Convertibles mostly extend losses a second day; biotechs waver, but some energy issues see more gains

By Rebecca Melvin

Princeton, N.J., June 24 - Convertibles were mostly lower for the second consecutive day Friday, following stock markets lower amid concerns over uncomfortably high oil prices.

Airline and automaker convertible paper was down and many biotechnology convertibles refused to be comforted despite news from that sector. But some energy sector companies, like Halliburton Co., saw their convertibles trade up.

Also bucking the trend was a new issue from solar power company Evergreen Solar Inc. Its $75 million of 4.375% convertibles, pricing on the cheap end of guidance, rose 2 points on the day.

A second new issue from real estate investment trust GSC Capital Corp. of $85 million pre-IPO convertibles carried a coupon of 7.25%. The deal priced at par but didn't trade, a syndicate source said.

A New York-based sellside desk analyst echoed the sentiments of many when he said, trading activity "wasn't bad this morning; but it really died down this afternoon."

Some attributed the slow afternoon to market participants lured by the promise of a warm, sunny weekend. But one New York-based sellside trader suggested the quieting was due to a Russell index adjustment.

Institutional investors were adjusting their portfolios to reflect the annual rebalancing of the Russell indexes, contributing to some volatility in the markets, he said.

Recent issues trade

Cephalon Inc. and Invitrogen Inc., both issuers of new convertible deals this month, saw trades of their paper on Friday. Frazer, Pa.-based Cephalon priced its $800 million of 2% convertibles on June 2; while Carlsbad, Calif.-based Invitrogen priced $350 million of 3.25% senior notes on June 14.

Also prompting Cephalon convertibles was news that the drug developer struck an agreement with Alkermes Inc. to jointly develop, market and share future profits of an investigational drug to treat alcohol dependence, called Vivitrex.

Cephalon will pay Alkermes $160 million cash under the agreement, plus $110 million if Vivitrex is approved by the Food and Drug Administration.

Alkermes, a Cambridge, Mass.-based drug discovery company, submitted its new application to the FDA in March and said the drug has an expedited review.

Cephalon's 2% convertibles due 2015 traded Friday and were at 97.25 bid, 97.75 offered near the end of the day, according to a syndicate source. Shares of Cephalon closed down 23 cents, or 0.6%, to $38.21.

No trades were reported of Alkermes' 2.5% convertible due 2023 or its 3.75% issue due 2007. Alkermes shares closed up 11 cents, or 0.84%, to $13.21.

Invitrogen's 2% convertible due 2023 traded higher Friday at 128.75, up from 126 earlier in the week. Its 1.5% convertible due 2024 moved up to 95.579 from 93.50 and its 2.25s due 2006 traded at 101, compared with 99.50 earlier in the week, according to Trace quotes. The biotechnology company's shares rose $1.22, or 1.5%, to $82.55.

A couple of other small biotechs mentioned in convertibles trade Friday included Bridgewater, N.J.-based Enzon Pharmaceuticals Inc., a drug discovery company, that saw its 4.5% convertible due 2008 tick up to 88 bid, a trader said, while its stock lost 18 cents on the day, or 2.76%, to close at $6.35.

NPS Pharmaceuticals Inc., a Salt Lake City, Utah-based biotechnology company, saw its 3% convertible due 2008 lifted to 84.125, a trader said. Its stock dropped nine cents, or 0.77%, to close at $11.63.

Solectron trades lower

Solectron Corp. convertible paper traded lower Friday after the contract electronics manufacturer posted late Thursday a slightly higher net loss on lower sales amid weaker demand in its networking and consumer electronics markets.

Its net loss, including restructuring charges, for the third quarter ended May 31 was $67 million, or seven cents a share, compared with a net loss on continuing operations of $65 million, or eight cents a share, a year earlier.

Sales fell 14% to $2.60 billion from $3.03 billion in the same period last year.

The Milpitas, Calif.-based company also said it expected flat to lower sales for the fourth quarter ending in August, and president and chief executive Mike Cannon told investors during a conference call: "We remain in an environment of cautious IT [information technology] spending and, as such, our fourth-quarter guidance reflects softer end-markets."

Solectron's 0.5% convertible traded Friday at 75.25, down from a recent trade of 76.61, according to a desk analyst.

Pressure builds for airlines

Convertibles of airline companies were seen a point lower, but little traded on Friday, two traders said, as turbulence remains in the outlook for the sector. On Friday, Morgan Stanley downgraded shares of Delta Air Lines Inc. to underweight from equal weight, telling clients that savings achieved by the company last year are being overwhelmed by the current situation with oil prices.

"We continue to believe that management is working aggressively to avoid a bankruptcy. However, with oil prices high and liquidity resources limited, we believe that the risk of bankruptcy is rising despite significant non-fuel cost reductions," said analyst Douglas Runte.

Runte also noted that available liquidity options for the company are limited since a substantial amount of all of its assets are encumbered.

Shares of Atlanta-based Delta slumped 20 cents, or 5.2%, to $3.65. No trades of its convertibles were reported.

The 4.5% convertible of AMR Corp., parent company of American Airlines, traded at 76.75 on Friday, compared with a close Thursday of 79.332 bid, 79.832 offered, traders said.

Oil rally continues

Halliburton's 3.125 convertible and some energy paper extended gains, buoyed by oil prices that are making policy makers and many investors jittery.

Crude had its highest ever close Friday amid speculation and heavy demand for distillates and gasoline.

The August crude contract closed up 42 cents to $59.84 a barrel on the New York Mercantile Exchange. Prices have been rising since Wednesday when an Energy Department update showed unexpectedly strong U.S. demand for distillates, including heating oil and diesel.

The report showed a higher-than-expected 7% jump in demand for distillates compared with a year ago, and a 3.4% jump in jet-fuel demand.

Houston-based Halliburton's 3.125% convertible was up to 139.50 from a close of 138.504 bid, 139.004 offered Thursday, sources said. Shares of the oil services company slipped five cents, however, to $48.12.

Solar more appealing

Another sector that tends to rise with higher oil prices is solar power. Evergreen Solar priced its $75 million of seven-year convertible subordinated notes at par to yield 4.375% with a 20% initial conversion premium on Friday.

The notes, sold via bookrunner SG Cowen & Co., priced at the cheap end of guidance, which was for a 3.875% to 4.375% coupon and a 20% to 25% initial conversion premium.

The deal has a $15 million greenshoe.

The new issue traded up to 102.50 bid, 103.00 offered early in the day before closing off slightly at 102, according to a syndicate source.

The Marlboro, Mass.-based solar power company closed off its highs for the day, but up 3.1%.

Evergreen's was the second solar power deal this week. The other was a €45.3 million deal of 4.5% convertibles, with a 33% initial conversion premium, issued by Germany's Solon AG für Solartechnik. The deal was offered in the convertibles market in London.

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