Option Care gains, Isolagen at bat; Health Management holders bail out; Bunge better; Avaya easier

By Ronda Fears

Nashville, Oct. 28 - The reaction to new paper improved Thursday as Option Care Inc.'s small issue shot up by 1.25 points, but Armor Holdings Inc. and Quicksilver Resources Inc. were both still underwater and dropping.

On tap was another deal from Isolagen Inc., and market sources said that while there was no gray market seen for the deal, "it must be going well, because they [bookrunner UBS Investment Bank] said the books would close early." The $75 million issue was talked to yield 3.25% to 3.75% with a 35% to 40% initial conversion premium.

Otherwise, traders said the secondary market was busy with earnings and reactions to shocks in the broader markets, such as the huge slide in oil futures and China's interest rate hike. While the sell-off in Treasuries subsided Thursday and stocks were rather "flattish," one sellside trader remarked that "we are still reeling."

"There seems to be some degree of repositioning taking place," the trader said. Part of it is in reaction to oil prices and interest rates, but he added, "It looks a bit bi-polar, in that for some fixed-income accounts it seems they are keen to taking on risk now, or more so than in the recent past, yet some of the more traditional convert guys are getting a bit squeamish and are looking for a safe haven."

Delta Air Lines Inc. certainly has been in the category of high risk, for some time now, and the credit has run up sharply this week on events such as the tentative wage concession pact inked with union pilots on Thursday, but many traders remained skeptical of the airline's long-term horizon.

"They will die," said one sellside trader who traffics Delta bonds. "It might take a year, but they will file [bankruptcy]."

Delta's 8% and 2.875% convertibles gained another 4.5 to 5.5 points on Thursday, but he said the only action in the long-dated issues was related to short covering. Meanwhile, Delta's short-dated 7.7% straight bonds shot up to the high 70s.

The drop in oil prices, more so than the Delta headlines, fueled some buying in AMR Corp., Continental Airlines Corp. and Northwest Airlines Inc. - with all those convertibles gaining roughly 1 to 2 points each. Meanwhile, UAL Corp. reminded the markets of the pressures from ongoing historically high fuel costs and said it may push it out of compliance with EBITAR covenants next quarter.

Crude oil futures settled Thursday at $50.92 a barrel, down by another $1.54. That put some pressure on oil and gas group, with Halliburton Co. and Schlumberger Ltd. convertibles both slipping "about a half-point or so."

Volatility plays also have been an area of focus for convertible players, and with a big drop-off in volatility in Health Management Associates Inc. there were several holders bailing out of those positions. Bunge Ltd. and Avaya Inc. also were mentioned trading on earnings and outlook news.

New issues trade widely mixed

Option Care sold its small $75 million issue at par to yield 2.25% with a 35% initial conversion premium - at the cheap end of guidance for 1.75% to 2.25% yield, up 35% to 40%, and it went north right out of the chute.

Right after breaking to trade, a buyside trader said it was bid at 101. It hovered around that area for most of the session, he said, and was last spotted at 101.25 bid, 101.375 offered. Option Care shares lost 21 cents on the day, or 1.57%, to $13.13.

The trader said the deal offered a little more coupon that seen lately, and "people like the story. I think the speculation is that they are in a business [home pharmacy services] and now in a financial position to do a sizable deal, an acquisition to grow the company."

Meanwhile, other fresh paper was still fading.

Quicksilver Resources Inc.'s 1.875% convertible dropped 1.25 points to 98 bid, 98.25 offered while the stock - under pressure alongside the oil sector - ended off 77 cents, or 2.4%, to $31.34. A trader said that some of the stock decline could be attributed to short selling, but he said the convertible seemed to be played heavier by outright convertible accounts rather than hedge funds.

Armor Holdings Inc.'s new 2% convertible - the chunkiest deal this week, at $300 million - also was flagging, losing 0.75 point to 98.25 bid, 98.75 offered. The Jacksonville, Fla., defense company's stock lost 57 cents, or 1.53%, to close Thursday at $36.78.

Delta soars, but ripe for a dive

Delta's convertible paper continued to climb Thursday as the airline struck a tentative accord with its union pilots, but traders said they expect a big fall unless there is some restructuring news quickly following the $1 billion in wage concessions.

"I bet they [Delta converts as well as straight bonds] come in, in the next couple of days," said a sellside convertible trader, "unless there is some big news on the restructuring."

Delta's 8% convertible added another 4.5 points to 48.25 bid, 50.25 offered and the 2.875% convert up another 5.5 points to 50.75 bid, 51.75 offered.

Delta shares shot up 78 cents, or 15.79%, to $5.72 - well off its 52-week low of $2.75 but still far shy of the 52-week high of $13.50.

Delta's straight paper also rose sharply, with the 7.7s due 2005 jumping to 76 bid, 78 offered on Thursday from 63 bid, 65 offered on Wednesday.

The airline's target of $1 billion in reductions from the pilots was hit, but onlookers note that there is still no news on the company's debt exchange offer of $680 million for $1.56 billion. Other savings forecast at $1 billion, in part from 6,000 to 7,000 layoffs, some $350 million in pay cuts for non-pilot employees would be on top of expected cost structure improvements of $2.3 billion by the end of 2004.

But in the face of still high fuel costs, it is still an uphill battle.

"The fact that Delta is still incurring heavy losses despite these savings highlights the severity of the challenge facing the airline," said S&P credit analyst Philip Baggaley.

He also noted, in addition to Delta convertible holders, that Delta has yet to disclose any information about its boosted incentives for bondholders subject to its exchange offer to tender their securities early. The early deadline was Tuesday, whereas the overall deadline for the exchange offer was extended to Nov. 14 from Oct. 14.

Health Management sees selling

Health Management Associates' interest died with the sudden and sharp drop-off in volatility, a buyside trader said, noting the stock was unchanged Thursday at $20.55. Another sellside market source had said holders were "peeling out of HMA" converts in response to the decline; and the 0% issue was pegged at 87 bid with the 1.5% issue at 103.25.

The buyside trader also said there was selling pressure in Health Management because of widespread concern about the impact of legislation in Florida on the Naples, Fla.-based rural hospital operator's business.

"There are a couple of pieces of legislation that could cause big problems for hospitals, especially the smaller ones like HMA," he said. "One involves malpractice judgments, which could cause an exodus among doctors in the smaller hospitals. The other would open hospital communication records, internal memos, stuff like that, to review by lawyers, which cause their liability insurance to skyrocket because of the higher exposure to lawsuits."

Some were getting out of Health Management and looking to pick up LifePoint Hospitals Inc. as it skidded Thursday following a sharp uptick earlier in the week on strong earnings, but a trader noted that the LifePoint convertibles are hard to come by. LifePoint shares Thursday dropped $1.53, or 4.5%, to $32.47.

"LifePoint earnings came in strong. The stock jumped on that, and then snapped back today," the trader said, pegging the 4.5% due 2009 issue at about 99.25 bid, up about a quarter-point over the past week.

Avaya convertible steady to easier

On Thursday, Avaya shares gained nicely ahead of an analyst conference scheduled for Friday morning, but traders said the convertibles traded in a more sideways pattern, ending steady to slightly easier, by 0.125 point or so, at 57 bid.

Avaya shares gained 32 cents, or 2.22%, to $14.73.

One trader said there was still probably some short covering going on in the stock, after the Lucent spinoff reported very strong earnings earlier in the week.

Late Tuesday, the company posted a third-quarter profit of $100 million, or 21 cents a share, nearly double year-ago earnings of $55 million, or 13 cents, adjusted for discontinued operations. The company reported that revenues climbed to $1.08 billion from $971 million.

Avaya said it sold more internet-based phone systems to corporate clients and increased sales overseas and anticipates fourth-quarter sales could grow at a "double digit" rate.

Avaya had its earnings call Tuesday, but watchers are hoping to glean more details into the company's outlook during the analyst conference call that is slated for 9 a.m. ET on Friday.

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