Cephalon suffers in aftermarket; Joy Global pulled; Symmetricom at bat; Elan retreats on drug news

By Ronda Fears

Nashville, June 2 - Push came to shove again Thursday as convertible players lobbying for better terms caused Milwaukee mining equipment maker Joy Global Inc. to pull out of the market. And, drugmaker Cephalon Inc.'s $800 million overnighter may have been heartening because of its size, but that's as far as the enthusiasm went.

In fact, Cephalon's deal sank right out of the gate and remained underwater throughout the session. The issue ended at 98.375 bid, 98.875 offered but traders said, on swap, it settled the day slightly above par.

Meanwhile, after the closing bell, Symmetricom Inc. was at bat with a $100 million issue talked with a 2.75% to 3.25% coupon and 25% to 30% initial conversion premium. The San Jose, Calif.-based communications equipment maker plans to use proceeds for working capital and possible acquisitions.

Even without the Joy Global deal, Cephalon and Symmetricom together, especially if the $120 million greenshoe on Cephalon is exercised, nearly match the $1.06 billion of issuance for all of May, according to a tally by Prospect News, which includes investment bank deals.

"I think these deals suggest that the market is opening back up," said a portfolio manager at a huge hedge fund in New York. "But it's still pretty shaky, with all the [hedge fund] redemptions. Big players are staying around, you can be certain, but with returns so bad in the asset class and the cheapening of the secondary market, there's more muscle to throw around."

Outside of the new deal action, Elan Corp. plc retreated on another dose of bad news that a fourth patient who took its now-withdrawn muscular sclerosis drug Tysabri in combination with Biogen Idec's Avonex had been diagnosed with a potentially fatal brain infection, following the death of another patient.

On the positive side of the roster, Cray Inc. was sharply lifted after getting a notice from the Nasdaq that its stock would not be delisted. The 3% convertibles rose alongside the stock, which added 10 cents, or 6%, to settle Thursday at $1.76.

Joy Global underscores shift

Traders described the market overall - from a secondary standpoint as well as primary activity - as a bit manic-depressive, or bi-polar. However you put it, the implications were that there is no solid conviction at play yet, as finicky bidders pick through existing issues and potential buyers flex muscle with issuers.

Joy Global was the latest victim of the changing mindset under way in the convertible market.

"It is a shift for issuers to get their minds around the terms that will fly in this market, versus what they have been able to get away with when the hedge funds were just throwing money around," said a convertible fund manager in New York.

The company said late Wednesday just before final terms were to be set that although the deal generated "significant demand," it decided that the terms were not sufficiently attractive. The deal, talked with a 2.5% to 3.0% coupon and 33% to 38% initial conversion premium, was being sold on swap with $75 million of proceeds earmarked for stock repurchases.

Buyside sources had said Joy Global's industry sector was appealing, and sellside analysts away from underwriter UBS Investment Bank had put the issue anywhere from 3% cheap to 9.5% cheap, but there was resistance from potential buyers.

"While we were pleased with investor support for this transaction, the conversion premium available to us did not recognize the significant future value we see in our stock," said John Hanson, Joy Global's chairman, president and chief executive officer, in a news release.

Joy Global shares were seen 4% higher early in the session on the news of withdrawing the convertible. But the stock settled off by $1, or 2.78%, at $34.96.

Cephalon points to rift

It was a big deal, but Cephalon's new issue sank out of the chute, and that in most onlookers' view means it was not a success. The $800 million issue was fully placed and was not reoffered below par, sources said, but it was too expensive to maintain par in the immediate aftermarket.

Still, others argued that the Cephalon issue illustrated the resistance among issuers that investment bankers are having to overcome. Thus, the structure of the transaction, which was seen instrumental in convincing Cephalon to come to market, won underwriter Deutsche Bank Securities praise.

The Frazer, Pa.-based drugmaker sold the10-year non-callable issue at par with a 2.0% coupon and 10% initial conversion premium, but through hedge instruments, the company was able to expand the effective conversion price premium of 60%.

"I think it was remarkable to get a deal this size done in this market," said a convertible player who participated in the new Cephalon convert. "The call spread idea is not new to the convert market, but it was a smart way to convince Cephalon to do a deal."

Cephalon is using the proceeds for a tender offer to purchase all of its outstanding 2.5% convertible due 2006, a $600 million issue when sold in December 2001, at 97.5, and in the interim to repay or repurchase other debt or for working capital and other corporate purposes.

Cephalon buyer likes story

By and large, the buyer for the new Cephalon convertible said he likes the underlying stock story. He's also a holder of other Cephalon converts, but he said he bought the new issue to hold, figuring he "may as well get paid to wait."

He admitted that the new Cephalon convertible was not exactly cheap, though. He pegged theoretical value at par, but one sellside shop not involved in marketing the deal put it at 99.5 using a credit spread of 235 basis points over Treasuries and a 25% stock volatility.

In addition to Cephalon paying up a premium to take out the old 2.5% convertibles, which traded up around 1.75 points on Thursday to hover just below the tender price of 97.5, the buysider said there is ongoing speculation that Cephalon may be on the hunt for acquisitions.

The source pointed to an equity report Thursday from Credit Suisse First Boston, which has a neutral rating on Cephalon shares, that said, "We believe the market correctly interpreted the net dilutive nature of the offering, with the new notes embedding lower conversion price than the old ones. The net raise of $280 million in cash also likely signals plans for additional acquisition activity."

Elan reverses on bad news

After gaining on buyback enthusiasm earlier in the week, Elan's bonds suffered a setback from the Tysabri news on Thursday. The convertibles were described 14 points lower, pegged at 119 bid, 120 offered at the close, while the Irish drugmaker's straight 7.75% issue was seen losing 4 points to 84.5.

Shares of Elan and Biogen Idec plummeted on the news that a fourth suspected case of a deadly brain infection in a former user of Tysabri has been reported to the U.S. Food and Drug Administration.

The companies suspended all sales and clinical trials of Tysabri on Feb. 28 over fears that two users had contracted an extremely rare brain infection called progressive multifocal leukoencephalopathy, or PML. Then, a third case of PML was reported in March.

Both had rebounded sharply from the previous lows on hopes that Tysabri could return to the market, which were elevated last week by remarks at Elan's annual meeting by chief executive Kelly Martin saying he was confident Tysabri would return to the market in some capacity. Biogen also has said it plans to meet with the FDA about putting Tysabri back on the market after further reviews are complete.

Elan Corp. plc's 6.5% convertibles this week had risen on news of the company buying back a big chunk of the issue and paying up about 24 points to holders.

ViroPharma up

Elsewhere in the market, more biotech names were bandied about, with ViroPharma Inc. convertibles moving sharply hire alongside a spike in the stock on reports of a company director buying 10,000 shares at $4.10 each.

ViroPharma shares shot up to $5.08 on heavy volume of 2.27 million shares Thursday, compared with the three-month running average of 563,215 shares. The stock gained 75 cents on the day, or a whopping 17.32%.

"It's smart. Insiders have been buying a lot of it," said a sellside convertible source, who said he still considers the ViroPharma convertibles cheap. "I don't know about you, but this is one sexy company."

The ViroPharma 6% convertible due 2007, which the company has been buying back, went out Thursday at 97 bid, 98 offered. The sellsider noted the latest levels put the yield to maturity at 7.55% and current yield at 6.15%. ViroPharma's 6% convertibles due 2009 gained 17 points on the day, he said, going out at 220 bid, 222 offered for terms of 2.7%, up 8%. Many holders are converting the 2009 issue, he added.

Impax Labs sweetener

Impax Labs Inc. officials could not be reached Thursday to respond to market chatter that they are negotiating with bondholders in an attempt to avoid a default on the 1.25% convertibles because the company is expected to miss the extended deadline to file its financials with the Securities and Exchange Commission.

The buzz has been circulating in the market since earlier this week, as Impax faces a June 21 deadline extension to file reports at the SEC, but specifics had not surfaced previously.

"Holders are forcing the company to make some adjustments to the terms [on the 1.25% convertibles] since they will not have the filing done on time," said a sellside convertible market source familiar with the situation. "They are offering 10 more shares and adding takeover protection. That should be worth 10 points."

Some onlookers said earlier this week that holders of the Impax Labs convertible might be hoping for a "cash kiss" as an incentive not to force the bonds into default because of the delay in filing its quarterly report, similar to a move by Interpublic Group of Cos. Inc. recently.

Impax Labs is joined by a host of other late filers this year, which in the convertible market has been blamed for the light issuance to some degree. Corporations have asked for more time to file financial reports because of more stringent accounting review standards. Many convertible indentures could give bondholders cause to force a default claim because of the late filing, however.

The company has until June 21 to get waivers or file its financials.

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