Armor overnighter slips in gray market; Isolagen, Option Care deals also emerge

By Ronda Fears

Nashville, Oct. 25 - The convertibles primary market heated up slightly Monday with a trio of new deals - a $300 million issue from Armor Holdings Inc., a $75 million issue from Option Care Inc., and another $75 million issue from Isolagen Inc. In secondary action, Delta Air Lines Inc. got a lift from a financing package which many in the market saw as a precursor to filing bankruptcy, but traders said there was little volume in the paper. Otherwise, several biotech issues were mentioned.

Delta announced $600 million in financing from American Express Travel Related Services but conditional on the beleaguered Atlanta-based airline obtaining concessions from its pilots. The Delta convertibles were higher on the news but with little volume, traders said.

Although the company said it had reached an agreement with holders of its 7.7% straight notes to defer $135 million in maturities coming in 2005, traders said "bankruptcy is still inevitable for Delta" even with the $680 million debt exchange and about $1 billion in pilot wage cuts still in negotiations.

Delta's 8% convertible was up 2.75 points to 34 bid, and the 2.875% convertibles rose 4 points to 36.5 bid. Delta shares shot up, too, by 54 cents on the day, or 16.67%, to close Monday at $3.78.

In addition to several biotech names seeing action - although Isolagen was not yet visible in the gray market as its deal doesn't price until Thursday - automakers Ford Motor Co. and General Motors Corp. were both sharply lower on concern that higher interest rates will hurt already-flagging auto sales.

Ford's 6.5% convertible trust preferred plunged 1 point to 49, a dealer said, while the underlying stock lost 27 cents, or 2%, to end Monday at $12.70. GM's convertible bonds, each with a 25 par, fell about a quarter-point with the 5.25% issue at 23 and the 6.25% issue at 26.25, and the stock dropped 77 cents, or 2%, to $37.04.

Armor deal seen at 99.5 bid

Armor's overnighter - 20-year cash-to-zero convertible notes talked to yield 2.0% with a 37.5% initial conversion premium - was seen in the gray market with a bid of 0.5 point under the issue price and an offer at 0.125 point under.

Jacksonville, Fla.-based Armor Holdings, which makes security products and vehicle armor systems for law enforcement and the military, is expected to use proceeds to finance the previously announced $92 million purchase of The Specialty Group Inc., and future acquisitions.

Standard & Poor's has assigned a B+ rating to the issue and revised the company's outlook to stable from positive, reflecting the higher debt leverage following the offering and expectations of an increased level of acquisition activity with the proceeds. The issue will increase Armor Holdings' debt-to-capital ratio to 47% from 25% at Sept. 30, S&P said, and debt to EBITDA for the 12 months ended Sept. 30 will increase to 3.8 times after the deal, versus 1.5 times beforehand.

Moody's is rating it B1 with a stable outlook and said Armor Holdings' ratings and outlook may be subject to upward revision if the company demonstrates the ability to maintain gross profit margins of at least 26% and free cash flow of more than 10% of total debt amidst its acquisition activities.

Armor Holdings stock closed Monday up 8 cents, or 0.2%, to $39.28. In after-hours trading, it was off 89 cents, or 2.27%.

Option Care for Wednesday

Also after Monday's closing bell, Option Care launched $75 million of 20-year convertible notes talked to yield 1.75% to 2.2.5% with a 35% to 40% initial conversion premium for Wednesday's business.

Buffalo Grove, Ill.-based Option Care said it intends to use proceeds for acquisitions, share repurchases, working capital and other general corporate purposes, but some proceeds are earmarked to buy back up to 1.5 million shares of common stock from the company's chairman.

Option Care said it has reached an understanding with E.J. Financial/OCI Management LP pursuant to which E.J. Financial/OCI Management may sell back to Option Care up to 1.5 million shares of stock at a 25 cent discount to the closing price for the stock on the day of the convertible pricing.

E.J. Financial/OCI Management LP is the largest stockholder of Option Care and controlled by John N. Kapoor, chairman of the company's board of directors. Assuming a sale of all 1.5 million shares, Kapoor will remain the largest stockholder.

Option Care shares closed Monday up 6 cents, or 0.41%, to $14.88. In after-hours trading, the stock was down $1.50, or 10.22%.

Isolagen deal for Thursday

Isolagen launched early Monday $75 million of 20-year convertible notes talked to yield 3.25% to 3.75% with a 35% to 40% initial conversion premium, to be sold on swap with $32 million of proceeds earmarked to buy back stock from note buyers, for Thursday's business.

Houston-based Isolagen, a biotech concern that specializes in the development and commercialization of autologous cellular therapies for soft and hard tissue regeneration, plans to use $39 million of proceeds for working capital, capital expenditures and general corporate purposes. Also, the company intends to use proceeds to purchase, at a discount, up to 2 million shares of its common stock from insiders, affiliates and founders of the company.

Isolagen shares ended Monday down by $1.34, or 16.16%, to $6.95.

The new deal was not seen in the gray market as it is not slated to price until Thursday, buyside traders said, but several biotech and pharmaceutical names were busy Monday.

Watson drops 1.25 points

Watson Pharmaceutical Inc. suffered another hit on Monday as its chief operating officer's resignation was announced. But sellside market sources said the company's drop also was in anticipation of some heavy write-offs on its earnings, which are scheduled to be released Wednesday.

The Watson 1.75% convertible due 2023 dropped 1.25 points to 93.5 bid, 94 offered as the stock fell 96 cents, or 3.66%, to $25.28. The stock also was pressured from a downgrade by Buckingham Research.

Watson said Monday its president and chief operating officer, Joseph Papa, will step down Nov. 19 amid a broader management shakeup in which a president will be created for each of its business units following the Corona, Calif.-based company's decision in June to focus on the sale of generic and specialty branded drugs.

On the business change, an expected write-down is seen impacting earnings and there was "some negative" sentiment attached, a sellside source said.

ABC trades off to 104.5 bid

AmerisourceBergen Corp. was still trading on the Merck & Co. Inc. news from last week, traders said, with the 5% convertible edging down by a half-point to 104.5 bid, 105 offered on Monday.

"There's still a good amount of volume in the ABC convert on the MCK results and an upgrade on valuation last week," a sellside market source said, although the AmerisourceBergen issue traded off slightly on Monday.

Merck reported a 29% drop in third-quarter earnings last week, which was blamed on the withdrawal of its blockbuster pain drug Vioxx. Merck shares dropped 7 cents, or 0.23%, to $30.49 on Monday.

AmerisourceBergen stock lost 59 cents, or 1.14%, to $51.16.

ViroPharma lookers like view

Elsewhere in the biotech group, a market source said the "people are missing this call," referring to recent ViroPharma Inc. developments, which he said make its old 6% convertibles "look like a great buy now."

The 6% issue ended Monday at 77 bid, 77.5 offered, versus levels before the session got under way at 77 bid, 78 offered. ViroPharma shares closed off 6 cents, or 2.03%, to $2.90.

"People just need to look at the SGP deal, [and] now this deal with LLY," the source said.

A week ago, ViroPharma issued $62.5 million of one-year senior bridge notes plus warrants for 5 million shares in a private transaction arranged by Piper Jaffray & Co. with proceeds, plus $53.5 million of cash on hand, earmarked to finance a $116 million asset acquisition from Eli Lilly & Co. On closing of the acquisition, subject to stockholder approval, ViroPharma intends to swap the bridge notes for 6% convertible notes due 2009.

In August, Schering-Plough Corp. exercised its 2003 option to license an intranasal form of ViroPharma's pleconaril to treat the common cold in the U.S. and Canada, which means $10 million in license fees plus the eligibility for another $65 million from commercial milestones and royalties for ViroPharma. In addition, Schering-Plough will buy ViroPharma's existing inventory of the drug.

Revenues from the Lilly acquisition should make a significant contribution toward ViroPharma's goal of achieving positive cash flow from operations in 2006 and, perhaps more importantly, the funding transaction cinches the company's capital needs, said Michel de Rosen, ViroPharma chief executive.

In late June, ViroPharma abandoned an exchange offer for the old 6% convertibles and the issue slumped to around 70 offered, subsequently sliding even lower with the rest of the biotech pack of convertibles before making a recent comeback.

"Where can you find 18.2% paper of a company with a drug on the market; one with Schering Plough (a $25 billion market cap company); and three others in the pipeline," said the market source.

"People seem to be too lazy to do the work. I got to hand it to the management of VPHM and Brendan Dyson [Piper Jaffray banker]. This is a great deal, smart deal."

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