Fair Isaac plunges on fears of new rival product; Human Genome slides on mixed trial results

By Kenneth Lim

Boston, March 14 - The usually languid convertible bonds of Fair Isaac Inc. woke up on an otherwise quiet Tuesday and lost about seven points outright after three consumer credit rating agencies teamed up to introduce a potential rival product.

Meanwhile, Human Genome Sciences Inc.'s convertibles also fell slightly after the stock got pummeled on mixed data from a drug trial, but market sources say the drop gave gamma-trading investors a chance to take profit.

Amgen Inc.'s recently issued convertibles were also in play on Tuesday, with a buy-side trading source speculating that investors may be selling the longer-term B tranche to buy the A tranche.

Two new deals were announced and are set to hit the secondary market this week. Waste Connections Inc. plans to price a $175 million offering of 20-year convertible bonds before the market opens on Wednesday, while Universal Corp. has a $200 million of perpetual convertible preferred stock lined up for trading to begin Thursday.

Also, Watson Pharmaceuticals Inc.'s 1.75% convertible due 2023 rebounded slightly on Tuesday, trading at 90.875 bid, 91.625 offered versus a stock price of $29. The convertible had fallen on Monday after the company announced a $1.9 billion acquisition of Andrx Corp. Shares of Watson Pharmaceuticals (NYSE: WPI) gained 4 cents, or 0.14%, to close at $29.04 on Tuesday.

Fair Isaac retreats on rival

Fair Isaac's 1.5% convertible due 2023 plunged on Tuesday along with the stock after consumer credit agencies Equifax Inc., Experian and TransUnion LLC unveiled a new consumer credit scoring system.

Minneapolis-based Fair Isaac (NYSE: FIC) develops data-analysis systems for companies, including the Fico credit scoring software used by many lenders.

A buy-side trading source said the Fair Isaac 1.5% convertible was marked at 103 bid, 103.5 offered against a stock price of $38.50 on Tuesday. That was about seven points lower than prices at the start of March. Shares of the Minneapolis-based developer of credit scoring software closed at $39.37, down 6.62% or $2.79.

Equifax, Experian and TransUnion said in a statement Tuesday that they would start to use "VantageScore," a common scale that would meet "market demand for a more consistent and objective approach to credit scoring."

The three credit bureaus previously used their own systems to rate the creditworthiness of consumers, but they said the new VantageScore system will give scores that are almost identical across the agencies. The VantageScores will range from 501 to 990, with 990 being the best score.

A new standard for credit scoring could potentially threaten the current market-leading position of Fair Isaac's Fico system, although it is still not clear how serious of a threat it presents, said a sell-side convertible analyst.

"It depends on how much they derive from that [Fico]," the analyst said. "They also have a number of products and services that they do for financial institutions and other companies. This may have some revenue impact, but there's two ways that it could go - it could be a fairly limited impact, just that the Fico score becomes a part of a new system, but the other thing would be that this could mean financial institutions are going to start diverting other business from Fair Isaac as well."

Until Tuesday's announcement, Fair Isaac's convertible had largely been a quiet issue, the analyst said.

"It's been kind of a sleeping name," the analyst said. "It had been a pretty good, solid credit story, but not really exciting. Not a lot of volatility, not much to do for convertibles."

The analyst said that, on a credit spread assumption of about 140 basis points, the convertibles were still "going to model pretty rich" at 103 bid versus a stock price of $38.50. But the VantageScore news could spark more volatility in the security in the days ahead, he said.

Human Genome slides on test results

Rockville, Md.-based Human Genome Sciences saw its convertible bonds cheapen by about a point Tuesday as the stock got pummeled on mixed data from trials of its hepatitis C treatment.

But a buy-side convertible analyst said the bonds held up better than the stock because the opportunity presented "a nice gamma trading event for the bonds."

Human Genome's 2.25% convertible due 2011 traded at about 96.50 against a stock price of $11.50 early Tuesday, while the 2.25% convertible due 2012 changed hands at 89 points versus the same stock price, said a buy-side source.

Human Genome stock (Nasdaq: HGSI) closed at $10.89 on Tuesday, down $2.78 or 20.34%.

Human Genome, a biotech company, said Tuesday that 12-week data from drug trials showed that its treatment of Albuferon combined with ribavirin worked as well as the current standard treatment when given fortnightly. But for once-a-month doses the treatment did not fare as well.

"The news was not all bad," the analyst said.

The analyst said the convertibles could still fall a point, based on levels in June 2005 when the 2011 maturity securities were trading at about 94 against a similar stock price.

Another analyst said another concern with Human Genome was that its cash position is not as strong as it was two years ago, even though the company is still very cash rich for a biotech company. Human Genome now has only about $570 million in cash, compared to about $750 million in 2004, he said.

"It's all a function here of how you like the credit on this," the analyst said. "If I used 700 bps over swaps, I can get these things basically at fair value."

Still, the volatility of the stock at 55% over 400 days presents a good opportunity for investors, he said. "Seeing how the stock has moved around, I think you could easily realize that 55 vol."

Amgen in play

A buy-side trading source said the recently issued convertible bonds from Amgen were seeing some unusual movements, with the seven-year securities trading slightly higher than the five-years.

Amgen's A tranche 0.125% convertible due 2011 was trading at about 102.6 versus $74.50 on Tuesday, while the B tranche 0.375% convertible due 2013 was trading at 102.85 versus the same stock price, he said.

"I think some people are selling the Bs to buy As," he said. "I don't think it makes sense."

He said he expects the seven-year bonds to come in to slightly below the five-year bonds.

Amgen (Nasdaq: AMGN) is a Thousand Oaks, Calif.-based biotech company. Its shares rose $1.42, or 1.93% to $75.01 on Tuesday.

Waste Connections to price deal

Waste Connections said Tuesday that it plans to price $175 million of 20-year convertible bonds with a coupon of 3.75% and an initial conversion price of $51, a 35% premium over Tuesday's closing stock price of $37.79.

The bonds are expected to be reoffered at 98.5, market sources said. Pricing is expected on Wednesday before the market opens.

There is also a greenshoe option of $25 million.

Citigroup is running the books of the Rule 144A deal, sources said.

Waste Connections, a Folsom, Calif.-based solid waste services company, plans to use the proceeds to buy back $65 million of its own stock. The rest of the proceeds will be used to reduce its borrowings pending the potential redemption after May 7 of its floating rate convertible bond due 2007.

Shares of Waste Connections (NYSE: WCN) closed at $37.79 on Tuesday, up 3 cents or 0.08%.

Universal Corp. to offer preferreds

Also in primary news, Universal Corp. plans to offer $200 million of convertible perpetual preferred stock talked with a dividend between 6.75% and 7.25% and an initial conversion premium between 20% and 25%, market sources said.

Deutsche Bank Securities is running the books.

The Richmond, Va.-based tobacco leaf supplier said it plans to use the proceeds from the deal to repay the outstanding debt on its revolving loans and short-term notes.

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