Sonic, CompuCredit edge higher; Doral Financial surges amid rumors; Protein Design gains

By Rebecca Melvin

Princeton, N.J., Nov. 18 - The convertibles market was active in early trade Friday, with players involved in two new issues that edged higher despite lackluster performance of their underlying shares, market sources said.

The convertibles of Doral Financial Corp. surged amid takeover speculation, which was quelled after the close by a press release from the company saying it knew of no "relevant events or material information" that would have prompted the market activity.

Synaptics Inc. and Protein Design Labs Inc. also gained in trade on Friday, traders said, and General Motors Corp. rebounded for a second consecutive day after reports that details on the company's previously announced restructuring, including job cuts, could emerge as early as next week. GM's 5.25% issue, which was the most actively traded of GM's convertible bonds, was higher by 3%.

The convertibles of Calpine Corp. remained little changed after losing 1.5 points on Thursday when a court case was underway regarding restricted assets from a recent Calpine sale. The company is seeking to unfreeze the assets so that it can continue a debt reduction initiative embarked on earlier this year.

The judge's decision after arguments ended on Thursday was to mull the case over for a while rather than issue an immediate decision. The 4.75% Calpine convertibles, which were the most actively traded on Thursday, traded unchanged on Friday at about 35.

Sonic offers coupon step up

The new 4.25% convertibles of Sonic Automotive Inc. - at least they are 4.25% for the time being - edged higher in trade after pricing at par and being reoffered at 98.125.

The 4.25% coupon will be boosted to 4.75% after year five of the 10-year bonds, which mature in 2015.

Sonic priced $150 million of convertible senior subordinated notes at par to yield 4.25%, and later 4.75%, which an initial conversion premium of 22%, according to a syndicate source.

The bonds came at the cheap end of talk for the coupon, which was 3.75% to 4.25%, and toward the cheap end of talk on the initial conversion premium, which was 20% to 25%.

Joint bookrunners for the registered deal were Banc of America Securities LLC, J.P. Morgan Securities Inc. and Merrill Lynch & Co.

"They obviously had a hard time marketing this," said a Connecticut-based buysider, who was not involved in the deal. "Not much volatility and who knows how the GM situation will affect their business."

Other sources concurred that the roiling of GM stock and bonds this week wasn't a good backdrop for the new issue.

Charlotte, N.C.-based Sonic is an automotive retailer, operating 174 franchises and 38 collision repair centers in the United States.

Once the bonds were reoffered, however, they edged up slightly, with trading seen late in the afternoon at 98.25 bid, 98.375 offered, according to a buyside source. The close was called 98.625 bid, 98.875 offered by a syndicate source. Sonic shares ended unchanged on the day at $19.79.

One sellside source said that the bonds were still expensive using a credit spread of 500 basis points over Libor and 25% volatility.

The notes are non-callable for five years, with a put in year five. There is an over-allotment of up to an additional $10 million.

Net proceeds will be used to repay a portion of its revolving credit facility, which may be re-borrowed, and for general corporate purposes, including acquisitions.

Sonic also intends to use a portion of net proceeds to pay for a convertible note hedge and warrant transaction with affiliates of certain of the underwriters in connection with the offering.

CompuCredit convertibles edge higher

CompuCredit Corp. priced $300 million 30-year convertibles at par to yield 5.875% with an initial conversion premium of 20%.

In the aftermarket, the convertibles edged higher to 100.5 bid, 101 offered, according to a syndicate source. The consumer credit company's stock fell $2.03, or 4.61%, to $42.00.

The Rule 144A offering was a bought, overnight deal sold via bookrunner Bear, Stearns & Co. Price talk was for a coupon of 5.875% and an initial conversion premium of 20% to 25%.

Concurrently with the offering of senior convertible notes was an offering of up to 6.624 million shares, which were sold via Bear, Stearns International Ltd. as principal and Bear Stearns as agent. The shares were borrowed from CompuCredit under at 30-year share-lending agreement aimed at facilitating hedging transactions by holders of CompuCredit convertible notes.

The new 5.875% convertibles have a greenshoe of $50 million. They are non-callable for three years and there are no investor puts.

Proceeds from the convertibles are expected to be used to fund acquisitions and for general corporate and working capital purposes.

CompuCredit is a consumer credit and financial services company based in Atlanta.

Doral zooms amid takeover rumors

The convertible preferreds of Doral Financial zoomed up 20 points on Friday as its underlying shares spiked for a second consecutive day amid speculation that the troubled residential mortgage lender may be taken over by Popular Inc, the parent of Banco Popular.

Also on Friday, some analysts upgraded Puerto Rico-based Doral, including Cohen Bros., which upgraded Doral to "hold" from "sell," saying mortgage lending is the only banking segment that Popular doesn't dominate in Puerto Rico.

Doral shares surged on Friday by $1.37, or 15.29%, to $10.27. But they reversed course in after-hours trading after the company said it "knows of no relevant events or material information causing the unusual activity in the company's common stock on the New York Exchange during the last two days."

The company said that it was commenting on the rumors, which is against its policy, at the request of the New York Stock Exchange.

Doral Financial made the pages of this newsletter late last month after the company unleashed a slew of bad news, not the least of which was further delays in getting its financial statements out, which points to possibly bigger accounting issues than originally expected.

Doral also cut its common dividend by 56% and said that a regulatory probe of its accounting practices had been upgraded to a formal investigation by the Securities and Exchange Commission. That news, which hit Oct. 26, sent its preferreds lower at that time by 10 to 15 points.

Doral is restating its 2000 through 2004 financials, after deciding to write down $600 million to fix its accounting for floating-rate, interest-only securities called "strips."

The Doral 4.75% preferreds traded early Friday at 147 versus a stock price of $9.75. But shares ended higher at $10.27.

Protein Design gains on Tysabri news

News that the U.S. Food and Drug Administration granted a priority review for the multiple sclerosis drug Tysabri, which is jointly developed by Irish drug maker Elan Corp. plc and Cambridge, Mass.-based Biogen Idec Inc., sent the convertibles of Protein Design Labs higher.

Fremont, Calif.-based Protein Design stands to receive a royalty stream from Biogen and Elan on Tysabri sales, traders said.

Protein Design Labs' 2.75% convertibles due 2023 gained 5 to 7.5 points outright, or about 3 points on swap, to about 145.5 bid, 146 offered, while the stock added $1.40 on the day, or 5.3%, to $27.80.

Elan and Biogen also have convertibles, but they were not mentioned in trade. Shares of the two companies gained in the wake of the Tysabri news. But several players, who cheered the development, said they were hedging their bets heavily with regard to Elan because Tysabri is a more crucial product to Elan than to Biogen, as Biogen has several other products in its pipeline.

The FDA granted Tysabri a priority review, saying a decision about the drug returning to the U.S. market would be made in six months rather than the standard 10 months. Elan and Biogen shares have spiraled since February when the two companies took Tysabri off the market after the drug was linked to three cases of progressive multifocal leukoencephalopathy, or PML, a rare and usually fatal brain disease. The FDA also ordered the drug off the market.

In November 2004, the FDA had approved Tysabri for multiple sclerosis.

Following the February event, a subsequent review of several thousand people who took Tysabri in clinical trials produced no more confirmed cases of PML, leading to the FDA's review decision.

"First, this is a very nice move given the news, very nice," said a buyside market source holding Elan shares. "Second, the strength here suggests to me that there may be some credence to the 'no advisory panel' for this review."

Another buysider at a hedge fund said he liked the Elan story and thought options were the best way to participate - as long as the price is right.

"The best way to play from here is to long the Jan '06 calls, any price would do as long as it is below 60. Of course, the higher the strike, the cheaper the premium. But 60 itself is cutting too close and you have to buy a load of it to make a lot," he said.

Elan stock was quoted up $0.41 or 3.98% at $10.71 on the New York Stock Exchange.

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