Convertibles mostly softer; Citigroup, WaMu ease; Exubera news hits Nektar; Virgin, Endo to price

By Rebecca Melvin

New York, April 9 - News that Nektar Therapeutics was ending its inhaled insulin program after Pfizer Inc. released findings of a study that linked Nektar's Exerbura drug to lung cancer was just another nail in the coffin that was partly expected, market players said.

"We got out of that last fall," a West Coast-based buyside convertibles trader said, adding that his shop hadn't had the gumption to get back in to Nektar even though some see value in Nektar's remaining technology and equipment.

In financials, Citigroup Inc.'s convertible preferred shares eased to 50.5 bid, 51 offered, versus a share price of $24, amid general lack of conviction regarding the sector. Players have been pondering the New York-based bank's stock dividend intentions, which are expected to be revealed later this month.

Washington Mutual Inc.'s convertible preferreds dropped back amid a 3% decline in its underlying shares as players considered when it would be a good time to jump back in and buy this name.

A spike in the price of oil supported the convertible bonds of some oil-related companies, as well as their underlying shares Wednesday; but elsewhere the convertibles market was mostly lower in light volume, market participants said.

Airline paper generally falls on higher oil prices, but other variables were in play as well in that sector. Distressed Mesa Air Group Inc. saw its convertibles offered for sale at 36.5 amid a 27% plunge in underlying shares. The Phoenix-based carrier is asking shareholder to approve a plan to issue up to $37.5 million in new stock to pay off debt.

"It was softer. There was a lack of conviction," a New York-based sellside trader said of the convertibles market on Wednesday.

Another distressed name, Magna Entertainment Corp. traded about 15 points lower.

In the primary market, two new issues emerged after the market close, including an offering of $1 billion of eight-year convertible senior notes from Virgin Media Inc. and $345 million of seven-year convertibles from Endo Pharmaceuticals Holdings Inc. Both issues were expected to price on Thursday.

Virgin Media garnered initial applause from a New York-based buysider, who owns some bank debt that Virgin Media aims to pay down with the convertibles.

Also after the market close, two planned issues were expected to price, including $300 million of five-year convertibles senior notes from LDK Solar Co. Ltd. and $135 million of 20-year convertible senior notes from Globalstar Inc.

Nektar is no ambrosia

Nektar's 3.25% convertibles traded at 72 versus a share price of about $5, according to a New York-based sellside trader. Later in the session they were at 71.1 as its shares tanked 25% after the San Carlos, Calif.-based biopharmaceutical company announced that it will cease all spending associated with its inhaled insulin programs.

It has ceased all negotiations with potential partners for its inhaled insulin programs as a result of new data analysis from ongoing clinical trials conducted by Pfizer Inc. An increase in the number of new cases of lung cancer was observed in inhaled insulin patients as compared to the control group, the company said, also noting that all new incidences of lung cancer were in patients that are former smokers.

Over the past year Nektar has moved away from its once promising inhaled insulin drug to build a pipeline of other drugs in various stages of development, the company said.

Last October, Nektar was walloped by news that Pfizer, the world's largest drug maker, discontinued the inhalable insulin therapy that Nektar had received regulatory approval for in January 2006.

The treatment never caught on, however, and costs associated with it were blamed for creating a drag on Pfizer earnings. At that point the Nektar 3.25% convertible subordinated notes due Sept. 28, 2012 dropped to 81.3171 versus a closing stock price of $6.67. The convertibles on Wednesday were at 71.1 versus a stock price of $5.39.

Nektar stock (Nasdaq: NKTR) was beaten down $1.80, or 25.03%.

Citigroup, WaMu softer

While some viewed Citigroup's news that it was about to close on a deal to sell about $12 billion of leveraged loans to a group of private-equity firms as great news for the financial sector, others weren't so sure.

"Between that and Washington Mutual's capital raise it sounds like there's some 'smart money' ready to move in," a New York-based sellside desk analyst said via email.

At the end of the fourth quarter, Citigroup reported holding about $43 billion of the leveraged loans. The pending deal with the private-equity firms, which includes Apollo Group, TPG and Blackstone Group, would remove a significant chunk of that portfolio. But Citigroup will get less than 90 cents on the dollar for the assets.

"There was some fade," a sellsider said.

If there is a dividend change, as some assume, it will do it would be good to be ahead of that in the convertibles market, sources said.

Nevertheless, many are watching it closely. "That's the rationale with the Citigroup preferreds and BAC. Some guys anticipated the dividend cut with WaMu and if you set that up ahead, you were a pretty happy camper," a Connecticut-based buysider said.

Citigroup's 6.5% perpetual non-cumulative convertible preferred shares were seen closing Wednesday at about 50.8, versus a stock price of $23.58. On Tuesday the convertible preferreds were at about 51.325 to 51.825 versus a stock price of $24.60.

Citigroup shares (NYSE: C) closed down 18 cents, or 0.76%.

The Washington Mutual 7.75% series R preferreds traded early at 830, according to a sellsider. And they were later seen up at 845 bid, 852.5 offered versus $11.81, which was little changed from Tuesday. At the end of the day they were seen at 840 versus a stock price of $11.35.

The troubled Seattle-based savings and loan saw its shares (NYSE: WM) close at $11.45, down $0.36, or 3.05%.

Virgin to price $1 billion

Another happy camper was a buysider who would anticipated seeing a portion of his Virgin bank loans paid off at par when they had been trading in the 80s prior to Wednesday's announcement.

With the proceeds of the $1 billion of eight-year convertible senior notes expected to price Thursday, Virgin will pay off 10% of its bank loans, the buysider said.

"Nobody has been paying off these loans and Libor has gone down, down, down and credit concerns have gone up, up, up," he said.

The Rule 144A deal, being sold via bookrunners Goldman Sachs and Deutsche Bank, was being talked to yield 6.5% to 7% with an initial conversion premium of 47.5% to 52.5%.

"The premium is high, but so is the coupon," the buysider said. "Typically we've gotten a trade off between coupon and premium."

There is an option to purchase up to $150 million of additional notes.

The notes are non-callable and there are no puts. There is contingent conversion, subject to a 120% hurdle, and net-share settlement at the company's option.

New York-based Virgin Media provides television, broadband, fixed line telephone, and mobile telephone services in the United Kingdom.

Endo to price $345 million

Endo Pharmaceuticals plans to price $345 million of seven-year convertibles, talked to yield 1.625% to 2.125%, with an initial conversion premium of 15% to 20%.

There is an option to sell up to an additional $34.5 million of notes, which are being sold via bookrunner Deutsche Bank.

Proceeds will be used to help fund a $750 million share repurchase program, which the company announced Wednesday.

Endo Pharmaceuticals is a Chadds Ford, Pa.-based specialty drug developer.

Oil names up, airlines lower

There were bids on the convertibles of oil driller Nabors Industries Ltd. as oil rose to a record $112.21 a barrel. But Transocean Inc.'s credit has been weaker this week amid some profit taking in the name, a sellsider said.

The Energy Department reported an unexpected decline in U.S. crude supplies as imports fell. The 3.1 million-barrel decline in crude stockpiles last week to 316 million barrels sent the price up as much as 3.4% in New York.

Meanwhile, airline paper was pressured down, but little trading was reported in the sector's convertibles. AMR stock (NYSE: AMR) stock, for one, lost $1.15, or 11.14% after it cancelled flights for a second consecutive day.

AMR's American Airlines said it canceled nearly half its flight schedule Wednesday to continue inspecting wiring on its MD-80 aircraft. The cancellations came after American canceled nearly 500 flights Tuesday.

The Fort Worth, Tex.-based airline said it would need to reinspect its fleet of 300 MD-80s after the FAA raised concerns about whether previous inspections had been done properly.

AMR's 4.5% convertible senior notes due Feb. 15, 2024 were seen closing at 90.154 versus a closing stock price of $9.17. They were seen early Wednesday at 96.375.

AMR's 4.25% convertible senior notes due 2023 closed Wednesday at 99.86, little changed from previous levels.

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