Lear eases on layoffs; airlines dive on oil spike; Weatherford watched as put nears; CV, Impax deals eyed

By Ronda Fears

Nashville, June 27 - Convertibles traded lightly Monday, onlookers said, as the market seemed to be holding its breath ahead of the upcoming Federal Reserve meeting midweek when policy makers are widely expected to boost interest rates.

Month-end business also was a factor weighing on convertible players and keeping many preoccupied, traders said. The importance of the matter was underscored on news from Friday that the Securities and Exchange Commission had leveled fraud charges against Tenet Capital Partners Convertible Opportunities Fund, alleging the fund attempted to disguise losses from its investors.

"There's more of this [fraud] to come," a sellside trader said, inferring that some players might want to fudge numbers rather than mark the value of their positions much lower with the market cheapening. As redemption notices are acknowledged by funds, it could trigger more unhappy or disgruntled investors seeking retribution.

Otherwise, skyrocketing oil prices influenced the market, moving transportation and oilfield issues in opposite directions. Airlines were particularly weak Monday, with Delta Air Lines Inc. leading the downward move in that group. Several biotech names were active, too, either in primary or secondary action.

Oil pushes Schlumberger higher

Cheap gasoline and crude oil prices are a distant memory, and crude oil experts were being quoted Monday, even with crude oil spiking to over $60 a barrel, as saying that prices may climb even further. Crude hit a new intraday high of $60.95 before easing back to settle up 70 cents at $60.54 a barrel on the New York Mercantile Exchange.

As a result, transportation issues were slammed and airlines and auto issues took the brunt of the blow. On the flipside, however, oilfield names were zooming. Schlumberger Ltd. gained in tandem with the stock, which was upgraded Monday along with Weatherford International.

Schlumberger's 1.5% converts were active, ending Monday at 117 bid, 117.5 offered while the stock shot up $1.72 on the day, or 2.25%, to close at $78.18.

Weatherford converts did not trade heavily, but are being closely watched as the put/call approaches, one sellsider pointed out. "Keep an eye on the WFT zeros," he said. "They are putable/callable on Thursday. 'Fair value' is about 1 point below the put price."

The $500 million (initial proceeds at time of sale) issue is putable at 63.98 and was quoted unchanged Monday at 60.25 bid, 60.5 while Weatherford shares gained $1.63, or 2.77%, to $60.40.

Lear loses ground despite layoffs

On top of surging gasoline prices on the back of oil's rise, which has depressed sales of gas-guzzling SUVs and the like, financial trouble at big automakers Ford Motor Co. and General Motors Corp. has slowly trickled down to their suppliers. Several have wiped out, such as Tower Automotive Inc., which make a pit stop at bankruptcy court, but many are still struggling to stay in the race.

Lear Corp. is another, although it also supplies seats and other components to the flagging airline industry. The company announced a major restructuring plan Monday, but the news failed to lift the credit or stocks.

Before the open Monday, the Southfield, Mich., auto parts maker unveiled a global restructuring plan. Mel Stephens, a spokesman for Lear, said the plan could result in a reduction of 5% to 7% in the company's total workforce of 110,000. This translates to the possible layoff of up to 7,700 employees, although Stephens stressed that, at this time, the announcement represents a framework for changes, as definitive plans could change. In relation to the layoffs, Lear said it would take a $250 million pretax restructuring charge.

"We all knew it was going to happen sooner or later, a lot of the bad news has already been priced into the auto sector," a convertible trader said. "It's been a tough year if you are in the automobile industry. Lear has been sinking along with the rest of them for months."

Lear's 0% convertible shed about a quarter-point to 45.125 bid, 45.625 offered, he said. Basically the issue followed the stock, which lost 75 cents, or 2%, to $35.62.

Standard & Poor's put Lear's BBB- corporate credit and senior unsecured debt ratings on negative watch following the news. "Even before Lear's announcement that it would restructure operations," S&P credit analyst Martin King said the rating agency "was already concerned about the company's weakened financial performance due to lower production levels" at its two largest customers - Ford and GM.

Ford and GM "have cut production because of bloated inventory levels and market-share losses, especially for sport utility vehicles and light trucks," Martin said. "Of particular concern is the apparent shift away from midsize and large SUVs, where Lear is heavily represented, because of high gasoline prices and the growth of smaller crossover SUVs."

CV Therapeutics buyers lining up

The market was beginning to look hard at the CV Therapeutics Inc. deal on for Tuesday's business, whether it pops up as a surprise in the a.m. or in the p.m. as originally planned. Despite enthusiasm for the deal heard in several corners of the market, buyside traders said they had not seen a gray market emerge for it.

CV Therapeutics is pitching $100 million of eight-year convertibles talked at 3.25% to 3.75%, with an initial conversion premium of 20% to 25%. The issue with proceeds intended to repurchase some or all of the $79.6 million 4.75% convertible due 2007.

A big selling point for the issue is three years of collateralized coupon payments, which will be funded from proceeds. But many buyers lining up to participate in the new deal are simply fans of the company and its focus.

"We like CVTX a lot," said a buyside analyst at a convertible hedge fund.

Last week, CV Therapeutics and Solvay Pharmaceuticals Inc. said the FDA extended the deadline to Sept. 10 for deciding whether or not to approve their Aceon high blood pressure drug as a means to lower heart attack risk in heart disease patients. Aceon was first approved by the FDA in 1993 to treat high blood pressure, and offers 24-hour blood pressure control with once-daily dosing. The companies agreed in December to co-promote Aceon in the United States until 2010.

CV Therapeutics hopes to begin promoting Aceon to cardiovascular specialists this summer and then sees a potential launch of its Ranexa, a treatment for angina or chest pain induced by artery blockage, in the first half of 2006, company CEO Louis Lange said. CV Therapeutics said it expects to submit a new drug application for Ranexa by the end of August, one month earlier than previously expected.

"I think the drug works at least in angina, and that alone justifies the current price. If they get the ACS [acute coronary syndrome] indication then it's a home-run," said the convertible analyst. "I also think they have a great deal with Solvay on Aceon, and would be surprised if Aceon doesn't get the expanded label (they enjoy in Europe) here in the U.S. That then leaves their third drug/imaging agent, Regadenoson, as a free call option."

Impax refinances 1.25% converts

Impax Labs was in the market with a refinancing transaction for an existing convertible, too.

The company said it sold $75 million of seven-year convertible notes at par with a 3.5% coupon with an initial conversion price set at 130% of the average closing price of its common stock during the 10 trading days beginning and including June 20.

The transaction, with Highbridge International, was negotiated without a placement agent, Impax Labs chief financial officer Arthur Koch Jr. told Prospect News.

Impax Labs said proceeds from the Section 4(2) deal, along with cash on hand, will be used to redeem its 1.25% convertible notes due 2024, plus interest. The Hayward, Calif.-based biotech firm said it had received a demand to accelerate payment on the 1.25% notes from a holder representing more than one-quarter of the $95 million issue. The company also noted that it had $78 million of cash as of May 31.

"We are glad to get this behind us," said Koch.

Highbridge was the holder who accelerated payment on the old 1.25s, according to market chatter, but that was not confirmed by the hedge fund. The acceleration was possible due to a technical default with respect to the convertibles as a result of the company failing to file its 2004 annual 10-K report at the Securities and Exchange Commission within specified time frames. That also resulted in a default under the company's credit facility with Wachovia Bank, which has been waived by Wachovia.

On the news, a sellside trader said the Impax Labs 1.25% converts shot up around 10 points to par. The holder who accelerated payment because of the default held just over 25% of the issue. Impax Labs shares also zoomed, gaining 80 cents, or 5.16%, to close Monday at $16.29.

Ligand hope inspired by Impax deal

Drugmaker Ligand Pharmaceuticals is another name in a similar boat because of delayed financials and one buyside source said the Impax Labs transaction, which he couched as "an exchange that isn't an exchange" was a positive development for Ligand holders. A sellside source, however, said Ligand has more bargaining power, as its converts are trading well above par while Impax Labs' converts were well below par.

On May 20, Ligand announced it will restate financial results for 2002, 2003 and first quarter 2004 due to improper accounting for revenue and delayed filing its 2004 10-K report as well as its first quarter 2005 10-Q report.

San Diego-based Ligand, engaged in the discovery and marketing of drugs in the areas of cancer, pain, skin diseases, hormone-related diseases, osteoporosis, metabolic disorders, and cardiovascular and inflammatory diseases, has until July 29 to remedy the situation or face a delisting on the Nasdaq.

"If [Ligand convertible holders] negotiated a deal like Highbridge did with Impax, they essentially get paid for the old issue and buy a new one, it's like an exchange," the buyside source said. "For Impax they got paid the 1.25% plus interest on the old one and bought the new one with a 3.5% coupon."

It's quite a risky argument, the sellside analyst said.

"As far as IPXL goes, I think that the aggressive holder of the old convert probably told them that a new higher coupon offering was the minimum compensation that they would accept. Those bonds were trading at 90 before today, so the company could be pretty certain that the issue was going to get put back to them absent some other agreement," the sellsider said.

"My understanding of these situations is that if the company defaulted, then bondholders would be entitled to get their principal plus accrued interest. For issues trading above par, that wouldn't necessarily provide any upside or recourse."

There could be a problem with financing the put, however, which would motivate the company to negotiate. Ligand's 6% convertible due 2007 was quoted Monday in the neighborhood of 113.5 bid, 114.5 offered but little to no activity reported. Ligand shares gained 24 cents, or 3.75%, to close at $6.64.

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