AtheroGenics falls; Host Hotels, Freeport-McMoran up in gray; ProLogis, ViroPharma, Pioneer plan deals

By Kenneth Lim

Boston, March 19 - AtheroGenics Inc. plunged outright on Monday after its key heart disease drug failed late-stage trials, but arbitrage investors saw mixed outcomes depending on the weight of their hedged positions.

Host Hotels & Resorts Inc.'s new deal rose above its expected reoffered price range in the gray market.

Freeport-McMoran Copper & Gold Inc. also improved in the gray market, and traders said the early interest in the deal bodes well for the new offering.

The primary market saw three new deals launched after the market closed. ProLogis, ViroPharma Inc. and Pioneer Cos. Inc. are expected to price a combined $1.3 billion of new convertibles on Tuesday after the market closes.

AtheroGenics crashes on drug failure

AtheroGenics' two convertibles lost about one-third of their price on Monday after the company's heart disease drug AGI-1067 failed a late-stage clinical trial.

The AtheroGenics 4.5% convertible due 2008 was 78.5 at the closing stock price of $3.09, while its 1.5% convertible due 2012 was around 50 at the same stock price. AtheroGenics stock (Nasdaq: AGIX) finished 60.54% or $4.74 lower on Monday.

"That's the one you have to write about," a sellside convertible trader said. "The stock was down 60%, they did spread out on the way down."

AtheroGenics said its drug did not meet the target requirements in a widespread clinical trial. Its partner, AstraZeneca, will have 45 days to decide whether to continue being involved in the program. AtheroGenics said some secondary goals of the trial, such as reductions in heart attacks, stroke and death, may have been achieved, and the company plans to continue developing the drug. The company also said it has the financial resources to pursue further development of the drug.

The sellside trader said the shorter 4.5% convertible was trading at a higher yield-to-maturity.

"It doesn't make a lot of sense to me," the trader said. "If you want to play it, you'd rather put fewer dollars up. I would think that the shorter paper in this case, and the higher coupon and greater optionality, should be trading at a lesser yield to maturity to the 1.5s. Maybe in the next few days it'll get sorted out."

A buysider who had a heavily hedged position in the name said it was difficult to generalize on the impact on arbitrageurs.

"It was not a real big event for us," the buysider said. "But we were set up rather heavy. I suspect that most of the people who were hedged were lighter than we were, so it probably hurt them a little bid. But there were so many things going on, it's really impossible to say how it affected people."

The buysider said almost all the investors in the convertibles were hedged.

"Pretty much this is all hedge guys playing it," the buysider said. "There's a million different ways to play it."

The buysider said holding on to the convertibles makes sense at this time.

"We're definitely going to hold on to them," the buysider said. "You've got a $3 stock, the company's still going to develop the drug. They're going to keep the dream alive."

Biotechs in trouble can be very creative in finding a lifeline of some sort, the buysider said.

"You can't really kill a biotech," the buysider said. "If you do a little research, you'll be hard-pressed to find one that went bankrupt in the past five years. There's always a little bit of intellectual property, a little bit of partnership to be had, new Phase 1 or Phase 2 trials."

Host Hotels gains in gray

Host Hotels' planned $550 million offering of 20-year exchangeable senior debentures were bid about 3/8 to ½ point above its expected reoffered price in the gray market on Monday.

The exchangeable was talked at a coupon of 2.625%, an exchange premium of 20% and a reoffered price range of 98 to 98.5. Pricing was slated for after the market closed.

Host Hotels stock (NYSE: HST) improved 2.21% or 58 cents to close at $26.88.

The exchangeables were to be issued by Host operating partnership Hotels & Resorts LP and are exchangeable into the listed company's common stock.

There is an over-allotment option for a further $50 million.

Goldman Sachs, Banc of America, Deutsche Bank, Citigroup and Merrill Lynch are the bookrunners of the Rule 144A offering.

Host, a Bethesda, Md.-based real estate investment trust that focuses on hotel properties, said the proceeds of the deal will be used to repay mortgage debt and fund general purposes.

One convertible analyst said the deal modeled around 98.75 using a credit spread assumption in the low 100 basis points over Libor region and a volatility in the mid-20% range.

"It could come at 98.5, but better if it came at 98 obviously," the analyst said.

Another analyst had a similar valuation for the deal.

"It looks OK to me," the second analyst said. "Nothing looks that great these days, but as far as REITs go, this one seems like it maybe had a little more volatility, although it's not quite the credit as some of the others are so it's not has high gamma as the other REITs. But it's a stronger credit than before and did model a little bit cheap."

Freeport-McMoran sees early interest

Freeport-McMoran's planned $1 billion offering of three-year mandatory convertible preferred stock was bid up by a quarter-point in the gray market on Monday.

The deal, which is being offered at par, is only expected to price Thursday after the market closes, and the early activity could be a positive sign for the issuer, market sources said.

"Since it's that early and since it's plus a quarter, I would say it's more like plus half in my mind," a sellside convertible trader said.

Freeport-McMoran is talking the deal at a dividend rate of 6.75% to 7.25% and an initial conversion premium of 18% to 22%.

The 10 million preferred shares will be offered at par of $100 each.

There is an over-allotment option for a further $150 million.

The company is concurrently offering 35 million shares of its common stock.

Merrill Lynch and JP Morgan are the bookrunners of the registered deals.

Freeport-McMoran, a New Orleans, La.-based copper, gold and silver mining company, said the proceeds of the deal will be used to repay two outstanding term loans due 2012 and 2014 that were used to help fund its acquisition of Phelps Dodge Corp.

"We haven't had a true mandatory in a while," a sellside convertible analyst said, adding that that the deal modeled around half a point cheap at the midpoint of talk using a volatility in the high 30% range.

"It's not too attractive, and that's at the mids," the analyst said. "I would naturally guess that it would come at the cheap end. It's a huge deal, $1 billion, so they may have to give something back."

But another analyst said the deal modeled more then 1% cheap at the midpoint using a higher volatility assumption, but added that sometimes interest in mandatory preferreds is limited because "some people just won't play mandatories."

"I guess I'm more where the underwriter's expecting it to come," the second analyst said.

The second analyst said the Phelps Dodge acquisition was initially expected to boost Freeport-McMoran's attractiveness because it would diversify Freeport-McMoran's exposure beyond Indonesia, but the funding of the acquisition mostly with debt makes the acquisition more neutral on a credit basis.

It is not certain if investors will want to switch out of Freeport-McMoran's existing 5.5% convertible perpetual preferred, the second analyst said.

"They're perpetual, but these are only three-year mandatories," the analyst said. "It's going to depend on what they're looking for. A three-year mandatory is a totally different animal. It's really short-term debt. Where the perpetual preferreds are trading now, they're really equity sensitive, so they're quite similar, so it really depends on what people want."

More deals launched

Another $1.3 billion of new convertibles were launched Monday after the market closed and they are expected to price Tuesday after the close.

The largest deal comes from ProLogis, which is planning $1 billion of 30-year convertible senior unsecured notes talked at a coupon of 1.75% to 2.25%, an initial conversion premium of 20% and a reoffered price range of 98 to 98.5.

There is an over-allotment option for a further $150 million.

JP Morgan, Morgan Stanley and UBS Investment Bank are the bookrunners of the Rule 144A offering.

Prologis, a Denver, Colo.-based real estate investment trust that focuses on industrial distribution properties, said it will use the proceeds of the deal to partially repay its revolving debt and for general purposes.

ViroPharma's $200 million of 10-year convertible senior notes is talked at a coupon of 2% to 2.5% and an initial conversion premium of 27.5% to 32.5%.

The notes will be offered at par.

There is an over-allotment option for a further $30 million.

Goldman Sachs is the bookrunner of the registered offering.

ViroPharma, an Exton, Pa.-based pharmaceutical company, plans to use the proceeds of the deal to fund convertible note hedge and warrant transactions and general purposes.

Pioneer is talking its $100 million of 20-year convertible senior subordinated notes at a coupon of 2.75% to 3.25% and an initial conversion premium of 25% to 30%.

The convertibles will be offered at par.

There is an over-allotment option for a further $20 million.

CIBC is the bookrunner of the Rule 144A offering.

Pioneer, a Houston-based maker of chlor-alkali products, said it will use the proceeds of the deal to redeem its $75 million outstanding of 10% senior secured notes due 2008, fund the expansion of its St. Gabriel, La.-plant and fund general purposes.

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