Convertibles market turns mostly lower; biotechs, autos, oil services down, but Six Flags gains

By Rebecca Melvin

Princeton, N.J., Jan. 12 - The convertibles market turned mostly lower on Thursday, dragged down by a pull back in biotechnology names, and with autos and oil-services names lower. But Six Flags Inc. was a notable exception to the trend.

The 4.5% convertibles of Six Flags gained 8.5 points, with its underlying shares jumping 7%, after Bear Stearns upgraded the shares, citing potential for debt reduction, experienced new management and a workable restructuring plan for the Oklahoma City-based theme park company.

But the market overall struck a decidedly lower tone, after trading mixed Tuesday and Wednesday, and following the tail end of the beginning-year rally on Monday.

In biotechnology, sector leader Genentech Inc. extended losses after reporting fourth-quarter earnings late Tuesday, which were in line with expectations, but raised concerns over sales of Avastin, a colorectal cancer treatment that is viewed as its key product.

Amgen Inc. also came off about 1%. And with those two lower, "it didn't help" the sector, a New York-based sellside desk analyst, ticking off convertible issuers that were down, including: Alkermes Inc., Abgenix Inc., Amylin Pharmaceuticals Inc., Celgene Corp., Cephalon Corp., Chiron Corp., Connetics Corp., CuraGen Corp. and ViroPharma Inc.

"They've had a strong run for the last two months," the desk analyst said.

General Motors Corp. and Ford Motor Co. also saw their shares and convertibles slide on Thursday. Meanwhile, Lear Corp. held its ground, with its 0% convertibles due 2022 trading at 44.13 bid, 44.38 offered, with a lower bid seen at 43.9, after Moody's Investors Services revised its rating outlook to negative. On Wednesday, a closing level on the Lear zero-coupon issue was 44.38 bid, 44.63 offered.

Shares of the Southfield, Mich.-based auto parts maker (NYSE: LEA) dropped $1.13, or 4.4%, to $24.58.

In airlines, the 2.875% convertibles of Delta Air Lines Inc., which is in Chapter 11 bankruptcy, sold off late in the day, and the 8% convertible notes came down with them, according to a New York-based sellside trader. Both issues were down about 0.5 point to 23 bid, 24 offered.

The 2.75% convertibles of Tyco International Ltd. (NYSE: TYC) were weaker, trading at 133 versus a share price of $30.35, compared to a trade of 135 versus $30 on Monday.

A week ago, the convertibles market was enjoying a broad-based buying spree in a range of sectors including the auto group as money was being put back to work following a quiet period at the end of last year.

Six Flags coasts higher

Six Flags' 4.5% convertibles due 2015 traded up 8.5 points to 162.15 bid, 162.65 offered. Trades were seen higher at 163.69, compared to a level Wednesday of 153.58 bid, 154.08 offered, according to a New York-based sellside shop.

Shares of Six Flags (NYSE: PKS) rode higher as well to $9.85, which was up 64 cents, or 6.95%.

"It's a parity trade," a New York-based sellside desk analyst said of the convertibles, meaning that the bonds move in tandem with the underlying shares.

An upgrade by Bear Stearns' leisure analyst Glen Reid was said to be behind the move. Reid upgraded the shares to "outperform" from "peer perform," citing a doable capital restructuring plan, crack new leadership and the potential for asset sales that could be put toward debt reduction.

The goal is not unlike that of a typical leveraged buyout, quickly pay down debt to give equity holders a greater claim on free cash flow, Reid said.

Chief executive Mark Shapiro took the helm of the theme park owner in December. Ousting old leadership and refilling the top management slots marked the end of a proxy fight launched by shareholder and Washington Redskins owner Dan Snyder. Snyder won the contest to replace Six Flags chief executive Kieran Burke in November.

"The crux of our upgrade is the potential for asset sales," Reid said, listing undeveloped land valued at $300 million, Astroworld, which is currently for sale, for $100 million, other potential park sales, and a plan already underway to get out of the food service business, which means selling food equipment with a book value of $200 million and doing a sponsorship deal with an entity like Papa John's or Pizza Hut.

"We assume significant debt reduction and modest EBITDA gains," Reid said, putting his year-end share price target at $12, up 30% from the current level.

Also making Six Flags headlines on Thursday was a Securities and Exchange Commission filing that showed hedge fund Highbridge as a sizable shareholder in Six Flags, holding 2.54 million shares of Six Flags and almost $40 million of convertibles.

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