Convertibles mixed, new deals at center stage

By Ronda Fears

Nashville, Tenn., Feb. 27 - New deals took center stage Wednesday, convertible traders said, as the market was sloppy and mixed on divided pulls from stocks. Overnighters from Pride International and Abgenix were pressured out of the gate but nothing dampened the enthusiasm for Gap, including tighter terms and credit downgrades by Moody's and Fitch. The upcoming General Motors Corp. slipped a bit in the gray market on fear that price talk also would be tightened, but that never happened.

Elsewhere in trading, ImClone Systems Inc. shot up on news that it appears following a meeting with the FDA that it may get approval to sell the cancer drug Erbitux without having to launch an entirely new round of tests. WellPoint Health Networks Inc., however, fell sharply after the company disclosed a big block sale of stock by an institutional holder. And traders were anticipating a possible negative reaction to Agilent Technologies Inc.'s news after the close that its chief operating officer resigned, although the issue was higher on Wednesday.

"It was kind of wild today, what with all the new paper. Trading was heavy but the market was really sloppy," said the head trader at a major investment bank in New York.

"The gray market is hopping. It was interesting to hear the GM issues were lower thinking that the terms would be revised. Nothing was stopping Gap, though, that's a hot one. As for the secondary, it was just sloppy. A lot of the tech names were moving up because of the Robbie Stephens conference, but there probably were more downers in the market overall."

GM's $3 billion deal didn't see any change to the price talk, but both tranches of the new deal slipped about 0.25 point in the gray market, traders said. Both are only bid up about 0.25 point from issue price, however. GM shares were lower, dropping $1.17 to $53.77. The deal doesn't price until after the close Thursday. Both tranches of the deal are estimated about 4.5% to 10% cheap, using a credit spread of 325 to 350 basis points over Treasuries and 30% volatility in the stock, sources said.

"It's funny, GM was bid down because the market was assuming that the price talk would be revised but the price talk was revised on Gap, and by quite a bit, and it still went even higher," said a convertible trader at a hedge fund in New Jersey.

Indeed, Gap's $1 billion deal is now expected to yield 5.75% to 6.0% with a 25% to 30% initial conversion premium, compared with original guidance that put the yield at 6.0% to 6.5% and initial conversion premium at 22% to 25%. Also just before pricing, Moody's rated the new deal at Ba3 and lowered Gap's senior unsecured bonds to Ba3 from Ba2, and Fitch assigned a BB- rating to the new convertible and cut its senior unsecured rating for Gap to BB-.

Even with the new price talk, sources said the Gap deal is about 5.75% to 9% cheap assuming a credit spread of 700 basis points and 50% volatility in the stock. Thus, interest was not dampened at all and market sources said it would be no surprise if the Gap deal got upsized. The issue kept going higher in the gray market even after the events of the day, and was quoted just before the closing bell at 2.625 to 3 points over par in the gray market. Gap shares were down $1.15 to $12.40.

Pricing along with Gap after the close was Adaptec, returning to the convertible market with $250 million of five-year subordinated notes talked to yield 3.0% to 3.5% with a 28% to 32% initial conversion premium. Sources said the enticing kicker was the three years of interest payments guaranteed with Treasuries. The issue is about 3.5% to 7.25% cheap, assuming a credit spread of 625 basis points and 50% volatility in the stock, sources said. Adaptec's old 4.75% convertible due 2004 was quoted lower by 3 points to 86 bid, 87 offered with the stock down $2.02 to $11.61.

New deals slipped a bit in the immediate aftermarket, traders said, as buyers flipped the paper to buy the newest of the new deals.

"Sometimes flipping can really backfire. The overnight deals rear up and bite you while you're not looking, so you have to get rid of something you just bought because you've got an order for the deal coming tonight," said a convertible trader at a hedge fund in Connecticut. "With Abgenix, some news popped up about a writedown of some sort and it looks like a lot of people just bailed out."

Abgenix's new 3.5% convertible subordinated notes due 2007, which priced with a 15% initial conversion premium, was quoted closing at par but traders said it went as low as 98 during the session as the biopharmaceutical company's stock closed fell $3.38 to $20.60.

Abgenix said in an SEC filing Wednesday that it may take a charge against earnings possibly by next quarter on the declining value of its investments in CuraGen Corp. and ImmunoGen Inc., but did not quantify on the amount of the charge. The biopharmaceutical company purchased $15 million of CuraGen stock in December 1999 at $17.90 a share, and another $50 million in CuraGen shares in December 2000 for $34.69 a share, the filing said. The company also said it bought $15 million of ImmunoGen stock in September 2000 for $19 a share. On Wednesday, CuraGen shares closed at $16.69 and ImmunoGen at $11.28.

In the secondary market, traders said ImClone and WellPoint were hot spots at both ends of the spectrum.

In response to inquiries from investors, WellPoint Health Networks announced that it has been informed that The Missouri Foundation for Health sold approximately 2.77 million shares of WellPoint stock that it had received in connection with the merger of RightCHOICE Managed Care Inc. in January to a large financial institution. The foundation received 4.8 million shares as a result of the merger. WellPoint has 72.2 million shares outstanding.

It sparked a huge selloff and WellPoint's 0% convertible due 2019 (Baa2/BBB-) lost ground with the stock. The convert was quoted down 2.125 points on the day to 86.625 bid as the stock fell $4.34 to $121.10.

ImClone moved the other direction, however, after suffering a sharp falloff since yearend 2001 when it learned from the FDA that its request for approval to market the cancer drug Erbitux was declined, which sparked several stockholder suits and a Congressional inquiry into possible misconduct. But late Tuesday, ImClone said that after meeting with the FDA, it appears that ImClone and its partner Bristol-Myers Squibb could win clearance to sell Erbitux without having to launch an entirely new round of testing.

The ImClone 5.5% convertible due 2005 climbed 6.5 points on the day to 76 bid, 77 offered and the stock rose $5.01 to $20.53.

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