BioMarin new deal gets thumbs-up; YRC weaker on poor outlook; Cephalon fails to get FDA nod

By Kenneth Lim and Ronda Fears

Boston, March 23 - A trio of new deals slated to price after the market closed held the attention of the convertible bond market on Wednesday. But BioMarin Pharmaceutical Inc.'s deal was seen as the cheapest during price talk, stealing some of the limelight from the offerings coming from Time Warner Telecom Inc. and King Pharmaceuticals Inc.

"We got three new deals coming in tonight," said a sell-side analyst. "BioMarin is the cheapest, that one will do well."

In trading Thursday, YRC Worldwide Inc.'s convertibles were a little weaker on a dollar-neutral basis after the company formerly known as Yellow Roadway Corp. gave first-quarter earnings guidance that fell short of Street estimates.

Carnival Corp. also missed expectations for its first-quarter results and cut its forecast for 2006, sending the convertibles on a slide in line with the stock.

Meanwhile, Cephalon Corp. said after the market closed that the Food and Drug Administration had rejected its bid to market its drug Sparlon as a treatment for attention deficit hypertension disorder. Analysts expect the stock to take a beating when it resumes trading on Thursday.

BioMarin seen as cheapest in class

BioMarin Pharmaceutical's new $125 million offer of seven-year convertible bonds were seen as the cheapest of the three new deals slated to hit the secondary market on Thursday, with price talk guiding for a yield of 2.5% to 3% and an initial conversion premium of 22.5% to 27.5%.

There is a further $18.75 million greenshoe option on the deal, which will be priced at par.

Merrill Lynch is the bookrunner of the registered offering.

A trading source said the new BioMarin convertibles were up 1.25 points bid in the gray market on Thursday.

A sell-side analyst said the convertibles were "interesting" and modeled about 3% cheap at the mid-range of talk based on a credit spread of Treasuries plus 650 basis points and a volatility of 40%. Another analyst had earlier modeled the securities at a price of 101 based on a credit spread of Libor plus 800 bps and a volatility of 45%.

BioMarin reported a week earlier that it had received positive results from phase 3 trials of the drug Phenoptin, which is used to treat a metabolic disorder. The sell-side analyst said Phenoptin was not necessarily a "big drug," but BioMarin has already partnered with Serono SA to market the drug in the United States and Europe, "which should help the credit."

The convertible bond offering, which is being launched together with an issue of 9 million shares, will raise about $340 million for BioMarin, the analyst noted.

"That gives them plenty of time to work on the other drugs in their pipeline," the analyst said.

But a trader said the underwriters may "take a very strong notice of the juice in the gray market" and adjust the pricing to the richer end of talk.

Novato, Calif.-based BioMarin plans to use the proceeds of the convertible and stock offerings to fund the commercialization of its products, additional clinical trials of products that include metabolic disorder drug Phenoptin and potential acquisitions. The company may also use some of the proceeds to buy back some or all of the $125 million outstanding of its 3.5% convertible bonds due 2008, which become callable on June 20 this year.

The 3.5% convertibles were marked at 104.38 bid, 105.38 offered against the closing stock price of $13.13 on Thursday. BioMarin stock (Nasdaq: BMRN) retreated 4.37%, or 63 cents.

BioMarin reported the week before that it had gotten positive results from phase 3 trials of Phenoptin, which increased the likelihood that its product would make it to market.

Time Warner Telecom prices upsized deal

After the close Thursday, Time Warner Telecom Inc. priced an upsized $325 million offering of 20-year convertible senior notes within talk to yield 2.375% with an initial conversion premium of 27.5%.

Price talk for the deal, which was originally sized at $200 million with a $30 million greenshoe option, was for a coupon between 2.125% and 2.625% with an initial conversion premium between 25% and 30%. The greenshoe is now $48.75 million.

The initial conversion price is $18.6405 per share. Time Warner Telecom stock (Nasdaq: TWTC) closed at $14.62 on Thursday, up 15 cents or 1.04%.

Morgan Stanley, Wachovia Securities and Deutsche Bank were the bookrunners for the off-the-shelf deal.

Trading sources said one million units of the new convertibles were offered at 101 in the gray market on Thursday.

There was "broad investor interest from all sides" and the offering was "well oversubscribed," allowing the company to significantly increase the size of the deal, said a syndicate source.

A sell-side analyst had earlier valued the bonds as 0.3% cheap at the mid-range of talk based on a credit spread of Libor plus 450 basis points and a 35% volatility, but another analyst felt that such a spread may have been too generous.

"I don't particularly care for it [the Time Warner Telecom deal]," the analyst said, adding that his assumption of Libor plus 500 bps and a 35% volatility may be harsher than what the rest of the market is using. But he explained that his view of the company's credit risk was based on where Time Warner Telecom's straight debt is trading and the fact that he views the company as a CCC credit story.

"I'm just not that excited," the analyst said.

Time Warner Telecom, a Littleton, Colo.-based IT services company that manages data and voice networks, said the proceeds of the deal will be used to call for redemption a portion of its 10.125% senior notes due 2011.

King deal seen as weak

King Pharmaceuticals' $400 million offer of 20-year convertible senior notes talked at a coupon of 0.75% to 1.25% and an initial conversion premium of 20% to 25% was seen as unexciting by a few market sources on Thursday.

The convertibles were expected to price on Thursday after the market closed, but sources said the pricing announcement was not expected until Friday morning before the market opens.

Citigroup, UBS Investment Bank and Banc of America Securities were the bookrunners of the Rule 144A deal. They have a greenshoe option to purchase a further $60 million of notes.

The gray market saw the new King Pharmaceutical convertibles offered up half a point on Thursday, a trading source said.

The company's existing 2.75% convertible due 2021 rose to approach par with King Pharmaceutical (NYSE: KG) earmarking proceeds from the deal for redeeming or repurchasing the older bonds. The 2.75% convertible was seen at 98.75 bid on Thursday while the stock fell $1.67, or 8.78%, to close at $17.36. There is $345 million of the 2.75% convertible outstanding.

A sell-side convertible analyst said how the deal would perform would depend on how outright investors viewed it, but he did not find the offer interesting.

"I'm using 175 bps over Libor, but maybe I'm being aggressive, it's probably around 200 bps, and 28% vol," the analyst said. "At the very cheap end of talk, it's maybe fair valuish, around 97.5-ish. I would think it would come in on the cheap end of talk."

He also said there were valid concerns about the track record of King Pharmaceutical's management. "They've had a spotty track record and inventory issues that seem to reoccur every other quarter, so they're definitely not spotless," he said.

It was possible that holders of King Pharmaceutical's existing 2.75% convertible due 2021 would be attracted to the new convertibles, which would have a lower conversion price than the $50.16 on the older tranche.

"It makes sense, but it doesn't really matter to them [the current bondholders]," he said. "They can still get the old bonds right around par, it doesn't necessarily mean the holders will necessarily put in for the new ones."

Bristol, Tenn.-based King Pharmaceutical, a biotech company, will also use some of the proceeds from the deal for general corporate purposes.

YRC skids on poor guidance

YRC's convertibles stayed in line with its diving stock early Thursday after the trucking company cut first-quarter estimates, but weakened on a dollar-neutral basis as the day wore on, market sources said.

A sell-side trading source said the 5% convertible due 2023 was seen marked at 127 bid, 127.5 offered versus $38.67 during the day, while a buy-side trader reported YRC's 3.375% convertible due 2023 changing hands at 113 against a stock price of $38.30. Shares of YRC (Nasdaq: YRCW) closed at $38.56, down $6.73 or 14.86%.

Overland Park, Kan.-based YRC said late Wednesday that it was reducing its first-quarter earnings outlook to between 65 cents and 75 cents per share, down from the earlier range of $1 to $1.05 per share, because of weak volumes and cost overruns.

Calling the cuts "exceptionally negative news," Credit Suisse equity analyst Jason Seidl cut his 2006 earnings forecast for YRC by 90 cents to $5.35. His share price target was also cut, by $13 to $45.

A sell-side convertible analyst said that although "the magnitude of this miss was quite surprising," he was surprised that convertibles weakened against the stock.

"I would have thought they would hold up better," the analyst said. "Every other quarter they seem to have a blow-up, so their business is cyclical."

Carnival sinks under weak outlook

Carnival Corp.'s convertibles were also active on Thursday and slid in line with the stock after the cruise ship operator said its first-quarter earnings dropped by almost a fifth.

Carnival's variable-rate convertible due 2033 was marked at 69.5 bid against a stock price of $47.17, said a sell-side source. A trading desk marked Carnival's 0% convertible due 2021 at 78.92 bid, 79.07 offered versus the closing stock price of $47.49 on Thursday, while the 2% convertible due 2021 was marked at 123.77 bid, 124.02 offered against the same stock price.

A buy-side trader said the movement in the convertibles was not a surprise, and that "most of these [convertibles] are really in the money anyway."

Shares of Carnival (NYSE: CCL) closed down $2.54, or 5.08%.

Carnival on Thursday said its first-quarter profit fell 19% to $280 million, or 34 cents per share, from $345 million, or 42 cents per share, in the year-ago period. For the second quarter, Carnival is expecting earnings per share of 48 cents to 50 cents, while the forecast for the full year is $2.90 to $3 per share.

Cephalon fails to get FDA nod

Cephalon Corp. said after the market closed on Thursday that the Food and Drug Administration had unanimously decided not to approve its drug Sparlon for attention deficit hypertension disorder for children aged 6 to 17.

The FDA said Sparlon, which is currently sold as a sleep disorder drug under the Provigil brand, was effective for its intended use but recommended that the company collect additional data to support the safety of the drug in children and adolescents with ADHD, Cephalon said.

Frazer, Pa.-based Cephalon had hoped to launch Sparlon in the second quarter and those sales have been included in many analysts' estimates.

Cephalon said its previously issued 2006 earnings per share guidance of $3.80 to $4.00 remains unchanged, but it reduced its 2006 sales guidance by $100 million to $1.45 billion to $1.50 billion.

After a gain Wednesday, many expect the stock to react negatively Friday. Cephalon shares (Nasdaq: CEPH) closed Wednesday higher by $1.45, or 2.02%, at $73.31 but traded in a range of $65.04 to $73.97 on huge volume of 22.5 million shares compared to the three-month running average of 3 million.

On Wednesday, Cephalon's B tranche 0% convertibles due 2033 traded Wednesday at 127 on a stock price of $67.75 amid the uncertainty - about a half-point drop from Tuesday.

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