Celanese, AtheroGenics talk emerges; Delta cuts fares but convertibles quiet; OMI firmer

By Ronda Fears

Nashville, Jan. 5 - Delta Air Lines Inc. substantiated market chatter on Wednesday by slashing ticket prices by 50%. On fears that it will ignite a full-blown airfare price war, airline stocks were universally lower, but traders said there was "surprisingly" little traffic in those convertibles.

"The [airline] credits are holding up, for the most part, against the equity, which was getting smacked," said an analyst on a convertible trading desk. "Surprisingly, though, we're not seeing much volume [in any of the airline converts] at all. That all happened yesterday."

A potential collapse in airline ticket prices would counteract any benefits from the decline in oil prices, a trader said. Furthermore, he added, while lower ticket prices might boost revenues it would squeeze profit margins.

Oil futures continued to slide Wednesday, settling off 52 cents to $43.39 a barrel on higher supplies combined with lower demand due to milder winter weather.

Oil tanker OMI Corp. continued to firm in the face of the drop in oil prices, however. A holder in the OMI convertibles said that while oil inventories were higher than expected in the last week they are still lower than year-ago levels, so that is propping OMI up.

Bristol-Myers Squibb Co. also was a touch better on the day amid market noise that the drug giant is in talks to sell its over-the-counter drugs business. The convertible floater gained about a quarter-point.

AtheroGenics Inc., another drug concern, returned to tap convertible investors Wednesday with $125 million of seven-year non-callable convertible notes talked to yield 1.5% to 2.0% with a 30% to 35% initial conversion premium. The deal is for Thursday's business and will be the first convertible to price in 2005 unless something like a breakfast deal or intraday pricing pops up Thursday.

The Atlanta firm, which concentrates on chronic inflammatory diseases such as clogged arteries, also has a 4.5% convertible due 2008 that was quoted off a half-point at 147.5 bid, 148.5 offered. AtheroGenics shares ended Wednesday off 11 cents, or 0.6%, at $18.13.

Also added to the calendar was Celanese Corp.'s $200 million perpetual convertible preferred, which is pricing concurrently with its initial public offering on Jan. 20, with guidance for a 4.0% to 4.5% dividend and 18% to 22% initial conversion premium.

Delta cuts some airfares 50%

Delta Air Lines unveiled a new pricing scheme to cut its most expensive fares and nix restrictions like a Saturday-night stay-over rule for cheaper tickets, and while it could boost volume, some onlookers warned that industrywide revenues could plunge as much as $3 billion a year if all carriers followed suit.

On speculation that the move might spark a fare war, Delta CEO Gerald Grinstein said on a conference call: "Let it be clear, this is not a fare sale. This is a fundamental change to our pricing structure."

The new policy, dubbed "SimpliFares," is aimed at simplifying Delta's ticket pricing by removing some restrictions and reducing some fares, but does not entirely mirror the pricing structure used by Southwest Airlines Co. and some other low-cost carriers.

"There still are limits on the number of seats sold in each fare class and various other restrictions, so the full extent of the change cannot be estimated as yet," said Standard & Poor's credit analyst Philip Baggaley. "Still, the move is an important one and likely to trigger pricing changes by competitors."

Delta's ratings remain on positive watch with S&P, where they were place in November due to the airline making some headway in debt-reduction and liquidity-bolstering measures such as a new pilot contract, some limited debt refinancing and new secured borrowings to bolster cash.

Airline convertible traffic slow

"The credit is holding up fine but there is a lot of anxiety about the stock among the arbs," a convert trader said, mentioning all the major legacy air carriers, not just Delta.

Delta shares dropped 25 cents on the day, or 3.31%, to $7.31.

Overall, convertibles linked to airline stocks were surprisingly quiet on the trading desks in light of the Delta news. In addition to pressure from the prospect of an all-out fare war, however, airline stocks were still spiraling lower in reaction to Continental's flagging December revenue figures released earlier this week.

The convertibles linked to the major carriers were marked lower with the stock, which fell sharply on huge volume, along with virtually all the other smaller airlines such as JetBlue Airways Corp., AirTran Holdings Corp., ExpressJet Holdings Inc., Alaska Air Group Inc. and several others.

With sentiment on airline stocks suddenly shifting to a bearish post rather than the bullish stance emerging at year-end 2004, particularly with strides made by Delta in its restructuring efforts, a buyside trader said there was an explosive surge in options activity in the airline stocks.

Bristol-Myers floater rises

Bristol-Myers reportedly is in talks to sell its consumer over-the-counter drug line, which includes pain relievers Excedrin and Bufferin, cold medicine Comtrex and Keri lotions, and traders said its convertible floater was ticking up a touch on buying interest. But the demand had as much to do with the floating coupon as any possible transaction, one dealer said.

The floater was quoted up about 0.25 point at 100.75 bid, 101.25 offered. Bristol-Myers shares closed Wednesday off 8 cents, or 0.32%, at $24.79.

"It seems to sort be a trade-off if they get rid of the OTC drugs because those are open to competition from the generics, which have gotten a lot more aggressive, and those profit margins are so much less than the prescription drugs," the dealer said.

"There were some [research] notes I saw that attributed the revenue stream form the OTC drugs to the reason Bristol-Myers can sustain its common dividend, but I'm not sure that makes sense, but of course any kink in the stock will cause a ripple for convert holders."

Analysts estimate the OTC unit could be worth $700 million to $1 billion, the trader said. The unit accounts for less than 2% of Bristol-Myers' $21 billion in annual sales.

OMI firmer as oil eases

Convert players remain content to ride with oil tanker OMI despite the return-to-earth decline in oil prices, because of historically low oil and distillates inventories. A big part of the play, too, traders said, relates to a spike in volatility, which is a direct result of the gyrations in oil prices.

The U.S. Energy Department reported Wednesday that supplies of distillates rose 2 million barrels last week to 121.1 million barrels, which was more than the oil pundits expected but still 11% below year-ago levels.

"There was lots of buying interest in the converts today. Those bonds have gone up 3 to 4 points since they were issued" on Nov. 30, a sellside trader said. "The volatility has spiked with oil prices - from the low 40s to the mid- to high-40s - but I don't think that's sustainable."

The Stamford, Conn.-based oil tanker company sold the $225 million of 20-year convertible senior notes in late November at 2.875%, up 46.5% and used $72.5 million of proceeds to repurchase 3,455,900 shares of its common stock from convertible buyers who were selling the stock short.

A buyside trader holding the OMI converts, however, said the rise in implied volatility of his estimates in the high 30% area when the deal came to the current mid-40s area should be the case for some time given that oil prices have such a long way to go before reaching more "normal" levels.

"It depends on what you mean by sustainable. I don't think the vol is going to permanently stick, but I think it's going to be a long time before it drops, too," he said.

"I've been trying to sink as much as I can into the tanker sector, and OMI is beautiful. They're probably going to have blow out earnings. Fourth quarter will dazzle everyone and first quarter '05 will be strong. Remember, winter is only 14 days old and it's not going to end in another 14."

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