Convertibles flat to weaker: Gilead weaker, unchanged on hedge; James River down on hedge

By Rebecca Melvin

New York, April 2 - The majority of trading in the convertible bond market on Monday - which was described as a slow, quiet day - was in the larger, investment-grade issues. In addition, offers were said to be more abundant than bids, so there was pressure to the downside.

"I'd say it was better for sale: we had more orders for sale. But it was very slow today," a New York-based sellsider said.

Gilead Sciences Inc. was one of the most actively traded names of the day with all three issues of the Foster City, Calif.-based biopharmaceutical company in trade and slightly lower on an outright basis, but unchanged on a hedged basis, sources said.

The two convertible issues of James River Coal Co. were down 1.5 points to 2 points on a hedged basis as the downdraft in that name continues while market players weigh the possibility of a bankruptcy filing from the Richmond, Va.-based coal producer, a sellsider said.

There was also follow-through on Monday, the first day of the second quarter, from last week's big trades.

Amylin Pharmaceuticals Inc.'s 3% convertibles extended gains for a fourth straight day to 99.9. The move in the San Diego-based diabetes drug maker's convertibles was sparked by word of a rejected buyout offer from Bristol-Myers Squibb Co.

But Omnicare Inc.'s new 3.75% convertibles due 2042, which were exchanged for its 3.75% convertibles last week, slipped back slightly from higher prints on Friday.

Gilead slips outright

Gilead's three convertible bond issues were active, but unchanged in trade on Monday on no particular news.

Gilead's shorter-dated 0.625% convertibles due 2013, or the B convertibles, slipped by almost 0.5 point on an outright basis to 132.375.

Gilead shares pared early losses to end nearly unchanged at $48.78, or down 8 cents.

Gilead's 1% convertibles due 2014, or the C convertibles, were lower outright by about 0.25 point to 122.2.

Gilead's 1.625% convertibles due 2016, or the D convertibles, were also lower outright by about 0.2 point to 127.7

Unless there was news that affected the credit, it was probably correct that the paper was unchanged on a hedged basis given the tiny premiums, a Connecticut-based analyst said.

But the paper "has come in a couple of points over the last month or so," a sellsider commented.

In late February, a study of the company's hepatitis C drug showed that the majority of patients, who previously had not responded to a traditional therapy of interferon-containing drugs, experienced a viral relapse within four weeks of completing a 12-week treatment with Gilead's GS-7977.

The small study of patients that failed to respond to either treatment isn't the last word on Gilead's GS-7977 drug. There will be more news on the drug's development in the coming weeks.

James River comes in

James River's 4.5% convertibles due 2015 were seen at 51 bid, 53 offered near the end of the session on Monday. That level was called down by about 1.5 points to 2 points since late last week.

The 4.5% convertibles trade on an 80% delta typically, although some players are heavier.

The James River 3.125% convertibles due 2018 were seen near the end of the session at 41.5 bid, 42.5 offered.

On the other hand, James River shares jumped in thin trade, up 25 cents, or nearly 5%, at $5.37.

"It's not unusual that they would move separately," a sellsider said of the stock and bonds. "There was a [convertibles] seller in the name."

In fact, there has been a seller in James River for a while, he said, and the trajectory of these bonds in the last six to eight months has been straight down.

"These were trading in the 90s eight months ago," the sellsider said.

There is an expectation that the company will be the first among the coal companies to file for bankruptcy, the sellsider said. Since the beginning of February, the James River 4.5% convertibles have fallen more than 14 points on a hedged basis. And since March 29, they are in another 2 points, he said.

The fact that the 4.5% convertibles are much shorter dated than the 3.125% convertibles, and yet not trading at a recognizable premium is further evidence that the market is anticipating a filing, he said.

"They are trading right on top of each other," he said. "When they start to converge, it's a sign of bankruptcy People are guessing what the recovery is going to be."

Last week the coal names in general including Alpha Natural Resources Inc. and Patriot Coal Corp. traded down after the U.S. Environmental Protection Agency released new proposed carbon dioxide rules.

Under the new rules, no new coal plants could be developed without carbon-capture technology - something industry critics have deemed cost ineffective.

Mentioned in this article:

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

Gilead Sciences Inc. Nasdaq: GILD

James River Coal Co. Nasdaq: JRCC

Omnicare Inc. NYSE: OCR

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