Convertibles gain as buyers emerge, PDLI clips slide

By Ronda Fears

Nashville, Tenn., March 21 - Convertibles gained ground Thursday as buyers emerged looking for down-trodden issues, traders said. Many were hunting in the drug and biotech areas as some had predicted and Protein Design Labs Inc. was leading the pack north.

Activity was still described as quieter than normal, however. Some action came through the primary market as Lehman Brothers brought the second convertible floater to market in an overnight deal, however, and EDO Corp. announced a deal after the close.

"There was a nice rebound this afternoon," said a convertible trader at a major investment bank in New York.

"It's still pretty quiet, though, and I can't really explain it. There was a Goldman conference in Las Vegas and the Fed meeting this week, but those things shouldn't make it this quiet. We are hoping for some new deals to liven things up for us."

Lehman brought a $500 million convertible floater with a coupon at the 3-month Libor less 90 basis points and a 48% initial conversion premium, and it climbed 1.875 points from par to 101.875 bid, 102.125 offered as Lehman shares dipped 41c to $64.52.

Merrill's 0% floater convertible due 2032 - the market's first floater - was quoted up 0.125 point to 103.75 bid as Merrill shares added 45c to $55.50.

Buyside sources said the Lehman deal was pretty rich, although it priced at the aggressive end of guidance and syndicate source said it was well over-subscribed.

"Defensively, it's not a bad play. It's just so richly priced. I can't understand why anybody would get into anything like this," because of the low cash income, said a convertible trader at a hedge fund in New Jersey, referring to the Lehman floater.

"The deals with good terms that have come lately have a lot of hair on them, a lot of baggage. As long as there's people chasing these deals, it's not going to get any better. But we've decided we are not going to chase anything and we're not going to be forced into something that's going to blow up on us."

Rather than blowing up, Protein Design Labs Inc. actually lead the biotech group higher, despite reporting late Wednesday that its psoriasis drug had failed to meet its objective. That was largely due to analysts quickly coming to the aid of the injured company, traders said.

Morgan Stanley convertible analysts characterized the disappointment as "good news in bad news for PDLI" and said the 5.5% convert was a good defensive play, in a report on the firm's website, ConvertBond.com. Morgan Stanley equity analysts said the event "removes a dark cloud over the stock" and created an attractive entry point.

Investors took it to heart, and Protein Design Labs shares rose $3.28 to $18.30. The 5.5% convertible notes due 2007 (CCC) gained 7 points to 87.5.

Several other biotech names were natural tag-alongs, like Sepracor Inc., ImClone Systems Inc. and Alpharma Inc.

Alpharma's 5.75% convertible due 2005 gained 3.5 points to 83.25 bid and the 3% convert due 2006 rose 3 points to 88 bid, while the stock added $1.35 to $15.20. The company announced Thursday that it had exchanged for common shares about $70 million of the two issues. Combined, the outstanding total for both issues had been $273 million.

Sepracor's 7% convertible due 2005 rose 1point to 73.75 bid, the 5.75% convertible due 2006 added 1.375 to 66.75 bid and the 5% convertible due 2007 was up 0.5 to 60 bid. Sepracor shares closed up $1.10 to $20.48.

ImClone's 5.5% convertible due 2005 added 2.625 points to 88.5 bid with the stock up $2.01 to $27.

The Amex biotech index was up nearly 4% on the day, but there were some decliners.

Most notable of the southbound biotechs was Invitrogen Inc. The Invitrogen convertibles were both down 1.375 points with the 2.25% due 2006 at 78 bid and the 5.5% due 2007 at 88.375 bid. The common shares lost $1.63 to $35.50.

"I think people were shying away from Invitrogen still because its in the gene cloning area and there's still a lot of uncertainty about that area," one trader said.

Uncertainty prevailed in the tech area also, traders said, with widely mixed results and no specific focus.

New paper joined the march northward for the most part and Lucent Technologies Inc. was clearly the leader of the pack.

Lucent's new 7.75% convertible trust preferred due 2017 gained 5.25 points on the day to 97 bid and the 8% convertible trust preferred due 2031 added 3.5 points to 90 bid. Lucent shares closed up 29c to $4.79.

Airborne Inc.'s 5.75% convertible senior notes due 2007 were flat to slightly lower at 103.5 bid as the stock slipped 20c to $17.28.

Navistar Finance Corp.'s 4.75% exchangeable due 2009 declined added 0.5 point to at 103 bid with the underlying Navistar International Corp. shares down 51c to $43.

The Computer Associates 5% convertible due 2007 rose 1 point to 113 bid as the stock gained 45c to $20.63.

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