Level 3 falls on Global Crossing meltdown; Marriott offered at par in gray market; biotechs plummet

By Ronda Fears

Nashville, March 10 - Convertibles plunged Wednesday on accelerated selling pressure generated by the selloff in stocks, traders said. The unmistakable note of negativism dampened enthusiasm on the primary side of the market, also.

"It was pretty bloody is all I can say about today," said a convertible dealer. "We're probably headed into a full-blown correction."

A buyside convertible trader, however, said there seems to be too much selling, particularly for some of the wireless telecom names, and that is creating a buying opportunity.

"I'm not going to mention any names, but we think there are some situations that are way oversold in the wireless area," he said.

Several telecom names were particularly stung by the downdraft Wednesday, chiefly as a result of fiber optic network operator Global Crossing Ltd.'s poor earnings - its first quarterly financial report since exiting bankruptcy in December - and a disappointing outlook.

Level 3 Communications Inc. was very active, closing out the day with a loss of about 2 points for each of its converts. Weakness in fiber optics names aside, Lucent Technologies Inc. ticked slightly higher on heavy flow in the converts after Standard & Poor's upgraded its senior debt to B.

Hoards of drug and biotech issues also were getting sold off on valuation worries mixed with concern about the impact of generic drugs on Big Pharma sales - the latter underscored by Ivax Corp. getting approval to expand marketing in Europe of its generic version of a Bristol-Myers Squibb Co. drug.

Deal slate stalled

There had been some buzz that a deal or two might surface Wednesday, but nothing transpired once the stock market looked decidedly negative.

Meanwhile, there was little to no activity in the gray market for the Host Marriott LP or Apex Silver Mines Ltd. deals, although Marriott was seen with an offer at issue price around lunchtime. Both were at bat after the close.

Apex Silver Mines Ltd. has $125 million of 20-year convertible notes talked to yield 2.375% to 2.875% with a 25% to 30% initial conversion premium. Shares of the Grand Cayman-based mining outfit lost $2.38, or 9.83%, to $21.84.

While gold prices fell sharply Wednesday, the May contract for silver posted another gain, albeit slight, adding 0.5 cent to close at $7.185 an ounce on the New York Mercantile Exchange.

Host Marriott LP is marketing $375 million of 20-year exchangeable notes, convertible into Host Marriott Corp. shares, with guidance for a 2.75% to 3.25% coupon and 50% to 55% initial conversion premium.

Lehman Brothers analysts put the Marriott deal 2.18% rich, at the midpoint of price talk, using a credit spread of 290 basis points over Libor and 28% volatility. It was noted that the Marriott credit default swaps were at about 275/300 basis points over Libor.

Just as the deal was announced late Tuesday, a buyside source estimated the Marriott deal about 1% rich.

Host Marriott shares dropped 22 cents, or 1.77%, to $12.20.

Level 3 hammered

Level 3 Communications Inc. was very active, with its converts losing about 2 points outright, on the meltdown in Global Crossing (the stock plunged 38%).

Traders said Level 3's newest convertible, the 2.875% issue, was the most active, closing out the day at 85 bid, 86.5 offered. Meanwhile the underlying stock ended off 19 cents, or 4.36%, to $4.17 - perilously close to its 52-week low of $4.12.

After gaining slowly but steadily in much of the past three weeks or so, traders said sellers emerged in the Level 3 converts in a severe reaction to the Global Crossing news.

"The [Level 3] 6s had been looking pretty good in the 70s area, using a 1,000 basis point spread, but that sort of fell apart, and the new convert blew out, too," said one trader.

Global Crossing said revenues this year will be reduced by $75 million to $125 million because of pricing pressures, producing an estimated EBITDA loss of $100 million to $130 million. Also, the operator of a 100,000-mile fiber-optic network said it hired Citigroup Global Markets Inc. to explore the possible sale of its Global Marine installation and maintenance services business.

Lucent upgrade lends lift

Lucent Technologies Inc., however, was one of the rare issues better on the day, edging up after the S&P upgrade to the credit.

There was considerable activity in the Lucent convertibles, which are very liquid in the market as a rule, but little change, traders said. The 2.75s were both higher by less than 1 point, with the 2023 issue quoted at 143.5 bid, 143.75 offered and the 2025 issue at 151.5 bid, 151.75 offered. Lucent shares closed up 1 penny, or 0.26%, to $3.91.

S&P said the credit upgrade was based on stabilized revenues in recent quarters, while cost reductions have enabled a return to moderate profitability. S&P also upgraded Lucent's outlook to positive from negative and said that if Lucent is able to sustain profitability intermediately, there may be another upgrade coming.

Akamai falls on tender trouble

Akamai Technologies Inc.'s new 1% convertible dropped sharply as the company revealed first thing Wednesday that its tender for its old 5.5% converts was not going well.

At the market open, Akamai announced that as of the close of business Tuesday, only $5.2 million of notes were tendered; the tender was for $101 million.

Thus, Akamai bumped the offer price and extended the deadline to participate in the modified dutch auction, now willing to pay between 100 to 101.25. Previously, the offer was for 100.5. The tender has been extended until March 24.

Akamai's 1% convertible fell 3.25 points to 119 bid, 120 offered and the underlying stock dropped 64 cents, or 4.14%, to $14.81.

Ivax falls with Bristol-Myers

Although Ivax had good news on the tape, traders said it fell victim to sectorwide pressures in pharmaceuticals.

Ivax's new 1.5% convertible lost 1.5 points to 10l.375 bid, 111.375 offered. The stock dropped 64 cents, or 2.71%, to $23.

Ivax got approval to extend marketing of its Paclitaxel drug in the European Union, which sparked a selloff in Bristol-Myers. Paclitaxel is generic version of Bristol-Myers' in Taxol, a drug marketed for the treatment of metastatic breast cancer and metastatic ovarian cancers. Annual European sales of Taxol are estimated at $400 million to $600 million.

Bristol-Myers was further pressured by a negative watch from S&P that actually was sparked by the unfavorable results of a study on its cholesterol drug, Pravachol, compared with Pfizer Inc.'s Lipitor.

Bristol-Myers' floating-rate convertible plunged 1.375 points to 101.625 bid, 102.125 offered. The stock plummeted $1.13, or 4.15%, to $26.07.

S&P credit analysts expressed increased concerns that Bristol-Myers faces significant patent expirations on several other products in the intermediate term. In addition to Pravachol, the company has roughly $2.2 billion in annual drug sales that will become exposed to generic competition in the next 18 months, S&P said.

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