Convertibles market extends gains; Human Genome, GM, Delta Air Lines, Duke up

By Rebecca Melvin

Princeton, N.J., Jan. 9 - The convertibles market remained buoyant on Monday as stocks extended gains from last week and a rally in General Motors Corp. sent the Dow Jones Industrial Average above 11,000 for the first time since June 2001.

General Motors surged after a Goldman Sachs analyst upgraded GM shares and said the struggling auto giant doesn't face an imminent bankruptcy.

Of the auto giant's three $25 convertible bonds, the shorter dated 4.5% convertibles were most active and jumped 0.82 point, or 3.75%, to 22.69. The 6.25% convertibles were also mentioned in trade at 16.70 versus a share price of $21.625. GM shares closed higher at $22.41, up $1.61, or 7.8%.

"It was pretty busy; most stuff was up," a New York-based sellside desk analyst said of the overall convertibles market.

Most of the gains were on company-specific news and in line with their underlying stocks, rather than having to do with credit events or the convertibles market in particular, he added.

Especially strong were the convertibles of biotechnology companies, which were mostly in line with higher shares. But the convertibles of Human Genome Sciences Inc. were better by about 0.5 point on a hedged basis after the Rockville, Md.-based biotech announced a license agreement with Amgen Inc.

Under the agreement, Amgen bought the rights to develop and market therapeutic products based on the human gene discovered by Human Genome with potential applications in autoimmune diseases, immune deficiencies or suppression and cancer.

"This is an event that may be perceived as a credit positive, or should be," the desk analyst said.

Also higher on Monday were a couple of airline convertibles including the distressed 8% convertibles of Delta Air Lines Inc., which were up a point.

Elsewhere, the convertibles of Tyco International Ltd. was a couple points higher in line with its shares, but credit spreads for the diversified manufacturer widened amid uncertainty related to a potential breakup of the conglomerate.

Also trading were Duke Energy Corp.'s 1.75% convertibles, Juniper Networks Inc. 0s, Reebok International Inc.'s 2s and Motorola Inc.'s 3.5s.

GM strengthens after upgrade

Goldman Sachs analyst Robert Barry upgraded GM shares to "in line" from "underperform" based on expectations that the company will not be forced to file for Chapter 11 bankruptcy protection because of its high liquid assets.

The analyst also said that it appears increasingly likely that GM will be able to sell part of its GMAC unit and that a strike at its No.1 parts supplier, already bankrupt Delphi Corp., will be averted.

In a Bloomberg report GM's chief financial officer said that the GMAC sale process is moving fast.

In addition GM chief executive Rick Wagoner was very visible on Monday at this week's auto show in Detroit. In several different interviews, Wagoner said that bankruptcy is not a strategy that GM is pursuing and that it is unnecessary due to its liquidity, $6 billion cost cutting plan, and new products coming on the market.

Pact lifts Human Genome

The 2.25% convertibles of Human Genome, both the new and the old issues, traded up a couple of points on Monday on news that Amgen has acquired non-exclusive worldwide rights for the development and commercialization of diagnostic products for human use based on the same gene.

According to the terms, Human Genome Sciences will receive an upfront payment and certain annual fees, as well as development milestone payments and royalties on annual net sales for therapeutic and diagnostic products successfully developed and commercialized using such rights.

The 2.25% convertibles of 2012 traded at 83 versus a share price of $10, and the 2.25s of 2011 traded at 88.5 versus a share price of $10.25. The Human Genome shares closed up 32 cents, or 3.3%, up $9.97.

Delta 8s ascend

With word that UAL Corp. launched its bankruptcy exit financing loan and planned to get out of bankruptcy on or about Feb. 1, distressed Delta Air Lines' 8% convertibles were mentioned in trade, up about a point at 24.

UAL Corp has been operating under Chapter 11 bankruptcy protection for more than three years. It obtained an agreement for the six-year exit loan last fall from JPMorgan Chase & Co. and Citigroup Inc., with GE Capital to act as syndication agent.

The loan is to be secured by the airline's existing assets and is comprised of a $300 million revolving credit facility and a loan of as much as $2.7 billion.

Meanwhile a headline on Delta, which has been in bankruptcy court since September, was that the bankruptcy judge heading up the case, judge Prudence Carter Beatty, has taken a two-month medical leave and the case has been reassigned to judge Adlai Hardin.

Renewed interest in distressed airline paper surprised some.

"It seems that a chunk of money has come into the distressed folks pockets. Every name that passes by is being taken except a few. UAL is coming out of bankruptcy so it is a bit different; but with oil back up over $63 a barrel, I think the rally is just cash burning [a] hole in folks pockets," a New York-based distressed trader said.

A Connecticut-based buyside source said that investor interest relates to more supply going out of the market, citing the cessation of operations last week of FLYi Inc.'s Independence Air.

"Independence Air going Chapter 11 takes some supply out of the market. Passenger volume is up, and some costs are being passed through," the buysider said, adding that some airlines such as Continental Airlines and AMR Corp.'s American Airlines are posting some strong numbers.

Asset sale boosts Duke

The 1.75% convertibles of Duke gained 1.5 to 2 points on Monday to 118 bid, 119 offered after it announced that as expected it is selling its North American wholesale power generation assets outside the Midwest.

The Charlotte, N.C.-based energy company said that a subsidiary of private equity firm LS Power Equity Partners is buying the assets for about $1.5 billion.

The buyer LS Power Equity Partners had previously bought a Calpine merchant plant in Pennsylvania, noted independent bond research group Gimme Credit, which also said the news is positive.

Proceeds of the Duke asset sales combined with the contract book acquired by Barclay's Capital will exceed $500 million, the company said in its release.

Duke shares closed up 6 cents at $27.85. On Friday when the Duke convertibles were also in trade, they were seen at 116.5 bid, 117 offered, versus a share price of $27.45.

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