Omnicare active, holders make 5 points on exchange; Illumina adds on hedge; Amylin gains

By Rebecca Melvin

New York, March 29 - Holders of Omnicare Inc.'s existing 3.75% convertibles due 2025 made about 5 points of profit on swap for every bond they exchanged for a new 3.75% convertible due 2042, market players said Thursday.

The existing Omnicare 3.75% convertibles traded very actively during the session but ended about unchanged at about 143.5.

The new Omnicare 3.75% convertibles also traded actively and improved some to close at about 97.5.

"It was excellent for those who exchanged," a New York-based sellside analyst said of the Covington, Ky.-based geriatric pharmaceutical services company's exchange agreements.

An existing Omnicare preferred convertible ended slightly lower by about 0.25 point.

Elsewhere, Illumina Inc. added about 1.37 points outright and about 0.50 point to 0.75 point on a dollar-neutral, or hedged, basis after Switzerland's Roche Holding upped its bid to buy the San Diego-based gene-sequencing company in a deal that would now value the company at more than $6.5 billion, up from $5.7 billion previously.

Meanwhile, the Amylin Pharmaceuticals Inc. convertibles extended gains, moving up by more than a point, after gains Wednesday, on word of a rejected offer from Bristol-Myers Squibb Co. for the San Diego-based diabetes drug maker.

"That was pretty sweet," an analyst said of the Amylin developments.

Issues in the coal space haven't fared as well this past week. James River Coal Co. and Alpha Natural Resources Inc. were mentioned as being particularly hard hit, with the James River 4.5% convertibles in 3 or 4 points in the last two days, and 13 points from the beginning of February on a dollar-neutral basis, according to a New York-based sellsider.

Patriot Coal Corp. was also looking weaker Wednesday and early Thursday, but later Thursday the Patriot Coal convertible traded at 96, which was higher compared to the previous level of 95.5 bid, 95.75 offered.

The Patriot Coal convertibles were around 96.5 before the setback, maybe just a couple day blip.

Overall, the convert market was seeing some weakness in its higher dollar priced issues, a New York-based convertibles strategist said.

"The same ones that have been under pressure from declining volatility, probably because outright holders may be looking to lock in this year's profits," the strategist said. A second source agreed that profit-taking was a possibility.

Equities were weak for a third straight session, although the Dow Jones industrial average eked out a gain, and stocks in general rallied into the close.

The U.S. economy expanded at an unrevised 3.0% in the fourth quarter of 2011, the Commerce Department said in its third and final estimate for the period. The gain, while the strongest since the second quarter of 2008, lagged expectations. Economists had anticipated the department would revise its estimate up to a 3.2% increase.

In economic data, initial jobless claims fell by 5,000 to a seasonally adjusted 359,000 last week, following revisions to previous data, the Labor Department said. But the number was a little higher than the 350,000 economists expected.

Manufacturing activity in the Federal Reserve Bank of Kansas City's district slowed for March, in part because of a drag from higher gasoline prices, the bank said in a report. The Kansas City Fed's manufacturing composite index fell to 9 in March from 13 last month, which had been the highest reading since June 2011.

There were no new issues in the U.S. primary market on Thursday, but internationally, Lufthansa Malta Blues LP, a subsidiary of Deutsche Lufthansa AG, launched and priced a Regulation S offering of €234 million of five-year bonds exchangeable into shares of JetBlue Airways Corp. to yield 0.75% with an initial conversion premium of 37.5%, which was the rich end of talk.

Omnicare exchange eyed

Omnicare's 3.75% convertibles due 2025, which priced in December 2010, traded actively but were little changed from previous levels by day's end at 143 bid, 144 offered. They had traded down to 142 during the session.

The new Omnicare 3.75% convertibles due 2042 were seen at 98.5 bid, 99.25 offered at the close, which was a little better on the day. The paper had traded at 96.987 around noon ET, according to Trace data.

It was thought the new paper was issued at a discount to par of 96.5, but the underwriter Lazard Capital Markets couldn't be reached to confirm that level.

The Omnicare preferreds, which are listed, were seen at 47.8, which was lower by 0.25 point, according to a New York-based trader.

Holders that participated in the exchange received 1.5 new bonds for every old bond exchanged.

The company retired about $256 million of bonds and issued $390 million of new bonds.

The new bond has a lower theoretical delta of about 82% compared to 86% for the old bonds. So there was stock trading affiliated with the exchange, a market player pointed out.

"If you swapped from the old bonds to the new, you had to buy some stock - well, you didn't have to, but a lot of guys did - because the new bond had a lower theoretical delta. Also, the new bonds have more appeal to outrights because of the lower dollar price, so if bonds were moving from arbs to outrights that means stock had to be bought to cover the stock they sold short as they sold bonds to outright players.

A second source said he thought that the convexity of the new bonds, or the better participation to the upside than to the downside, increased for arb players, given the more balanced profits and lower delta.

"A lot of bonds have been trading today," a sellsider said of the Omnicare bonds.

Lufthansa prices at rich end

Deutsche Lufthansa's €234 million of five-year convertible bonds priced with a 0.75% coupon and a 37.5% initial conversion premium, which was at the rich end of 0.75% to 1.5% coupon talk and 32.5% to 37.5% premium talk.

The Regulation S deal launched and priced on Thursday via joint bookrunners Goldman Sachs, Morgan Stanley and UBS.

Ahead of final pricings, the convertibles analysts of Barclays Capital in London issued a note saying that they saw the deal at 99.6 to 04.2 on "worst to best" terms using an exchangeable model."

The Barclays analysts assumed a credit spread of 300 basis points over Libor and 30% to 38% implied volatility with a 50 bps borrow cost.

Barclays analysts Luke Olsen, Angus Allison and Heather Beattie calculated a bond floor of 84.1 to 87.4, and a delta of about 50%.

The analysts found it attractive at the midpoint of talk or better.

The bond was seen in the gray market ahead of final pricings at issue plus 1 to 1.5 points.

"The fairly small size and hedgeability of the bond is supportive, although it does compete to some degree with other European airline convertibles," the analysts wrote in their note.

Deutsche Lufthansa, which guarantees the notes, said they are exchangeable into up to 46.7 million shares of JetBlue common stock. Lufthansa has an option to give investors exercising their exchange rights cash instead of JetBlue shares.

JetBlue will not receive any of the proceeds, which Lufthansa said are for general corporate purposes.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

Deutsche Lufthansa AG Germany: LHA

Illumina Inc. Nasdaq: ILMN

James River Coal Co. Nasdaq: JRCC

JetBlue Airlines Co. Nasdaq: JBLU

Omnicare Inc. NYSE: OCR

Patriot Coal Co. NYSE: PCX

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