Serologicals weakens on hedged basis; JetBlue, Level 3 gain on results; Dov falls on drug trial woes

By Kenneth Lim

Boston, April 25 - Earnings and a takeover drove trading in the convertible bond market on Tuesday, with interest focused on a handful of names.

"It was quite quiet today, but if I was involved in one of those names I imagine I'd be pretty busy," said a sell-side trader.

Serologicals Corp. was weaker on a hedged basis after the company was revealed as the target of a $1.4 billion acquisition bid that sent the stock skyrocketing.

JetBlue Airways Corp.'s convertibles were higher on an outright basis, in line with the stock after the company announced a slew of cost-cutting measures amid a smaller-than-expected first-quarter loss.

In the primary market, Cell Therapeutics Inc. priced $33.2 million of five-year convertible senior notes at a coupon of 7.5% and an initial conversion premium of 15%. The company also made a concurrent placement of a further $33.2 million of convertible bonds on the same terms as an exchange for its existing 5.75% convertible subordinated debt due 2008.

Dov Pharmaceutical Inc. (Nasdaq: DOVP) came in about 1.5 points on a dollar-neutral basis as the stock crashed after the company's chronic lower back pain drug Bicifadine proved ineffective in a phase 3 trial. The company's 2.5% convertible due 2025 was last seen at around 73 bid, 74.5 offered, while the stock closed down 42.14% or $6.19 at $8.50.

"I think with a lot of these biotech names, a lot of people don't know what they're getting into," said a sell-side trader.

Dov Pharmaceutical is a Hackensack, N.J.-based biotech company whose main product was Bicifadine.

Meanwhile, Level 3 Communications Inc. saw its 2.875% convertible due 2010 improve about 2 points on an outright basis in line with gains in the stock after the company reported a wider quarterly loss but guided for higher revenues. The convertible was marked at 90.25 bid, 90.75 offered against the closing stock price of $5.32 on Tuesday. Level 3 stock (Nasdaq: LVLT) closed higher by 8.13% or 40 cents.

Level 3 said it lost $168 million, or 20 cents per share, in its first quarter. But the Broomfield, Colo.-based network services provider raised its full-year revenue forecast.

"Overall I like the story," said a buy-side convertible analyst. "I think they're well-positioned."

Serologicals takeover hits hedge

Serologicals' 4.75% convertible due 2033 was about 3 points weaker on a hedged basis but more than 30 points stronger outright on Tuesday after the stock shot up by a third on news that the company was being acquired for a 35% premium to its share value.

The convertible was marked at 210.25 against its opening price of $31.10. Serologicals stock (Nasdaq: SERO) closed at $31.15, up 33.58% or $7.83.

"It's some pain, but it's not a disaster," said a sell-side convertible bond trader.

Millipore Corp. said Tuesday that it would buy Norcross, Ga.-based Serologicals for $1.4 billion in cash and assume the biological consumables supplier's debt. The acquisition price of $31.55 per share represented a 35% premium to Serologicals' Monday closing stock price of $23.32. Millipore expects the acquisition to be completed around June 30, and will aim to increase Serologicals' sales in Europe, Asia and Japan.

A sell-side convertible analyst explained that Serologicals' convertible was trading so high above parity that investors who were hedged would have had to short a lot of the stock. The sharp rise in Serologicals' stock would have reduced the convertible's already small premium while punishing the short equity position.

"That's going to hurt some people," the analyst said.

JetBlue soars on results

JetBlue Airways was about 1.5 point higher on an outright basis on Tuesday after the company reported a smaller-than-expected first-quarter loss and laid out plans to control costs and raise fares.

The company's 3.5% convertible bond due 2033 was marked at 89.07 bid, 89.57 offered against the closing stock price of $10.64, while its 3.75% convertible due 2035 was marked at 92.08 bid, 92.58 offered versus the same stock level. JetBlue stock (Nasdaq: JBLU) closed higher by 13.19% or $1.24.

"The older ones are strictly a yield-to-put play, and the newer ones they're getting there," said a convertible trader of the convertibles due 2033, which have a put in 2008.

JetBlue said Tuesday that it incurred a first-quarter loss of $32 million, or 18 cents per share, from a net profit of $6 million, or 4 cents per share, in the year-ago period. But the company said it would delay deliveries of some aircraft and sell others, and expects to return to profitability in subsequent quarters.

JetBlue, a Forest Hills, N.Y.-based budget carrier, said it would also shift to shorter-haul markets and try to improve its pricing system to raise its average ticket price.

Goldman Sachs equity analyst Glenn Engel noted that JetBlue had one of the highest unit cost increases among major airlines in the first quarter. He said the delayed aircraft deliveries could save the company $200 million a year in capital expenditure, but JetBlue may still have to borrow an extra $1 billion every year.

A sell-side convertible analyst, who thought the convertibles "look attractive," remarked that "it's a credit issue with them now."

A buy-side convertible fund manager said "I wouldn't bet on the stock," but the convertibles are money-good with a yield-to-put at around 8.7%.

"They're going to slow down on expansion, raise fares," the buysider said. "That's all they have to do and this credit is fine. And the yield-to-put is quite attractive."

The possibility that JetBlue becomes distressed before the put in July 2008 are quite "far fetched," especially now that the management is taking steps to keep its costs in check, the buysider added.

"What I do see in their numbers is a credit that can be maintained by ordinary mortals," the buysider said.

Cell Therapeutics deal gets narrow interest

Cell Therapeutics' new $33.2 million of five-year convertible senior notes that priced at a coupon of 7.5% with an initial conversion premium of 15% may have limited interest, market observers said.

A sell-side convertible said the small size of the deal would dampen any interest in the market. Another analyst noted that Cell Therapeutics has been loss-making.

The convertibles were offered at par and have a conversion price of $2.09. Cell Therapeutics stock (Nasdaq: CTIC) closed at $1.83 on Monday.

There is a greenshoe option of a further $5 million.

CRT Capital Group was the bookrunner for the off-the-shelf deal.

Price talk terms were not provided, but market sources said book building took place about two weeks before the final terms were set and most of the interest came from existing investors in Cell Therapeutics.

"Most of the investors were existing investors that understood the company," a syndicate source said. "Cell Therapeutics is a good biotech, but it's a small firm so it doesn't have a very, very big following."

Cell Therapeutics has also concurrently placed out another $33.2 million of 7.5% convertible senior notes due 2011 with an initial conversion premium of 15% in exchange for $40.7 million of existing subordinated convertible debt. The existing debt comprises $39.5 million of its outstanding 5.75% convertible senior subordinated notes due 2008 and $1.2 million of its outstanding 5.75% convertible subordinated notes due 2008.

Cell Therapeutics, a Seattle-based developer of cancer treatments, said the proceeds from the public offering will be used for general purposes.

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