Convertibles of Northwest Airlines firm; OSI Pharma drops on acquisition; CP Ships lifts on offer

By Rebecca Melvin

Princeton, N.J., Aug. 22 - Convertibles players did a lot of market watching but not a lot of trading on Monday, with Northwest Airlines Corp. among issues being eyed as the stock and bonds of the carrier moved higher on day three of its mechanics labor strike.

Acquisition news also spurred some activity in the paper of CP Ships Ltd. and OSI Pharmaceuticals Inc., with CP Ships gaining a little on news that its board approved an offer to be purchased, while OSI moved lower on news it has agreed to buy Eyetech Pharmaceuticals Inc. for $935 million.

Otherwise it was a pretty quiet Monday, traders said. There were better buyers later in the afternoon but not a lot of sellers.

A hedge fund trader concurred there were better bids in the afternoon but with "no obvious interest."

"It was spotty buying in terms of volume. They're waiting for the market to move up or down to have some volatility," the buyside trader said.

Northwest gains on handling of strike

The convertibles of Northwest gained on Monday following the underlying stock higher as the Eagan, Minn.-based airline weathered day three of a strike by its 4,400 mechanics and maintenance workers. But volume was thin.

"There are no sellers. It's like a vacuum," said a Connecticut-based sellside trader focused on airlines. "They were up about a point across the board."

The Aircraft Mechanics Fraternal Organization began its strike early Saturday, and union members were still off the job on Monday, when airline travel generally picks up from weekend levels.

"NWAC is now in that quiet period before it and the market can evaluate how well its replacement crew is working...disruptions have not been reported in the media this past weekend," CreditSights analysts said in a report on Monday.

Having flown Saturday out of Detroit, one of Northwest's major markets, a convertibles desk analyst backed this assessment, citing relief that his flight to New York arrived just one hour late.

"The picketers were confined to one portion of the airport, and things were running relatively smoothly," he said.

The strike was called after management and the union failed to reach an accord by midnight Friday over the mechanics' share of $1.1 billion annual labor cost cuts, which the carrier has said it needs to take from salary expenses to remain competitive.

To handle the strike, Northwest assembled a replacement mechanic workforce and outside vendors for heavy maintenance. "As a result, a replacement crew can keep planes flying for awhile until mechanical issues start to add up and affect schedule reliability," the CreditSights analysts said.

As for the possibility of bankruptcy, the analysts said: "UAIR took two bankruptcies and still is not viable on a stand alone basis. UAL is having trouble exiting its first bankruptcy. AMR was able to achieve all of the above except reduce public debt through intense negotiations and brinksmanship. Pension reform is around the corner, good or bad. Industrial labor unions are weak. NWAC surveyed its options and decided to restructure outside of Chapter 11."

As for advice to investors, the CreditSights analysts concluded: "the equity is fundamentally worthless, while the unsecured bonds have some value as the airline will not liquidate."

They backed up the conclusion by saying the Pacific routes are valuable enough to reorganize around or merge with another domestic carrier. "That value spills over from the overcollateralized term debt. Long unsecured bond and short equity still works," CreditSights finished.

On Monday, Northwest's 6.625% convertible due 2023 was quoted at 52 bid, 53 offered late in the day, up from a trade Friday at 47.50. The 7.625% convertible was quoted at 43 bid, 44 offered compared to trades on Friday at 43.25.

The stock closed up 5.2%, or 28 cents, to $5.66.

Eyetech buy sends OSI lower

OSI Pharmaceuticals saw its convertible bonds come in a couple of points early in the session but then recover somewhat, even as its stock plunged.

The activity followed news that OSI will fund a $935 million acquisition of Eyetech with 75% cash and 25% stock. Melville, N.Y.-based OSI, a biotechnology company, said it would buy Eyetech for $20 a share, a 43% premium from Friday's close.

OSI focuses on cancer treatments, while Eyetech makes an age-related macular degeneration treatment, which it sells along with marketing partner Pfizer Inc.

OSI's 3.25% convertibles due 2023 opened right around par when the stock was at about $34 a share. Later in the session, the 3.25% issue traded around 97, with its stock at $32.30, according to one trader. The stock closed down $8.85, or 22%, at $31.92.

"On a delta neutral basis it came in OK," said a sellside trader, who didn't actually trade the convertible but fielded inquiries on it.

The same trader said that compared to Aug. 15, when the 3.25% traded at 107.5 versus a stock price of $40.30, the new convertible price should be 98.375 on a delta neutral basis.

"The bid is a point below that," he said of Monday's level.

Offer lifts CP Ships

The convertibles of CP Ships added about a point after the U.K.-based shipper said that its board unanimously recommended that shareholders accept an offer from TUI AG to acquire the company in an all-cash deal for $21.50 per share, or $2 billion, plus $300 million of net debt.

On Friday, it was reported that the two companies were in talks.

The deal represents a 28% premium over CP Ships' average closing price over the last three months.

It is expected that TUI will refinance the debt, CP Ships chief executive Ray Miles said in a conference call with investors and analysts on Monday.

A source at RBC Capital Markets, one of the underwriters of the 4% convertibles issued in February 2004, said that he hadn't yet looked at what the acquisition means for the convertibles. He expected more answers in a few days. Morgan Stanley was the other underwriter.

Miles said the deal is expected to close in October subject to regulatory approvals. Approvals are required in Canada, the United States, Europe and other countries. Miles said he doesn't expect competitive issues will prevent regulators from approving the deal.

"If it does become an issue, we can probably find a cure," he said.

Germany's TUI, the parent of Hapag-Lloyd, plans to combine Hapag-Lloyd and CP Ships to create the world's fifth-largest container shipping company. The combined company will have particular strength on the Atlantic.

Following the news, Standard & Poor's placed its ratings on CP Ships Ltd. on CreditWatch with developing implications. The ratings include the BBB- long-term corporate credit rating, the BB+ senior unsecured debt rating and BB+ subordinated debt rating.

S&P said it is unclear at this time how the transaction will be structured and what the combined credit quality of the companies will be. If the acquisition is successful, CP Ships' senior note, convertible debenture and bank line agreements all contain change-of-control provisions that could obligate TUI AG to redeem debt outstanding. In such event, it is also possible that the ratings on CP Ships will be withdrawn.

CP Ships' 4% convertible due 2024 traded between 100.125 and 100.5 on Monday. Its shares closed up $1.59, or 8.1%, to $21.19.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.