Tower Group tumbles; UAL preferreds outperform shares; Alpha Natural flat after upgrade

By Rebecca Melvin

New York, Sept. 27 - Tower Group International Ltd.'s stock and convertibles tumbled Friday after a news report suggested options may be dwindling for the ailing Bermuda-based reinsurance company that has been grappling with a reserve problem that it acknowledged in early August.

The Tower bonds fell about 10 points to 85 while the underlying shares fell $1.26, or 15%, to $6.91.

United Continental Holdings Inc.'s convertible preferred shares were lower outright, but outperformed on a dollar-neutral, or hedged, basis, compared to a $3.00 drop in the underlying shares after the Chicago-based airline cut its revenue per available seat mile forecast for the third quarter.

AMR Corp., the parent of American Airlines, saw its 5.25% convertibles trade unchanged at 105.5 for a second straight day even as traders eye its fight with the Department of Justice to allow its merger with U.S. Airways Group Inc. upon exit from Chapter 11 bankruptcy.

"We'll have to see how it pans out. The DOJ said it doesn't want to give out documentation of previous mergers, a Connecticut-based trader said on Thursday, referring to the latest move in the case.

The convertibles of Alpha Natural Resources Inc. were little changed despite pressure on the underlying shares after Goldman Sachs raised its rating on the shares to "neutral" from "sell," but lifted its price target to below where the shares were currently trading.

Dendreon Corp. remained quiet Friday after the Seattle-based biotechnology company announced positive data from a phase 2 study featuring Provenge. Dendreon shares traded essentially unchanged at $2.99.

The broader markets resumed their downbeat trend amid concerns related to decisions due in Washington over the U.S. federal budget and debt ceiling. The S&P 500 stock index slipped another 6.92 points, or 0.4%, to 1,691.75, the Dow Jones industrial average ended down 70.06 points, or 0.5%, to 15,258.24, and the Nasdaq stock market lost 5.83 points, or 0.2%, to 3,781.59.

Tower tumbles

Tower Group's 5% convertible notes due September 2014 skidded about 10 points to 85 and were left at 84 bid, 86 offered, with the underlying shares down $1.26, or 15%, to $6.91.

"Earlier in the day they were 86-90, and even from 11 to 1:30, they dropped another 2 points," a New York-based trader said.

A second trader said, "The common and the convertible both fell on the understanding that the company has spent a couple weeks trying to raise capital and now they are looking for a buyer and looking at a reorg."

Investors have been watching a situation that began in August with the company's admission that it was expecting to report an adverse development in its loss reserves and delayed release of its quarterly results.

Late Thursday a report by the Insurance Insider said that the company has hired three banks to seek solutions for its reserving crisis.

UAL preferred outperforms

UAL's convertible preferred was quoted at 44.375 bid, 44.875 offered, with the common down $3.16, or 9%, to $30.91.

"The common traded down a bunch early this morning, but the preferred on a dollar-neutral basis outperformed slightly," a New York-based trader said.

The drop followed a cut in the carrier's third-quarter PRASM. It said the increase would be 2.5% to 3.5%, compared to prior guidance of 3% to 5%. The decline was blamed on lower advanced bookings for the next six weeks in the Pacific region compared to the same period last year.

Alpha Natural steady

Alpha Natural's 2.375% convertibles due 2015 traded Friday at 94.375 in the early going, according to a New York-based trader. That was little changed from previous levels, he said.

Shares of the Bristol, Va.-based coal producer were off 3 cents at $6.24 at that point and closed down 19 cents, or 3%, at $6.08.

Goldman Sachs raised its ratings on the shares to "neutral" from "sell" but at the same time raised its price target on Alpha Natural shares to $6.00 from $4.00.

Alpha Natural's 3.75% convertibles due 2017 were not seen in early trade, but they were quoted at 96.5 bid, 97.5 offered versus the $6.27 share price.

Dendreon's 2.875% convertibles due 2016 weren't heard in early trade. They ended Thursday at about 62.8, according to Trace data, after having traded as high as 66.5 on Monday.

Dendreon also has a 4.75% convertible due in June 2014, which has only $52.5 million outstanding, and stands at a little below par.

Dendreon's drug trial data was being presented at the 2013 European Cancer Congress in Amsterdam. Preliminary data from a combination study demonstrated that Provenge product potency and immunology are maintained when administered with abiraterone acetate (AA) plus prednisone, according to a news release.

Additionally the preliminary data from an ongoing open-label study showed the long-lived immunological memory to Provenge lasts for years following treatment when patients are retreated.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

AMR Corp. Pink Sheets: AAMRQ

Avis Budget Group Inc. NYSE: CAR

Dendreon Corp. Nasdaq: DNDN

Tower Group International Ltd. Nasdaq: TWGP

United Continental Holdings Inc. NYSE: UAL

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