Enzon climbs, Nabors flat on debuts; American Axle gains on conversion expectations; DOV slides further

By Kenneth Lim

Boston, May 18 - The convertible bond market slowed down on Thursday, with most of the activity focused on a handful of names.

"I thought it was kind of a slow and boring day today," a sell-side convertible bond trader said on Thursday.

The new issue by Enzon Pharmaceuticals Inc. improved slightly on a dollar-neutral basis after it priced at the cheap end of talk. Nabors Industries Ltd.'s massive $2.5 billion deal was also actively traded and was flattish after it was reoffered at 99, at the cheap end of talk.

American Axle and Manufacturing Holdings Inc. continued to inch higher on Thursday after the company said investors could convert the 2% convertible due 2024 for cash in the sum of the accreted principal amount. The convertible even rose slightly above par, and market sources speculated that some investors were hoping to receive incentive offers to not convert the debt.

Also seen trading on Thursday were the new Amkor Technology Inc. 2.5% convertibles due 2011. The convertible saw a high quote of 96.25 bid, 97.25 offered with the stock at $10, but ended the day even lower at 94.75 versus the closing stock price of $9.65 as the stock slid 5.3% or 54 cents over the session. Amkor (Nasdaq: AMKR) sold the convertibles at par on May 11. Amkor is a Chandler, Ariz.-based semiconductor assembly and test services provider.

In the biotech sector, DOV Pharmaceutical Inc.'s 2.5% convertible due 2025 continued to slide despite a rebound in the stock, and was marked at 61 against a stock price of about $3.05. DOV stock (Nasdaq: DOVP) climbed 10.07% or 28 cents on Thursday to close at $3.06.

"It's just a volatile name right now," said a trader.

Hackensack, N.J.-based DOV's shares lost more than half their value on Tuesday after the U.S. Food and Drug Administration rejected a key dosage of an insomnia drug that DOV had licensed to co-developers Neurocrine Biosciences Inc. and Pfizer Inc.

The new deals by Enzon and Nabors kept convertible bond investors busy on Thursday, but the market was generally slower than the day before as equity markets once again finished lower.

"Yesterday was busy, today was slow," the sell-side trader said.

Enzon deal climbs on cheap pricing

Enzon Pharmaceuticals's fresh 4% convertible due 2013 was quoted higher on its debut despite a slide in the stock, but observers who noted that the deal came in cheap were also concerned about the company's prospects.

The convertible was seen at 100.5 bid, 101.5 offered early Thursday as the stock opened down at $7.60. Enzon stock (Nasdaq: ENZN) declined 3.14% or 24 cents during the session to close at $7.40. The deal was priced late Wednesday with an initial conversion premium of 25%. Price talk was for a coupon of 3.5% to 4% and an initial conversion premium of 25% to 30%.

The size of the deal was also increased to $225 million from $175 million, while the over-allotment option stayed at an extra $50 million.

Goldman Sachs was the bookrunner of the Rule 144A deal.

Enzon, a Bridgewater, N.J.-based biopharmaceutical company, will use the proceeds of the offering to buy back its existing 4.5% convertible subordinated notes due 2008, of which $394 million is still outstanding. Investment advisory firm Franklin Advisors Inc. has agreed to sell $128 million of the 4.5% convertibles back to Enzon and to buy at least $75 million of the new convertibles.

A convertible trader said the deal was priced cheap, but did not see the name actively traded on Thursday.

A sell-side analyst said it was "no surprise" that the convertible did better on Thursday because it modeled 5.7% cheap at the final pricing, and would have seemed attractive for hedged investors.

But outright investors may not be so keen.

"I think the problem with Enzon is it looks like the products that they have out there have peaked...and they don't really have a lot of approvals coming in the future, so there's going to be this gap," the analyst said.

Without a strong pipeline of products, Enzon's stock may not have enough upside to make the convertible attractive enough for outright investors, the analyst explained. The upsized deal will also increase Enzon's debt level further, which may affect the spread on the credit.

Nabors deal flat on debut

Nabors Industries' new 0.94% exchangeable due 2011 hovered around its reoffered price of 99 on Thursday and was largely flat as its stock slid slightly by 1.67%. The exchangeable was seen at 98.875 bid, 98.9375 offered versus a stock price of $35.25 early in the day, but was also seen trading at 99.125. Nabors stock (NYSE: NBR) closed at $34.66, down by 59 cents.

"There was a little bit of flurry in Nabors this morning, but it's a big issue," a convertible bond trader said of the overnight $2.5 billion deal. "A lot traded, but relatively speaking I don't think a lot did. A lot of people are just going to buy them and park them or buy swaps."

The notes were reoffered at 99 early Thursday morning, coming in at the cheap end of the reoffer range of 99 to 99.25. The initial conversion premium was set at 30%.

The notes are issued by Nabors' wholly owned subsidiary, Nabors Industries Inc., but are guaranteed by the parent. There is an over-allotment option for a further $250 million.

Citigroup and Lehman Brothers were the bookrunners of the Rule 144A deal.

Nabors is an oil and gas drilling contractor headquartered in Bermuda. It plans to use part of the proceeds to fund convertible note hedge and warrant transactions. The rest of the proceeds will be used for general corporate purposes.

"It was OK at 99," the trader said. "They did what they needed to do to satisfy investors...there was nothing special there."

The overnight deal had a few analysts grumbling about the short marketing period.

"For $2.5 billion, we can't have 24 hours?" a sell-side analyst asked.

The analyst said the deal came in about 3% cheap at the reoffered price, and was a decent deal for outright investors with good upside potential for the stock.

"It's not unusual to see good companies with very low leverage doing converts to take out stock," the analyst said.

A buy-side analyst said he was "neutral to positive" on the offering, which he described as "a kind of financial engineering" that leveraged on the strength of Nabors' balance sheet to improve the company's earnings per share.

American Axle inches higher

American Axle's 2% convertible due 2024 continued to be active on Thursday after the company confirmed that investors could convert the notes for at least the accreted principal amount in cash.

The convertible, which was trading at 83 at the start of Tuesday, reached as high as 100.5 on Thursday and ended at about 100.25 against the closing stock price of $16.46. American Axle stock (NYSE: AXL) slid 0.24% or 4 cents.

"That's how crazy it is," a convertible bond trader remarked.

A contingent conversion option on the 2% security was triggered two weeks ago when credit rating agency Standard and Poor's downgraded Detroit-based American Axle to below investment grade. An American Axle representative on Thursday confirmed that the company will settle conversions in cash of at least the accreted principal amount of the notes in line with a cash-settlement notice issued in 2004. The company has also said that it has enough liquidity to satisfy the conversions.

The representative did not know how many investors had applied to convert the notes.

The convertible trader said "I just don't understand why those things are trading."

"Maybe they're expecting the company to do some stock incentive to the holders to not put it back," the trader speculated. But that's a risk, the trader said. "It doesn't make sense to me that you would buy them above par."

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