Patriot Coal continues to weaken; Onyx extends gains; Royal Gold slips in line; K-V drops

By Rebecca Melvin

New York, June 22 - Market players were eyeing Patriot Coal Corp.'s convertibles Friday, which weakened along with the underlying shares, as a vacuum of definitive news for the hobbled St. Louis-based coal producer persisted.

The rest of the coal sector was not noticeably lower. James River Coal Corp.'s convertibles moved a couple of points higher over the past few days, a New York-based convertibles analyst said, and shares of the Richmond, Va., coal company were up 6% on Friday.

Onyx Pharmaceuticals Inc.'s convertibles extended gains, adding another 0.125 point on a dollar-neutral, or hedged, basis after a multiple-point hedged move up Thursday, a New York-based trader said.

The San Francisco-based biopharmaceutical company announced late Wednesday that it received backing by a regulatory panel for its Kyprolis carfilzomib drug for the treatment of multiple myeloma.

Savient Pharmaceuticals Inc.'s convertibles, which have been quiet for a couple of weeks, were in trade and in line with underlying shares of the East Brunswick, N.J.-based specialty biopharmaceutical company, which were flat to slightly lower.

Meanwhile, Royal Gold Inc.'s new 2.875% convertibles, which debuted last Friday, traded actively and essentially in line on a hedged basis with shares of the Denver-based precious metals royalties company slightly lower.

But the bottom fell out of K-V Pharmaceutical Co. That convertible traded down to 6 after dropping to 13.375 bid, 13.75 offered Tuesday from previous trades in the low 20s.

The selling was sparked by the updated statements of the U.S. Food and Drug Administration and the Centers for Medicare & Medicaid Services, which didn't come out strongly against compounders that compete with the Bridgeton, Mo.-based specialty pharmaceutical company's Makena drug to help prevent preterm births.

"It seems to be an overreaction, but at the same time there is not a ton of hope," a New York-based convertibles analyst said of the K-V Pharma moves.

Overall, trading volumes in the convertible market were low in typical summer Friday fashion. But equities regained their footing after suffering their second worst point drop on Thursday.

The Nasdaq stock market ended up 33.33 points, or 1.2%, at 2,892.42; the S&P 500 stock index added 9.51 points, or nearly 1%, to 1,335.02; and the Dow Jones industrial average gained 67.21 points, or 0.5%, to 12,640.78.

Patriot Coal weakens

Patriot Coal's 3.25% convertibles due May 31, 2013 were seen at 28 bid, 33 offered on Friday as the underlying shares of the company sagged 11 cents, or 8%, to $1.26 in heavier-than-average volume.

These convertibles had been in the mid 50s early last week; and prior to news after its last earnings report of a customer default, they had been near par.

"I heard that there might have been a bondholder call yesterday, and clearly by the price action, it didn't go very well," a New York-based convertibles analyst said.

The analyst noted that Arch Coal Inc. had news that it was shutting down some mines. But shares of that company were off less than 2%, and it didn't appear to be the genesis of what was occurring in Patriot Coal in the last couple of days, he said.

"The Patriot cap structure has been super weak," the analyst added.

The company has been trying to restructure, and expiration of a lender commitment letter is July 6. The company may try to argue the customer default, which triggered the recent sell-off, was a material adverse change, or MAC, clause.

But the analyst pointed out that the company has plenty of cash on its balance sheet and an existing revolving loan, so it should be fine to operate its business for the medium term.

"The real end of the line is Jan. 31; that's the maturity of the credit facility, and if they haven't restructured the convertible by that time, it will be a problem," he said.

But a second analyst disagreed and said that if Patriot Coal trips its covenant, then the existing revolver will be shut to them.

"The question is will Bank of America waive the covenant in the face of all the company's problems? If they don't have access to the revolver, then a Chapter 11 filing could happen fairly quickly," the second analyst said.

"I don't know that the fundamentals are very strong," he said.

Meanwhile, many this week were attempting to call a bottom for the coal industry, but it's unlikely that the central Appalachian coal mining companies have a real chance of recovery unless natural gas prices go back above $3.50 per BTU, an analyst said.

James River Coal shares closed at $2.38 a week ago, and now its $3.29. "It's up 38% this week and no one has any idea why. But it's up 70% from the lows," an analyst said.

K-V Pharma drops further

K-V Pharmaceutical's 2.5% convertibles due 2033 dropped to 6 on Friday, down from 13.375 bid, 13.75 offered Tuesday. Previous trades were notched in the low 20s.

Shares of the Bridgeton, Mo.-based generic and branded specialty pharmaceutical company fell another 10.6 cents, or 15%, to $0.5789, after plunging 29% to under $1 on Monday.

"I'm surprised the reaction has been this bad," an analyst said about the market's furious sell-off in the face of news of the updated FDA and Centers for Medicare & Medicaid Services statements regarding the compounded versions of Makena's active ingredient hydroxyprogesterone caproate.

"People expected that the FDA would come out with strong language against the compounders, and threaten to shut them down. That they aren't doing that is fueling concern," the analyst said.

The company is burning though cash and will run out in a month or two, he said, describing the business as running through expenses of $80 million to $100 million a year on the back of $40 million in revenue. Furthermore the recovery on these bonds if the company were to file for bankruptcy protection from creditors is about zero, he said.

Still, it's difficult to understand the market's reaction to this news, he said, since the decision to prescribe is on the doctors' shoulders, not the manufacturers.

Mentioned in this article:

James River Coal Corp. Nasdaq: JRCC

K-V Pharmaceutical Co. NYSE: KV-A

Onyx Pharmaceuticals Inc. Nasdaq: ONXX

Patriot Coal Corp. NYSE: PCX

Royal Gold Inc. Nasdaq: RGLD

Savient Pharmaceuticals Inc. Nasdaq: SVNT

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