CA up dollar-neutral amid delayed earnings; Level 3 deal seen as attractive; Cubist plans deal as expected

By Kenneth Lim

Boston, May 30 - The convertible bond market was slower for outright investors on Tuesday as equity markets took a hit, but the increased volatility presented welcome opportunities for some investors, market sources said.

A couple of new deals in the pipeline kept the market busy. Level 3 Communications Inc.'s plan to offer $150 million of 6-year convertibles was seen as an attractive deal, while Cubist Pharmaceuticals Inc.'s proposed $275 million of seven-year convertibles came as no surprise to investors expecting some fund-raising after the biotech's key drug gained approval the week before.

Meanwhile, CA Inc. improved on a dollar-neutral basis but fell outright after the company delayed its earnings announcement and warned of a quarterly loss.

Also seen trading on Tuesday were the Credence Systems Corp. 1.5% convertibles due 2008, which retreated by about an eighth of a point outright after the company reported before the weekend that it was scrapping a key development project. The convertible was at 88.875 bid, 89.25 offered against the opening price of $4.58 on Tuesday. Shares of Milpitas, Calif.-based Credence (Nasdaq: CMOS), a semiconductor test equipment company, closed at $4.44 on Tuesday, down by 2.84% or 13 cents.

Nabors Industries Ltd.'s newest 0.94% convertible due 2011 is now slightly better on a dollar-neutral basis as the stock climbed in early trading. The convertible was seen trading just under 100.2 against a stock price of $36 early Tuesday. Nabors stock (NYSE: NBR) fell later in the day, dropping 1.76% or 63 cents to end at $35.12.

"They have improved a little bit," a sell-side analyst said of the convertibles. "The shares are probably where they were when the convertibles were offered, and the convertibles were offered at 99."

CA firms despite earnings delay

CA Inc. saw its convertible hold firm despite a plunge in the stock on Tuesday after the former Computer Associates delayed the filing of its fiscal fourth quarter and warned of a quarterly loss.

The company's 1.625% convertible due 2009 was seen trading about three points lower on an outright basis at 113 against a stock price of $21. CA stock (NYSE: CA) closed at $21.51, down by 2.93% or 65 cents, although the stock went as low as $20.80 early Tuesday.

"Those were better dollar neutral," a sellsider said.

CA said it pushed back filing results for its March quarter, due Tuesday when the delay was announced, because of a "material weakness" in its ability to account for sales commissions. The company will also restate its third-quarter earnings. CA, which has been trying to turn around after being in the center of a multibillion-dollar accounting scandal that came to light two years ago, also expects a fourth-quarter loss of seven cents per share, down from the previous guidance of a profit of two cents per share.

"There's already been so much water that has passed under the bridge with CA over the past few years," a sell-side convertible analyst said. "This seems like it's pretty minor. I don't know if it's legacy problems or something new, but the stock seemed to recover pretty well after the morning."

Calling the news "modestly bearish," the analyst said the tone of the company's announcement did not indicate any major problems.

"If it's just a matter of sales commissions, the impact may not be that big," the analyst said. "I think that will put people's minds at ease a little bit."

The announcement was also unlikely to have significant impact on the company's credit, the analyst added.

Level 3 deal seen as attractive

Level 3 Communications' planned $150 million of six-year convertible senior notes was seen as attractive and positive for the company's existing debt, market sources said.

"The credit should be better, that's number one, and the borrow should get better because they're bringing another $600 million or so of stock, so the borrow should get significantly better," a buy-side convertible bond trader said.

Level 3's existing 5.25% convertible due 2011 was about 6 points lower on an outright basis early Tuesday, trading at 138 versus a stock price of $4.90. Level 3 stock (Nasdaq: LVLT) fell 7.39% or 39 cents to close at $4.89 after the new deal was announced.

"They opened up about 1.5 points," the trader said.

The new convertible bond offering is talked at a coupon of 3.25% to 3.75% and an initial conversion premium of 17.5% to 22.5%, market sources said. Syndicate sources declined to comment on price talk, but confirmed that pricing is expected the week of June 5.

There is a greenshoe option for a further $22.5 million.

Level 3 will concurrently offer 125 million shares in an off-the-shelf offering, with an over-allotment option of a further 18.75 million shares.

Merrill Lynch is the bookrunner of the registered convertible and stock deals.

Level 3 plans to use the net proceeds to redeem or repurchase is 9.125% senior notes due 2008 and 10.5% senior discount notes due 2008. The remaining proceeds will be used to buy back, pay out or refinance other debt.

Level 3 is a Broomfield, Colo.-based internet backbone services provider. Level 3 shares closed at $4.89 on Tuesday, down 7.39% or 39 cents after the offering was announced.

The buy-side trader said the deal looked "interesting, particularly in light of what should be a good borrow."

A sell-side convertible strategist said the deal modeled at 100.3 at the mid-point of talk using a credit spread of 600 basis points over Libor.

"You might find people wider on the credit, but the recent refinancing on the company has helped clean up the balance sheet, and they've made some smart acquisitions in terms of adding cash flow quickly," the sellsider said.

The paying off of the 2008 debt will be positive for holders of Level 3's existing 6% convertibles due in 2009 and 2010, the sellsider said.

"They're going to be using the cash to pay down the debt," the sellsider explained. "You're effectively almost next in line in getting paid off."

Cubist $275 million deal no surprise

Cubist Pharmaceuticals' planned $275 million of seven-year convertible subordinated notes was a widely expected fund-raising effort by the company after its key intravenous antibiotic drug Cubicin was approved before the weekend.

Cubist plans to price the notes on Wednesday after the market closes. Price talk is for a coupon of 2.25% to 2.75% and an initial conversion premium of 25% to 30%.

There is an over-allotment option for a further $41.25 million.

Goldman Sachs is the bookrunner of the registered off-the-shelf deal.

Cubist, a Lexington, Mass.-based biopharmaceutical company, said it will use the proceeds to redeem its outstanding $165 million of 5.5% convertibles due 2008. Any remaining proceeds will be used to market Cubist's intravenous antibiotic drug Cubicin, to build the company's product pipeline and for working capital.

Cubist stock (Nasdaq: CBST) closed at $26.03 on Tuesday, up 1.88% or 48 cents, before the offering was announced. Cubist's existing 5.5% convertible due 2008 was not seen trading on Tuesday.

"It wasn't a surprise at all," a sell-side convertible analyst said, adding: "It's not totally unexpected, but they moved really quickly."

Cubist said on May 25 after the market closed that the U.S. Food and Drug Administration approved its application to expand marketing for the intravenous antibiotic Cubicin. Cubicin, which was previously approved as a treatment for certain skin infections, may now be sold as a treatment for certain bloodstream infections as well. Cubist said Cubicin will be the only intravenous antibiotic given the green light to treat those bloodstream infections. The Lexington, Mass.-based company maintained its full-year revenue guidance at $190 million to $205 million.

"Cubist has been working on this drug for many, many years," and the FDA approval was a key milestone for the company, the analyst said.

At first glance, Cubist's credit should not be an issue, the analyst said.

"The credit's gotten a lot better after they got the approval," the analyst said.

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