Northwest, Delta lead lower on fuel prices, pilot contract concerns; drug paper higher

By Ronda Fears

Nashville, Oct. 11 - Bond markets were closed but convertible players were in Monday as stock trading remained open for Columbus Day. It was a thin market, however, and desks on both the buyside and sellside were light.

As oil hit another new high, with the November contract settling up 33 cents to $53.64 a barrel, airline paper was under pressure. But traders said contract negotiations with pilots were the foremost concern with the biggest declines in that space - Delta Air Lines Inc. and Northwest Airlines Corp.

"Yeah oil hit a new high and the airlines were all lower, but AP [Associated Press] keeps pointing out that while oil prices are about 80% higher on a year-over-year basis, inflation-adjusted, oil is $26 lower than what's considered the peak in 1981," said a buyside trader.

"For what it's worth, I think the airline paper is a good buy right now. I'll take the Delta converts in the 30s. All the other airlines are definitely worth where they are trading, as I see it. Airlines aren't going away, at least the majors."

Elsewhere, a sellside trader said nearly the entire pack of pharmaceutical or biotech convertibles were pushed up, although not by a large degree. Some were gaining on specific news about drug candidates or launching commercial products, such as Alpharma Inc., Teva Pharmaceuticals Industries Ltd., Biogen Idec and Elan Corp. plc.

It's also noteworthy to mention that Merrill Lynch reported Monday its convertible hedge index was up 0.42% net of a 2% annual management and a 20% performance fee in September, taking the year-to-date return up to 1.33% before hedging out interest rates.

Northwest nerves on edge

As analysts became more concerned about Northwest's credit line, investors began to bail out amid the record oil prices. The two Northwest convertibles tumbled 1 to 1.5 points while the stock dropped 29 cents, or 3.64%, to $7.67.

"You can't read an awful lot into what happened today, the volume was so thin, but people are almost as nervous about Northwest as Delta now," a sellside trader said. "The telling will be in what happens tomorrow [Tuesday]. I think we'll see some more weakness."

Northwest has acknowledged that the new pilot contract and other labor negotiations could impact renewing its credit line. The $962 million credit revolver comes due October 2005.

The airline, like Delta and others, is seeking wage concessions to improve key financial metrics. Analysts are worried that without significant declines in wage costs, while fixed costs like fuel rise, Northwest could find itself in violation of bank covenants. Too, liquidity deterioration could trigger credit downgrades.

Delta talks with pilots ongoing

Meanwhile, Delta - which is known to be in financial trouble on several fronts - is still in talks with pilots over wage concessions with no sign of an outcome, yet. So, in conjunction with the rise in oil prices Monday, fears were renewed among some analysts that the struggling carrier will be forced into bankruptcy if it doesn't get significant wage concessions from the pilots in the next three weeks.

"We continue to believe that absent a pilot deal this month, Delta's liquidity is too low to avoid a Chapter 11 filing," said Morgan Stanley airline analyst William Greene in a research note Monday.

Delta's convertibles dropped into the high 20s on Monday, a sellside trader said. He pegged both the 8% and 2.875% issues at about 29.5. Delta shares fell 18 cents, or 5.52%, to $3.08.

Alpharma flat amid uncertainty

Alpharma on Friday announced that they would launch generic versions of Pfizer's Neurontin capsules, which has annual sales estimated at roughly $1.7 billion. Alpharma remained relatively unchanged on the development, however, which a dealer attributed to Alpharma's weaker credit.

Alpharma's 3% convertible due 2006 was flat at 126.75 bid. The stock rose 9 cents, or 0.53%, to $17.21.

Standard & Poor's said while Alpharma holds the 180-day exclusivity on the capsule version of gabapentin, its generic version of Neurontin, and the drug represents significant revenue and deleveraging opportunity for Alpharma, its ultimate revenue potential to Alpharma is uncertain, given that it has to compete with Ivax Corp.'s tablet version of gabapentin, already on the market.

Pfizer also plans to launch its own generic version of Neurontin through a generic drug subsidiary, further undercutting the revenue potential to Alpharma.

Furthermore, S&P pointed out that Alpharma is launching gabapentin before final legal resolution of Neurontin's patents and an unfavorable decision could expose Alpharma to damages.

Biogen Idec, Elan up slightly

Biogen Idec's soon-to-debut multiple sclerosis drug Antegren gave its convertibles a shot in the arm, as well as Elan - its marketing partner who will share in the revenues generated by the drug.

Biogen Idec's 0% convertible due 2032 added a quarter-point Monday to 63.3125 bid, 63.6875 offered with the underlying stock up $1.31, or 2.22%, to $60.26. Elan's 6.5% convertible due 2008 was up similarly, a sellside trader said, and those shares gained 17 cents, to 9.78%, to close at $21.88 on Monday.

Lehman Brothers upped Biogen Idec shares to overweight from equal weight, noting that Antegren secures the company's place as the top player in the MS market. He noted that the firm now holds 40% of that market on sales of its already-marketed MS drug.

But the convertible trader said Biogen Idec shares and the convertibles had priced in most of the Antegren news.

Six Flags convertibles slightly off

Six Flags Inc. convertible players were selling out Monday, although in small numbers, while the stock rose. Yet, many players, as well as analysts, said the convertibles are a big income play for those who are risk tolerant.

The 7.25% convert on Monday was off by 0.265 point to 20.8935 while the stock gained 13 cents, or 2.4%, to $5.54. A sellside analyst said in a report in mid-August that he estimated the convertible is worth about 21.87.

"The [Six Flags] securities have made a strong comeback. I think there was just one holder, maybe, today taking a little profit," said a buyside trader. "In my opinion, the basic business model of a regional theme park is sound."

In early August, Six Flags shares and convertible preferreds were hit by the amusement park's earnings and particularly by the company's lowered guidance. At that time the convertible was at 17.25 bid with the stock at $3.49.

PMA holders still disgruntled

With PMA Capital Corp.'s proposed exchange for its 4.25% convertibles three weeks away, as for the first deadline, holders say they are still very dissatisfied with the company's offer.

On Friday, Moody's assigned a B3 rating to the $86.25 million new convertible debentures being offered in exchange for the 4.25s, but a bondholder pointed out that, too, Moody's states the security of 20% of sub is worth little.

"Giving up three years of put and [there] not being incentives, by a lower conversion price, is a non starter," he said.

"If there is an exchange, it will not be in the form that BAC [dealer manager for the exchange, Banc of America Securities] has proposed. They are impressed with themselves, but are forgetting that bondholders are driving this train, not BAC or the company. [If it's a bluff,] they will have to fold."

The Philadelphia insurance firm said the exchange is intended to refinance the existing convertibles with new securities that have a later put date, with a price yet to be established. In addition, PMA intends that the transaction will improve its debt ratings and the financial strength ratings of The PMA Insurance Group. The offer will run through midnight ET on Nov. 2.

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