Par Pharmaceutical gains amid restatements; Openwave slips on weak forecast; tech names better bid

By Kenneth Lim

Boston, July 6 - The convertible bond market picked up on Thursday as negative news on the earnings front hit a couple of names.

Par Pharmaceutical Cos. Inc. improved despite a sharp drop in the stock after the company said it will restate results going back to 2004 and delay its second-quarter report due to inadvertent under reporting of accounts receivable. The company's convertible was buoyed by speculation that the restatements could lead to an acceleration of the notes if a default event occurs, market sources said.

Meanwhile, Openwave Systems Inc. fell outright as the stock tumbled after the company disappointed the Street with a surprise forecast for a fourth-quarter loss.

Health Management Associates Inc.'s 1.5% convertible due 2023, which will pay 4.375% if it is not put after August, slipped in line with a modest decline in its stock but stayed well above par with the sweetened terms. The convertible traded at 101.125 against $19.80 on Thursday. Health Management stock (NYSE: HMA) closed at $19.34, down by 2.27% or 45 cents.

Health Management is a Naples, Fla.-based operator of acute-care and psychiatric hospitals.

Tech names saw better demand Thursday amid a stronger equity scene.

Intel Corp.'s 2.95% convertible due 2035 changed hands at 83.50 versus a stock price of $18.75, flat to slightly higher outright from the day before. Shares of the Santa Clara, Calif.-based chip maker closed at $18.85, up slightly by 0.53% or 10 cents.

Symantec Corp.'s 1% convertible due 2013 traded at 95.75 against a stock price of $15.20 early Thursday, in line with its stock. Symantec stock (Nasdaq: SYMC) declined 1.51% or 23 cents to end at $14.97. Symantec is a Cupertino, Calif.-based developer of computer security solutions.

"Tech names seem well bid for today," a sellside convertible bond trader said.

Par firms against restatement

Par Pharmaceutical withstood a beating in its stock on Thursday and ended better after the company said it will restate its financial results going back to 2004 and delay reporting its second-quarter earnings.

Par Pharmaceutical's 2.875% convertible due 2010 gained five points outright, trading at 86 against a stock price of about $13.10. Par Pharmaceutical stock tumbled 26.19% or $4.78 to close at $13.47.

"The stock's getting killed on the restatement, but the converts are doing better," a sellside convertible strategist said.

Par Pharmaceutical said Thursday that an internal review showed its accounts receivable reserves had been understated due to "inadvertent" errors. Par Pharmaceutical, a Woodcliff Lake, N.J.-based generic drug maker, said the restatements will reduce revenue by up to $55 million from 2004 onwards and had led the company to overpay some of its partners under profit-sharing arrangements. The company will try to recover some of those overpayments.

Par Pharmaceutical will also write off up to $15 million of its inventory.

The company said the restatement will not affect its ongoing operations, and it expects to "remain in full compliance with all debt covenants throughout the restatement process." The company currently has $183 million in cash and cash equivalents.

The convertibles gained on a combination of two factors, the sellsider said. First, there is always a possibility of a takeover on a distressed stock price. "It's that much cheaper, but any buyer would have to be comfortable with all the...issues with the restatement," the sellsider said.

Also, "there's some thought that...there could be an issue with acceleration of the bonds, but there are a lot of viewpoints on the issue," the sellsider added.

A convertible analyst said it was difficult to know if there was going to be any default event, noting that Par Pharmaceutical has until about September to report its finances and avoid a default on its debt.

"It could take a long time, but then it was an internal probe that discovered it, and they've already quantified the worst case scenario for everybody," the analyst said.

If the company fails to turn in its required filings on time, investors could get to put the convertibles at par. If not, the notes will probably retreat to their earlier levels, the analyst said.

"It was a great situation for hedge people," the analyst said. "The stock fell and the bond went up...It was probably good for outrights too, but the stock dropped so much that the hedge players were really happy."

Openwave steady on loss forecast

Openwave's 2.75% convertible due 2008 were slightly weaker on a delta basis as the stock fell almost a third after the company guided for a loss in its fiscal fourth quarter, disappointing investors.

The convertible was 93.75 bid against a stock price of $7.65 on Thursday, about six points lower on an outright basis. Openwave stock (Nasdaq: OPWV) fell 32.26% or $3.70 to close at $7.77.

"They moved down on a 25 delta today, so that looks like they held up pretty well," a convertible bond trader said.

Openwave said Thursday that it expects a net loss of 13 cents to 14 cents per share for the quarter ended June 30. For the year ended June 30, Openwave expects a loss of 3 cents per share.

Redwood City, Calif.-based Openwave, which develops software for the telecommunications industry, blamed the weak performance on poor sales in Europe and Japan.

Equity analysts were quick to slash their views on the stock. Morgan Joseph cut its target price on the stock to $12 from $27, while Wachovia cut its recommendation to market perform from outperform.

The convertible bond trader said Openwave is a very risky name at the moment.

"This is still a relatively small company sales-wise, so things could get dicey very quickly," the trader said.

Artemis deal fair value: Barclays

In Europe, Artemis SA's newly priced 2% notes exchangeable into PPR SA shares due 2011 are fairly priced but marred by risks, wrote Barclays Capital in a report.

The €900 million offering priced Wednesday at the cheap end of talk, with a yield of 5.75% and an initial conversion premium of 27%. The exchangeables were talked at a yield of 5.25% to 5.75% with an initial conversion premium between 27% and 32%.

There is a greenshoe option for a further €100 million.

JP Morgan, BNP Paribas and Calyon were the lead managers.

Artemis is a privately held holding company for French billionaire Francois Pinault and controls 42.8% of PPR's stock. The proceeds of the deal will be used to refinance Artemis' existing 1.5% notes due 2007 exchangeable into PPR.

The convertible is just slightly above fair value, using an issuer credit of 30 basis points below B rated companies and a volatility of 22.5%, Barclays analysts Luke Olsen, Haidje Rustau and Heather Beattie wrote in a report.

But the analysts noted that Artemis has not pledged or ringfenced the shares that will be used for conversion in the event of a default, which could lower the valuation of the convertible.

© 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.