AtheroGenics ends at 100.5; Western Wireless steady; Cap Gemini pressures techs

By Ronda Fears

Nashville, Jan. 7 - The convertible market's first new deal of the New Year - from AtheroGenics Inc. - was well received and broke well over par but eased back to close out the day just over par.

"It wasn't a gang-buster deal really, because it was so small, but it traded nicely," a buyside trader who bought into the new AtheroGenics convertible said

AtheroGenics, an Atlanta-based biotech firm, upsized the deal to $175 million from $125 million, and printed it with a 1.5% coupon. Sellside traders said it traded as high as 103.25 on Friday but ended at 100.5 bid, 101 offered with the underlying stock closing down 19 cents, or 0.899%, at $19.01.

Market participants are hoping issuance picks up soon, and many say merger activity will again be an important driver for the primary market. But, there could be problems with that theory.

"M&A is always something that drives new issues, and we've been seeing a big surge in M&A activity," said a convertible manager in New York. "But, for the same reason we're seeing more M&A there may not be a big portion of new deals - that corporations are flush with cash."

There was no further news on the speculation of a $4 billion takeover of Western Wireless Corp. by Alltel Corp. Those convertibles were steady while still active Friday in what traders otherwise described as very slow activity.

"They [Western Wireless convertibles] are hanging in there" at about 7 points over parity, a convert trader said. "There was still quite a bit of activity in the name, they just traded sideways."

Meanwhile, Alltel's 7.75% mandatory, a $1.4 billion issue that settles in May 2005, was a tad higher at 51.75, he said.

AtheroGenics breaks higher

AtheroGenics's deal sold an at the aggressive end of price talk for a 1.5% to 2.0% coupon and 30% to 35% initial conversion premium and still traded well north of par with orders running heavy. The trade at 103.25 was even better than the last gray market level, 102.75, seen before pricing.

"You've already heard it: It was a vol play," said a buyside convertible trader at an outright fund. "But there were plenty of outright players, from what I hear. After all, there is virtually no borrow on the stock. We just like the story, and the terms are not too offensive."

The Atlanta firm, which concentrates on chronic inflammatory diseases such as clogged arteries, arthritis and the like, also has a 4.5% convertible due 2008 that is trading deep in the money.

Sellside analysts put the new AtheroGenics convert around 1% to 1.5% cheap at the middle of indicative terms but at the tightest end of guidance. Where it priced, one analyst estimated it 1.3% rich.

Cap Gemini credit cut to junk

French IT services firm Cap Gemini on Friday disputed remarks by Standard & Poor's in its downgrade of the credit into junk territory at BB+ from BBB-. Nevertheless, on the strong negative comments by S&P, which some onlookers said could be a warning of more cuts to the credit rating, Cap Gemini spreads were blown out in a heavy sell-off.

The Cap Gemini "CDS have widened and the shares also fell a bit, so the CBs traded down quite a bit," a sellside source in London said. "They were fairly active today following the news."

Cap Gemini's 2.5% euro convertible due 2010 fell 0.375 point to 49 bid, 49.25 offered.

Five-year credit default swaps on Cap Gemini expanded by as much as 30 basis points, a trader in London said, but rallied back to end Friday wider by 15 basis points at 116 basis points over Libor on the bid side, with the offer at 121 basis points over.

Cap Gemini shares dropped €0.29, or 1.23%, to end at €23.38 on the Paris exchange.

"Cap Gemini expresses its strong disagreement with this opinion, given that during its discussions with Standard & Poor's it had shown evidence of the operating performance improvement witnessed in the last months as well as of its sound capital structure," the company said in a statement.

"There is no debt problem, no cash problem," Cap Gemini chief financial officer Nicolas Dufourcq was quoted in a Reuters article. "There is no problem with our financial situation."

Cap Gemini may fall further

Cap Gemini's optimism, however, was not borne out in how its securities traded, or comments from the investment community which pointed out that the credit still remains on negative watch at S&P.

Barclays Capital convertible analysts Luke Olsen and Haidje Rustau suggested in a bulletin Friday that more downgrades to the credit may be forthcoming, given the tone of the S&P conference call on the Cap Gemini action.

"The rating action was prompted by concerns that margins will not rise fast enough to sustain the previous rating. Although S&P notes that Cap Gemini's current liquidity situation is good, operational issues (in particular in North America) could lead to a deterioration, which if material could lead to a one notch downgrade of the issuer rating," the convertible analysts said.

In the S&P report, the credit analysts added that, given Cap Gemini's riskier credit profile, it will now need to look into structural subordination issues as debt is at the holding company level, which relies on cash flows from operating subsidiaries. To this end, scrutiny will be intensely focused on Cap Gemini's results due Feb. 15. S&P said that a one or two notch differential between issuer rating and senior unsecured ratings is possible, and it expects to make an announcement on that in March or April.

Infineon, Siemens trade higher

Several European IT issues traded actively on the Cap Gemini news, traders in London said. There was good two-way action in both German tech names Infineon Technologies AG and Siemens AG convertibles, moving the paper sideways to slightly higher.

Infineon's 4.25% euro convertible due 2007 ended at 101.875 bid, 102.25 offered, basically unchanged but active, while the 5% euro convert due 2010 moved up about 0.125 point to 113.375 bid, 113.875 offered. Infineon shares ended on the XETRA up €0.03, or 0.38%, to end at €7.95; but on the New York Stock Exchange the stock closed down 4 cents, or 0.39%, at $10.32.

Siemens' 1.375% euro convertible due 2010 gained 0.5 point to 117.75 bid, 118 offered with the stock up €0.32, or 0.51%, to close at €62.59 on the XETRA. Yet, on the NYSE, Siemens shares were down 6 cents, or 0.07%, ending at $81.75.

STMicroelectronics, ASM off

Dollar-denominated convertibles of Netherlands-based chip names ASM International NV and STMicroelectronics NV were both lower, however, which traders said reflected their lower credit quality.

STMicroelectronics' 0% due 2014 was described as about 0.375 point lower, ending Friday at 94 bid, 94.375 offered with the stock closing in the U.S. down 2 cents, or 0.11%, at $18.30.

ASM's newest convert, the 4.25s due 2011 sold in December, was down a quarter-point to half-point, a trader said. The underlying stock ended in the U.S. lower by 16 cents, or 1.05%, at $15.09. The ASM 5.25% due 2010 was also described as lower by about a half-point.

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