Convertibles quiet ahead of holiday; Lincare, Theravance extend gains; U.S. Steel better

By Rebecca Melvin

New York, July 3 - The convertible bond market was mostly quiet during a shortened, pre-holiday session Tuesday ahead of the Fourth of July, on which markets will remained closed, market players said.

Of the day's action, Lincare Holdings Inc. was again a feature, with its convertibles notching further improvement on a dollar-neutral, or hedged, basis after jumping Monday on news that the Clearwater, Fla.-based at-home respiratory services provider is being purchased by Germany's Linde AG for about $4.6 billion.

"I was surprised at the price, but needless to say, companies are desperate for growth and new areas for growth, so they are willing to do what is necessary to achieve that," an East Coast-based buysider said about the Lincare deal.

He also thought the $5.3 billion price tag for Amylin Pharmaceuticals Inc. was substantial.

But he expects more of the same in M&A in the coming months as there are other potential acquirers out there making the health care and biotechnology space in convertibles particularly interesting, he said.

Theravance Inc. equity was moving up again Tuesday following positive drug trial data Monday that supports putting the San Francisco-based biopharmaceutical company's treatment for chronic obstructive pulmonary disease on the market sooner rather than later. The bonds were higher but quiet in trade.

Elsewhere, United States Steel Corp. was still in focus and slightly better on a dollar-neutral basis on the heels of improvement seen over the last couple of days. The underlying shares gained 3.4% on Tuesday.

Strength in the Pittsburgh-based steelmaker's shares and convertibles was aided by news that the company was found not to have violated the Worker Adjustment and Retraining Notification Act when it laid off about 300 employees in 2008, a New York-based trader said.

U.S. Steel also announced Monday it has hired a former executive of Alcoa Inc. and Gerdau Ameristeel Corp. to be its chief operating officer.

Equity markets, which closed early at 1 p.m. ET, rose Tuesday.

The Commerce Department said Tuesday that May factory orders rose 0.7%, which was better than the 0.2% gain expected. The positive data was in contrast to the Institute for Supply Management's report Monday that manufacturing sector activity for June contracted for the first time in nearly three years.

Also on Tuesday the International Monetary Fund said that the U.S. economy will grow by 2% this year and about 2.25% in 2013 amid a "tepid" recovery and the European debt crisis.

Looking ahead, investors will be watching for the monthly U.S. jobs data report on Friday, and also keeping an eye on the European Central Bank, which is expected to cut rates this week.

Lincare extends gains

Lincare Holdings' 2.75% series A convertibles due 2037 moved up another point on a dollar-neutral basis Tuesday, a New York-based trader said. That move was on top of a 6- to 7-point dollar-neutral improvement on Monday.

The As changed hands during Tuesday's session at 154.25, which was up from a close at 153.5 versus an underlying share price of $41.34 on Monday. On Friday this paper was about 120.

The Lincare 2.75% series B convertibles due 2037 added another 0.75 point, the trader said. And that move was on top of a 5-point dollar-neutral move on Monday.

The Bs traded close to 170 compared to 169.25 versus the $41.34 closing share price on Monday.

Shares of the Clearwater, Fla.-based oxygen and respiratory therapy services company closed down 3 cents at $41.31.

On news of the Linde takeover the bonds did particularly well because of their so-called hyper structure, for which the conversion ratio is adjusted to include the incremental share factor.

In general "health care and biotech have been pretty hot," a buysider said. "There is a lot of paper here and there's a lot of potential for M&A."

"Fill-in acquisitions of one-drug or two-drug companies that are either just approved or going to be approved" are good candidates, he said.

Vertex Pharmaceuticals Inc., BioMarin Pharmaceutical Inc., Dendreon Corp. and Medivation Inc., in the prostate cancer arena, are all names that are being watched, he said.

Theravance higher

Theravance's 3% convertibles due 2015 were seen at 117.5 bid, 118 offered versus an underlying share price of $26.15.

Theravance shares surged $2.39, or nearly 10%, to $27.10 on Tuesday, on top of strength Monday.

"The bonds are up a little bit, but not trading actively," a buysider said.

The name has been up for a couple of days. On Monday it and its partner GlaxoSmithKline reported good results from four phase 3 tests for a COPD therapy. The companies are testing LAMA/LAMB, a mix of two molecules that dilate the bronchial passages.

U.S. Steel up dollar neutral

U.S. Steel's 4% convertibles due 2014 were seen trading at 103.5 versus a share price of $21.70 on Tuesday, which was about in line with the underlying shares if the bonds were held on a 40% delta, a New York-based trader said.

"That nukes into the bid side of the market," the trader said.

The bonds are typically held on a 45% to 50% delta, a second market source said.

Last Thursday, the U.S. Steel convertibles were trading at 102 versus a share price of $20.79, which was up 0.25 point on a dollar-neutral basis.

The U.S. Court of Appeals for the Eighth Circuit ruled Monday that U.S. Steel did not violate the Worker Adjustment and Retraining Notification Act when it gave a union about a week's notice before laying off more than 300 employees at a Minnesota plant in late 2008 because that year's economic crisis combined with a "dramatic decline in customer orders.

The situation constituted an "unforeseeable business circumstance," the court said.

Although U.S. Steel had knowledge of the economic downturn 60 days before layoffs began, the appeals court said the "resultant sharply decreased demand for steel" was not fully apparent until the end of November 2008.

The court ruling pointed out that the previous three quarters had brought historically high levels of demand and sales. But upon realizing that its business was in a "free fall," the company found idling the plant was necessary.

U.S. Steel shares have gained 14% over the past month. But the shares are still down 53% since July 2011.

Mentioned in this article:

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

BioMarin Pharmaceutical Inc. Nasdaq: BMRN

Dendreon Corp. Nasdaq: DNDN

Lincare Holdings Inc. Nasdaq: LNCR

Medication Inc. Nasdaq: MDVN

Theravance Inc. Nasdaq: THRX

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

United States Steel Corp. NYSE: X

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