion, and that they're likely to be conservative with regards to call cushion so that they won't wind up paying cash," he said.

The 5% convertible due 2008 was pegged at 108.5 bid, 109 offered, up 1.75 points. The stock gained $1.59, or 2.91%, to close Tuesday at $56.19.

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