BearingPoint suffers 30-point-plus plunge; Lazard terms emerge; Transkaryotic deal slams hedges

By Ronda Fears

Nashville, April 21 - A spate of ill-boding news in a handful of convertible names Thursday overshadowed the rally in the broader markets, which did help to improve overall moods among players. Caution still appears to the watchword, however.

"I am cautious, but I like tech and some financials, [am] quagmired in retail, worried about materials and gaming, and cannot decide on homebuilders," said one multi-strategy fund manager, in an effort to paint his broader view of the markets. "Autos trade on sentiment so hard to gauge their value."

BearingPoint Inc. was a particularly sore spot for convert players as news emerged of perhaps a more troubling state of affairs at the consulting firm than when it delayed filing its 2004 10-K at the Securities and Exchange Commission earlier this year. On top of that news, which pounded the two existing converts as well as the underlying stock, the company trotted out a private placement with much cheaper terms.

"At first, we thought the late filing was no big deal. There have been a boatload of delays" because of more stringent reporting requirements to do with accounting safeguards, said a sellside desk analyst. "Now it looks like there's more to it, maybe some really bad news. The bonds were just slaughtered."

Lazard Ltd. is in the market with a more traditional convertible, but there is a long roadshow ahead. The three-year mandatory, pricing alongside the initial public offering May 5, was being talked with a 6.25% to 6.75% dividend and 20% to 24% initial conversion premium.

Despite a strong of disappointing earnings from the airline sector, including a self-admitted disappointment Thursday from Delta Air Lines Inc., virtually all the carriers' convertibles got a lift from the underlying stocks. However, convert traders still reported that not a lot of that paper has been trading this week.

Transkaryotic Therapies Inc. shares took off sharply on news of a $1.6 billion all-stock buyout from Shire Pharmaceuticals Group plc and that put a short squeeze on hedge funds holding its 1.25% convertible. Moreover, Standard & Poor's credit analyst Arthur Wong said in a special report Thursday that there are lots of mixed signals in the biotech and drug sectors.

"Big Pharma faces new pricing pressures, not only from the uncertainty created by the implementation of the Medicare drug benefit in 2006, but also from the importation of drugs from countries with lower prices," Wong said. "In addition to major patent expirations, some companies also face product liability litigation, and others are struggling with manufacturing compliance."

Ford Motor Co. continued to outpace General Motors Corp. on Thursday but both credits were still in a tightening mode. Following results for first quarter, in which Ford posted a $1.2 billion profit to GM's $1 billion-plus net loss, there has been considerable buying in the Ford converts. GM issues also have been on the rise in recent sessions but not with a lot of traffic.

BearingPoint under pressure

News that BearingPoint would miss the extended deadline to file its 2004 10-K annual report at the SEC and a warning about potential funding shortfalls in addition to negative cash flow projections, which triggered violations of its bank covenants and sparked credit downgrades as well as several downgrades to the stock, sent its securities in a freefall Thursday.

The consulting firm, formerly KPMG Consulting Inc., was in the market with a $250 million convertible talked with a 4.25% to 4.75% coupon and 25% to 30% initial conversion premium, and buyside market sources said the Section 4(2) deal - expected to trade under Rule 144A after pricing after Thursday's close - might have to be reoffered below par to move it.

BearingPoint shares were down around 40% at one point in the session to $4.65 but got a bounce during the afternoon and closed off 32%, or $2.49, at $5.28. A whopping 67 million shares changed hands on Thursday, versus the three-month running average of roughly 1.75 million shares.

The BearingPoint 2.5% and 2.75% convertibles trade pretty closely to each other and both plummeted more than 30 points in trading Thursday, traders said. The last trade reported was at 64, compared with a trade Wednesday at 96, one sellside trader said.

Credit, equity analysts voice worries

At least three downgrades to the stock - by JPMorgan, Merrill Lynch and KeyBank - also followed the news from the company's late-Wednesday filing at the SEC as it suggested the situation at BearingPoint was worse than earlier thought when the company requested an extension to file its 2004 financials.

"For some time now we have viewed BearingPoint as a turnaround story requiring patience," JPMorgan analyst Tien-tsin Huang said. "Based on the latest information, we have less visibility into the duration of the turnaround and believe that the rewards no longer outweigh the risks."

Moody's Investors Service cut BearingPoint's existing convertibles to B3, citing the company's announcement that it will be unable to meet the April 29 extended filing requirements for its 2004 10-K amid issues of concern about additional financing to support operations through the end of 2005.

Standard & Poor's cut the converts to B-, noting that BearingPoint cautioned it could still run out of money to run the business. Also, BearingPoint expects losses for first quarter and 2005, with cash flows negative.

BearingPoint signals mixed

Most of the action in BearingPoint's converts was one-way with holders bailing out right and left amid a zero-tolerance attitude toward the risk associated with SEC investigations, traders said. One sellsider remarked, "Maybe we find out it's just a house of cards." Yet, there were mavericks willing to snatch up the paper on the downdraft.

"The market has no tolerance for risk - especially for investigations (AIG, CBH etc)! BE just blew up anyone left in the name," said one fund manager. In addition to the new deal pricing with cheaper terms, he added, "The existing [BearingPoint converts] now have YTPs north of 9% alongside a new convert put in front of you!

"I'm wondering if I want to buy these and then see next issue with another put in front of me! [It's an] ordeal in a landscape filled with more worthy ordeals!"

In mid-December, BearingPoint sold the 2.5% and 2.75% converts and replaced its then-current credit facility with a new $400 million senior revolving credit facility. Proceeds from both transactions are earmarked to repay its $220 million of senior notes and its $135 million previous revolving credit facility.

Proceeds from the new deal will go to collateralize and/or replace letters of credit under its existing credit facility, which may involve terminating the credit facility, to support letters of credit or surety bonds otherwise in respect to its state and local business.

Despite the news, one fund manager said, the plunge in BearingPoint's converts looked like a buying opportunity. "Don't get mad - get a higher return!," he said. "Buy!"

Transkaryotic hedges crushed

Convertible arbs involved with Transkaryotic Therapies were hammered by the Shire deal, as the stock shot up more than 15% in reaction to the surprise, sending them scurrying to cover short positions - and the fallout amounted to a sharp hit to the 1.25% converts.

Transkaryotic shares closed up $4.769, or 15.67%, to $13.209 on news of the deal, which calls for U.K.-based Shire to buy the Cambridge, Mass.-based biotech for $1.6 billion in an all-stock deal that represents a 44% premium to Transkaryotic's stock price over the last four months.

A sellside analyst said the deal combines disparate parts of the drug industry, as Shire has focused on mid-size specialty pharmaceutical brands and Transkaryotic has tried to build a business on biotech drugs with broader targets.

It is good news for Transkaryotic, he said, but it "just caught the arbs off-guard."

Transkaryotic is probably more well known, he said, for its court battles with Amgen Inc. and Genzyme Inc. over patents. The Shire deal, he added, underscores the increasing lack of distinguishing line between biotech firms and the more traditional drug industry.

Biotechs a bag of mixed greens

While the pharmaceutical industry has not been for want of negative news lately, including sudden market withdrawals, lackluster new product pipelines, manufacturing woes, drug liability litigation, and possible lower drug prices due to the Medicare drug benefit, S&P released a special repot Thursday saying it believes that painting the industry outlook with a broad brush may be misleading.

In the report, the rating agency breaks down each category of the pharmaceutical landscape, noting that while the Big Pharma sector has a negative outlook, the outlook is stable for other categories like specialty drugs and biotechs.

"Big Pharma faces new pricing pressures, not only from the uncertainty created by the implementation of the Medicare drug benefit in 2006, but also from the importation of drugs from countries with lower prices," S&P's Wong said. "In addition to major patent expirations, some companies also face product liability litigation, and others are struggling with manufacturing compliance."

Meanwhile, pharmacy benefit managers enjoyed a strong year in 2004. All three of the major independent PBMs generated cash well in excess of current needs and repaid significant chunks of debt. Standard & Poor's expects this strong performance to continue through 2005, as key trends remain positive for the industry.

Though S&P's outlook on the specialty pharma sector is stable, the rating agency stressed that individual company outlooks are as diverse as the industry players themselves.

Delta horizon cloudy again

Delta Air Lines Inc. basically rode the wave lifting the broader market, but convertible players were standing back in a holding pattern as many saw clouds reforming.

The Atlanta based carrier, which has wavered around bankruptcy levels for months and months, reported first-quarter results Thursday that were admittedly disappointing to its management. Convert traders did not report a lot of traffic in the converts but both issues were market up on a rise in the underlying stock.

Delta's 8% convert was quoted up 0.5 point to 40 bid, 41 offered and the 2.875% convert up 1 point to 37.5 bid, 38 offered, while the stock climbed 21 cents on the day, or 5.75%, to close at $3.86.

"It's a matter of time before they file [bankruptcy]. It might be a year. I hate this name," said a sellside convert trader.

For first quarter, Delta reported a net loss of $1.07 billion, or $7.64 a share, wider than the net loss of $383 million, or $3.12 a share, in the year-ago period. Excluding special items, the March loss was $684 million, or $4.89 a shares, versus a net loss of $598 million, or $4.86 a share, in first quarter 2004. Operating revenues increased 3.3%, while passenger unit revenues decreased 2.9% compared to year-ago levels.

"Today's financial results clearly are disappointing," said Gerald Grinstein, chief executive of Delta.

"Record-breaking fuel prices [up 54% year-over-year in first quarter] are masking the many crucial, large-scale, core initiatives our airline implemented during the quarter. The issue is simple: including fuel, Delta is not on plan, but excluding fuel, we are better than plan."

Grinstein added that as competitive and cost pressures continue to grow, Delta is aggressively pursuing opportunities to further curb its cost structure and maintain liquidity levels, with unrestricted cash standing at $1.8 billion as of March 31. For example, Delta said it's talking to lenders about amending covenants because of fuel price hikes.

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