Airline paper cheapens further, despite rise in stocks; Guilford shelf uplifts holders of rich bonds

By Ronda Fears

Nashville, May 20 - Traffic on convertible desks slowed further Thursday amid lackluster activity in the broader markets. Several traders commented that players were tiptoeing back into the market as it has cheapened in the past couple of weeks, but the market is still nowhere near a truly cheap level.

Meanwhile, market buzz about a deal getting launched after the close never came to pass, so the primary side of the market remained quiet.

"It's getting a little better; people are starting to dip back in," said Jimmy Giordano, president of the JGiordano Securities Group. "This is a digestion period."

Market participants are gauging reactions to higher interest rates, corporate earnings, volatility - the gamut of factors impacting the market - with no real conviction yet, traders said.

Airline paper was mixed as the cheapening over the past couple of weeks in those bonds has triggered some to look at the group, but traders said the major airline paper continued to lose ground Thursday as the stock soared.

Biotechs also remain an active group, also mixed. Ivax Corp. and Teva Pharmaceutical Industries Ltd. each were a couple of points higher while Affymetrix Inc. lost a couple of points.

"With the biotechs, some of it was still too expensive and had to come down to earth," one trader said. "Some of these [biotech convertibles] have come in a lot over the last week, or are really just more reasonable, worth considering."

Airline paper lower, stocks up

A fund manager involved in both outright and hedged strategies said Thursday he thought the airline paper "sure looks cheap" but lots of players continue to pressure the group lower, bailing out of some of the more questionable credits like Delta Air Lines Inc., Continental Airlines Inc. and Northwest Corp.

"Most airlines are cheaper, not cheap," said a sellside trader, adding that most of the airline paper closed lower again Thursday although the underlying stocks ended higher.

Higher fuel prices have contributed to the mounting concerns at the troubled airlines, but price hikes to offset the higher jet fuel costs at Continental were finally matched by Delta and selectively by Northwest and American Airlines Inc., which some investors in that group feel will help.

Upgrades to Delta shares by a couple of shops boosted the stock sharply, and some of its peers rose in sympathy, but convertible analysts note that Delta still is a shaky credit with a full-blown liquidity crisis looming.

"If they [Delta] don't get a major concession from their pilots they are looking like a bankruptcy candidate before the end of this year," said one sellside convertible analyst. Delta is still in talks with its pilots, which are the highest paid in the industry, for a compromise on pay and benefits.

The Delta 8% convertible closed Thursday at 55 bid, 56 offered and 2.875% convertible at 61 bid, 62 offered, a dealer said. Last week when the stock was ticking lower with the broader markets, he said, the newer 2.875s were better on swap by about 1.5 points on a 100% hedge. Delta shares Thursday climbed 82 cents, or 15.86%, to $5.99.

Continental's convertibles on Thursday were down 1-2 points, the trader said. The underlying stock closed up 43 cents, or 4.54%, to $9.91.

Northwest convertibles were also weaker on swap despite the stock being up on the day, he said. The stock closed up 29 cents, or 3.22%, at $9.29.

Bristol-Myers floater picked up

Potential buyers are excited to pick up the Bristol-Myers Squibb Co. floating-rate convertible on any slippage, like the slight dip marked Thursday as the major drugmaker announced it would stop making the antidepressant Serzone, traders said.

The Bristol-Myers convertible floater, which pays Libor minus 50 basis points, edged 0.25 point lower to 102 bid, 102.375 offered, a sellside trader said. The stock dropped 38 cents, or 1.49%, to $25.11 on the day.

News on discontinuing the drug Serzone, which is also the root of several lawsuits, pressured the stock and the converts, the trader said, "but there were people all over it," excited to buy a floater in the rising interest rate climate.

Guilford shelf piques interest

Guilford Pharmaceuticals Inc.'s filing Thursday of a $100 million shelf registration for debt and/or stock caught the eye of some players who were already thinking that the Baltimore-based biotechnology firm would be needing to look at either raising some capital through an offering or getting an infusion from a Big Pharma type firm.

Traders said there has been some interest in the Guilford convertibles all week, but typically the issue is very quiet.

"No one talks about them [the Guilford 5% due 2008]; I'm not sure if there is a borrow issue that keeps the hedge guys away or not," said a market source involved in an outright strategy.

"Me, I am willing to buy them here [119 area] and see what happens. At 4.23% yield, up 25%, it's interesting."

The company has two drugs on the market with $40 million to $50 million in sales, he said, plus a drug in Phase III trials called Aquavan that would compete with Diprivan, which had $750 million in sales in 1999. A new drug application on Aquavan is anticipated soon, he said, and the company has three or four other drugs in trials.

At the end of first quarter, the company had $81 million in cash, and another outright investor suggested the company will need some sort of capital infusion soon. So the shelf filing was a relief.

"We're hoping there could be a pop [in the stock] if they convince people that they can raise some cash. They are not long for the game without some help somewhere," the fund manager said.

He said there has been speculation that Guilford might be a takeover candidate and the recently announced departure of the company's chief financial officer might be an indication that talks are already underway.

It's a precarious situation for convertible holders, however, as they are still pretty pricey although the stock has "fallen too far, too fast," he said.

The 5% convertible due 2008 was quoted off about 0.25 point Thursday at 118 bid, 120 offered. The stock closed off a nickel, or 0.82%, to $6.02.

Casual Male drops 7.5 points

Casual Male Retail Group Inc. dropped sharply Thursday on an earnings report from the big and tall men's clothing retailer that failed to appease holders. Disappointing results were largely anticipated after the company's sales report and warning earlier this month, but some were surprised with the degree of the decline.

The 5% convertible on Thursday fell 7.5 points to 91.5 bid, 92.5 offered. Casual Male shares plunged 80 cents, or 10.74%, to $6.65.

Canton, Mass.-based Casual Male reported a fiscal first quarter net loss of $5.1 million, or 15 cents per share, widening from a net loss of $2.8 million, or 8 cents per share, a year before.

In addition to worries about the new George Foreman line of clothing, market sources said the debt-to-capital leverage of 42% with only $2 million in cash and $122 million in debt was a giant siren going off.

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