Cell Genesys climbs on drug hopes; Eddie Bauer, St. Mary lead new deals; RF Micro, Strategic Hotels trail

By Kenneth Lim

Boston, March 30 - Cell Genesys Inc. soared outright on the wings of renewed optimism about its experimental cancer treatment on Friday, while new issues turned out to be a mixed bag.

Eddie Bauer Holdings Inc. led the latest batch of new deals with bids as high as 9 points above its offered price even after the deal priced richer than talk.

But the other three new issues turned in more modest performances. RF Micro Devices Inc. was flat to slightly lower with aggressive pricing taking some of the shine away from its deal. St. Mary Land & Exploration Co. gained slightly, but Strategic Hotels & Resorts Inc. slipped even after it was reoffered below par.

Despite those four deals rounding out the best month for issuance volume since June 2003, the convertible market ended the quarter on a mixed note. One grumble was that some of the recent deals were too unattractive.

"They all sucked, every single one of them sucked," a buyside convertible trader said. "Eddie Bauer was great, but nobody got those bonds."

The trader said hedge investors were unlikely to end the month with stellar returns.

"It has just been a miserable month for the hedge guys," the buysider said. "It's not like hedge guys lost money. Nobody really made any money. I don't think you'll find many hedge players making a lot of money. The bad ones lost maybe 40 bp, the good ones made 30 bp."

The new deals injected some life into the secondary market early Friday, but the effect quickly wore off.

"It got quiet after the flurry this morning," a sellside convertible trader said. "You got a holiday week, month-end, quarter-end. People seem more busy marking books."

New deals set 2.5-year high

The $15.435 billion raised by 35 deals in March was the most in any month since June 2003, when 59 deals raised $19.525 billion.

JPMorgan overtook Deutsche Bank to grab the lead atop the league tables as a late surge of new deals pushed convertible issuance well beyond year-ago levels. JP Morgan helped to raise $5.835 billion in proceeds through 19 deals in the first quarter of the year, accounting for 22.03% of the total so far. The investment bank also led when investment bank exchangeables are counted, with 70 deals that raised $5.874 billion.

Issuers raised $26.485 billion through 64 offerings in the first three months of the year, more than double the $12.612 billion raised a year ago. Including synthetics, the year-to-date total of $29.756 billion from 524 deals is 70% above the $17.505 raised from 173 deals at the same time last year.

The increase was even more pronounced in March, when 35 deals raised $15.435 billion, almost five times the $3.285 billion raised through 13 deals a year ago. With investment bank exchangeables, the total reaches $16.595 billion from 174 deals, almost four times the $4.289 billion from 75 deals in March 2006.

The tail-end of the quarter was the busiest. The last two weeks of March saw 22 deals raise $10.985 billion in proceeds, or 41.5% of the total for the quarter. All of the month's deals that raised more than $1 billion - Freeport-McMoRan Copper & Gold Inc.'s $2.875 billion offering, Vornado Realty Trust's $1.4 billion issue, ProLogis' $1.1 billion deal and Nortel Networks Corp.'s two-tranche $1.15 billion deal - priced in the last two weeks of the month.

Cell Genesys soars on drug hopes

Cell Genesys' 3.125% convertible due 2011 climbed about 8 points outright as its stock shot up on optimism about its cancer drug GVAX.

The Cell Genesys convertible traded at 85.5 against a stock price of $4.75 on Friday. The stock (Nasdaq: CEGE) gained by a fifth, or 70 cents, to close at $4.20.

"We saw a bunch of the Cell Genesys trading this morning, but it became kind of quiet in the afternoon along with everything else," a sellsider said.

Cell Genesys stock climbed after a Food and Drug Administration panel recommended approving the prostate cancer drug Provenge that is being developed by Dendreon Corp. Dendreon and South San Francisco, Calif.-based Cell Genesys are biotech companies. The FDA is expected to rule on the drug on May 15, but the regulatory body usually follows the recommendations of its panels.

"From what I understand, Cell Genesys' drug works on the same general principles as the Dendreon drug, which means that Cell Genesys will probably benefit if Dendreon gets its approval," the sellsider said.

Cell Gensys' GVAX is also a prostate cancer drug and is in late-stage trials.

A buyside trader said that while outright investors were happy with the development, arbitrageurs probably did better only on a lighter hedge.

"The bonds did well; the stock did well," the trader said. "We were a little on the heavy side, but those on the correct hedge did fine."

Eddie Bauer surges on debut

Eddie Bauer's new 5.25% convertible senior notes due 2014 flew out the door on Friday with a bid of 106 against a stock price of $10.84 early in the day, but traders said investors asked even higher later in the day. The convertible was offered at par.

"Everybody loved Eddie Bauer," a buyside convertible trader said near the close. "It's 109 bid."

Another trader on the sellside said gains may have reached the double-digits.

"I'd heard that they were like 110 bid outright," the trader said. "I don't know if that's true, but it was 106 bid pre-open, so it's conceivable that they were 110 bid."

Eddie Bauer stock (Nasdaq: EBHI) rose 4.89%, or 53 cents, to close at $11.37.

Eddie Bauer priced the $75 million deal richer than talk on Thursday with an initial conversion premium of 25%. The convertibles were offered at par and priced after the market closed. They were talked at a coupon of 5.5% to 6% and an initial conversion premium of 20% to 25%.

JP Morgan was the bookrunner of the Rule 144A offering.

Eddie Bauer, a Redmond, Wash.-based retailer of casual sportswear and outdoor accessories, plans to use the proceeds of the deal to partially repay a term loan that will be amended and restated concurrently with the offering.

Despite the deal's quick rise, only a handful of investors are believed to have received the convertibles during allocations.

"It went to literally a handful of players," another buysider said.

RF Micro gets mixed signals

RF Micro's new 0.75% convertible due 2012 and its 1% convertible due 2014 saw early interest on Friday but quickly slipped as the deal's aggressive pricing took its toll.

The shorter paper was 100 against a stock price of $6.30 late Friday, while the 1% convertible changed hands at 99 versus the same stock price. The notes were offered at par. RF Micro stock (Nasdaq: RFMD) closed at $6.23, down by 1.27% or 8 cents.

"The RFMDS seemed as though both issues traded up but they quickly came better for sale," a sellside convertible trader said. "I guess the deal was oversubscribed, but people probably flubbed their orders. They asked for more than they really wanted, then it priced at the rich end and it was upsized and guys got more than they wanted."

RF Micro priced the upsized convertible subordinated notes after the market closed on Thursday with an initial conversion premium of 27.5% for both $175 million tranches.

The five-year tranche was talked at a coupon of 0.75% to 1.25% and an initial conversion premium of 22.5% to 27.5%. The seven-year series was talked at a coupon of 1% to 1.5% and the same initial conversion premium range.

Each tranche has an over-allotment option for a further $25 million.

Merrill Lynch was the bookrunner for the Rule 144A offering.

RF Micro Devices, a Greensboro, N.C.-based maker of radio frequency components, said the proceeds of the deal will be used for general purposes, which include working capital, potential acquisitions and future stock repurchases.

St. Mary gains to 101

St. Mary's new 3.5% convertible senior notes due 2027 gained about a point outright after its deal priced within talk.

The convertible traded at 101 against a stock price of $37. It was offered at par. St. Mary stock (NYSE: SM) eased 0.24%, or 9 cents, to close at $36.68.

St. Mary priced its $250 million deal with an initial conversion premium of 48% on Thursday after the market closed. The deal was talked at a coupon of 3.5% to 4% and an initial exchange premium of 47.5% to 52.5%.

There is an over-allotment option for a further $37.5 million.

Merrill Lynch and Wachovia Securities were the bookrunners of the Rule 144A offering.

St. Mary, a Denver-based oil and gas exploration company, said the proceeds of the deal will be used to repay outstanding revolving debt.

Strategic Hotels struggles

Strategic Hotels' new 3.5% exchangeable senior note due 2012 slipped below its reoffered price on Friday as analysts blamed its lackluster debut on poor timing and sentiment.

The exchangeable, which was reoffered at 99.5, was seen at 99 at the start of the session. Strategic Hotels stock (NYSE: BEE) closed at $22.87, lower by 0.91% or 21 cents.

The $150 million deal priced with an initial conversion premium of 20%. It was originally offered at par and talked at a coupon of 3% to 3.5% and an initial exchange premium of 20%.

The notes are issued by Strategic Hotel Funding LLC and are exchangeable into common stock of the Strategic Hotels & Resorts.

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

Deutsche Bank, Citigroup and JP Morgan were the bookrunners of the Rule 144A offering.

Strategic Hotels & Resorts, a Chicago-based real estate investment trust that focuses on upscale hotels, will use the proceeds to enter into capped call transactions, to buy back up to $25 million of its common stock, to repay outstanding bank debt and to fund general purposes.

"It's not a good day to be a REIT and issuing paper," a sellsider said. "First of all, it's a REIT, and the recent REITs just haven't been able to get good terms. This one actually looked pretty reasonable where it came, but the market's just not interested in another REIT at the moment."

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