New deals provide stimulation late, after very quiet session

By Ronda Fears

Nashville, Nov. 12 - It was a quiet session - until the bell rang, that is, when Teva Pharmaceutical Industries Ltd. launched a $375 million new deal for pricing early Wednesday.

Ligand Pharmaceuticals Inc. also announced a $135 million deal expected in the next few weeks.

"This is welcome news on a very quiet day," said a dealer.

"We really need some new paper in our market. Trading is so limited in scope that it's really difficult to get a grasp on where our market stands. You really can't make a broad statement about the market these days."

Stocks managed to move to higher ground but much of the convertible market was seen lower.

El Paso Corp. had a noteworthy drop after a downgrade by Standard & Poor's, putting its senior paper a notch away from junk territory. S&P cited debt service concerns on lower cash flow.

Credit spreads widened "considerably," reflecting positioning for a potential war with Iraq, according to a derivatives trader.

"There was some profit taking at the long end due to the war risk," the trader said.

"With so much uncertainty near-term, like if or when or how long a conflict would last, hedge funds are getting positioned for a flight to quality" by buying Treasuries now.

But market watchers have noted signs recently that corporate bond spreads are coming in.

"In response to the Fed's clearly signaled intention to remain on hold from here, the yield curve has since flattened from the long end," said Banc of America senior economist Peter Kretzmer in a report Tuesday.

"Wide corporate bond spreads, reflecting concerns about profits and creditworthiness along with war and corporate accounting-related risk premia, also have recently begun to narrow."

The U.S. economic recovery remains hesitant, Kretzmer conceded, however.

The financial markets are moving valuations lower, he said, due to lower levels of consumer and business spending. That is countered, he added, by the so-called stimulative forces of monetary and fiscal policy.

Convertible market participants are watching plans for tax legislation that could impact the market, now that President Bush has a republican majority in Congress.

A convertible trader at a hedge fund in New Jersey noted a report by a sell-side shop Monday outlining the potential impact of the elimination of double taxation on corporate dividends.

It would be a negative prospect for secondary prices as well as new issues since the tax break would encourage higher dividends, whereas convertible players lately have been looking for dividend reductions.

In trading activity Tuesday, traders said it was very slow.

"It was very, very quiet," said a buyside trader.

"There were a few mandatories trading around, as many went ex-dividend today. Other than that, it's been boring."

El Paso saw good two-way action, according to one dealer, as high-yield buyers emerged for the converts.

Some El Paso bonds already trade on high-yield desks and a junk trader said those issues were lower by 5 to 6 points on the downgrade.

El Paso's convertibles were about 1 point lower, with the 0% convertible due 2021 at 29.5 bid, 30.5 asked. The 4.75% convertible preferred was at 26 bid, 26.5 asked and the 9% mandatory was at 26.1 bid, 26.3 asked.

El Paso shares closed down $1.02 to $26.28.

There was a bit more action after the close, as Teva launched its deal via book-running lead manager Lehman Brothers and co-manager Salomon Smith Barney.

Teva was pitching $375 million of 20-year convertible notes talked to price at a yield of 0.375% to 0.625% with an 18% to 22% initial conversion premium.

Final terms will be set early Wednesday.

Sources put the new deal, at the midpoint of talk, anywhere from 0.5% cheap to 2.15% cheap.

Traders quoted it at issue to bid 0.25 point over par.

Teva shares closed up 70c to $72.71, as the deal was not launched until after the close.

Teva's 0.75% convertible due 2021 was quoted up 0.75 point to 106.125 bid, 107.125 asked and the 1.5% convertible due 2006 up 1.5 points to 108.125 bid, 108.875 asked.

Also after the close, Ligand Pharmaceuticals Inc. announced plans to offer $135 million of five-year convertible subordinated notes in the Rule 144A market sometime in the next several weeks.

The drug research and development company said it intends to use proceeds to complete the restructuring of its Avinza license and supply agreement with Elan Corp. plc, to buyback Ligand shares owned by Elan and for general corporate purposes.

Ligand also reported earnings Tuesday.

The company posted a net loss for third quarter of $7 million, or 10c per share, compared to a net loss of $7.7 million, or 13c per share, for third quarter 2001 with total revenues of $25.3 million, up from $19.2 million.

An earnings call is scheduled for Wednesday at 8:30 a.m. ET.

Ligand shares closed up 24c to $7.14.

Those deals more than offset Goodrich Corp. taking its potential mandatory deal off the table.

Goodrich on Monday said it would sell $200 million of common stock to fund its $1.5 billion acquisition of TRW Inc.'s aeronautical systems unit. At one point, the company also planned a convertible offering along with the stock sale.

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