Ballooning credit spreads weigh but drugmakers gain on buying

By Ronda Fears

Nashville, Tenn., Sept. 24 - Selling continued to dominate the market but a few drugmakers saw a nice gain on buying that stemmed from a view of better reception for new drugs by regulators.

Weak credits and a widening of spreads pressured the vast majority of the convertible market, however, and selling persisted with investors scrambling to unload Electronic Data Systems Corp. and El Paso Corp. along with a rash of other high-profile troubled names.

For some of the repeatedly troubled names like El Paso, credit default swaps were said to have blown out from about 750 basis points to something like 1,500 basis points.

Paper and building products name Temple Inland Inc. fell sharply on its warnings, and that also contributed to a drop for homebuilder Lennar Corp.

"Credits were weak. Couple that with a huge drop in stocks continuing and it was a terrible set of circumstances," said Venu Krishna, head of convertible research at Lehman Brothers.

"The environment is not conducive to convertibles but there are some opportunities on a selective basis, like Sealed Air."

Moreover traders said there was just too much bad news on the corporate profits front for the Federal Reserve Open Market Committee meeting to matter much.

"The Fed was really a non-event as far as I could tell. The tolerance levels in some situations, like El Paso and EDS, have reached a place where people want out, now, period," one trader said.

"If they [the Fed] had lowered rates that might have provided a little lift, but I doubt it. There's too many warnings and lots of headline risk."

While El Paso's convertible bonds tanked sharply, traders said the EDS convertible bond was holding up better due to a cash put coming up next year. The convertible preferreds of both fell precipitously with the stock, however.

El Paso's 0% due 2021 fell 9 points to 28.5 bid, 29.5 asked and the mandatory dropped 5.64 points to 13.5. The stock declined another $2.21 to close at $5.30.

EDS moved to stave off a rush to sell its securities after Moody's Investors Service put the credit on review for downgrade and a Merrill Lynch & Co. equity analyst shifted the stock recommendation to sell but traders said it did little to nothing to help the situation.

The EDS 0% due 2021 lost 2.125 points to 71 bid, 71.25 asked while the mandatory fell 4.5 points to 16. The stock dropped another $4.84 to $11.68.

Other troubled companies like Continental Airlines Inc., Duke Energy Inc., Teco Energy Inc. and EchoStar Communications Corp. sank lower also.

Xerox Corp. returned to the hot spot, too, as a new federal investigation of its accounting practices dashed hopes that it had put concerns about its books behind it after agreeing to a $10 million fine to settle an SEC probe.

The Xerox 7.5% convertible trust preferreds plunged 4.5 points to 42.75 bid, 43 asked. The stock closed down 71c to $5.96.

Traders said developments at EDS and El Paso and now Xerox's renewed woes have soured convertible investors on mandatories to some extent, as they have little downside protection. But, traders also said there appear to be some risk-tolerant buyers for those issues.

"It looks like there are some takers for these very depressed mandatories," said a convertible trader at a hedge fund in New York.

"They are probably the same people who are holding Lucent, Nortel and those type names. But, the bottom line is that there apparently are some people out there willing to take this kind of risk. If it pays off, it pays off big. But that's more gamble than we're willing to take right now."

On the positive side, there was an FDA advisory panel voting to support AstraZeneca plc's drug Iressa for treating advanced lung cancer when other therapies fail.

That news boosted ImClone Systems Inc., OSI Pharmaceuticals Inc. and Abgenix Inc. as they are developing similar drugs.

OSI Pharma's 4% due 2009 added 5.5 points to 65.5 bid, 66.5 asked. The underlying stock rose $3.64 to close at $16.73.

Abgenix's 3.5% due 2007 gained 2.25 points to 63.25 bid, 63.75 asked while the common ended up $1.02 to $6.81.

ImClone's 5.5% due 2005 was up 2.875 points to 56.375 bid, 57.375 asked as the stock added $1.85 to $7.96.

Also higher was Sepracor Inc. on news that it is buying back converts.

Sepracor announced that it has repurchased in privately negotiated transactions a total of about $131.1 million face value of its 7% convertible subordinated debentures due 2005 for around $84.8 million in cash, excluding accrued interest.

That news boosted the 7s by 1.5 points to 62 bid, 64 asked. The Sepracor 5% due 2007 gained 0.5 point to 45.5 bid, 46.5 asked and the 5.75% due 2006 added 1.125 points to 48.125 bid, 50.125 asked. Sepracor shares closed up $1.228 to $5.228, partly due to the positive bend in drug stocks.

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