Xoma, deCode, Cephalon buyers seen; XM, Sirius at odds in race; Beverly auction in second round

By Ronda Fears

Nashville, May 18 - Convertible players are still waiting for the other shoe to drop, so to speak, with June 1 as the focal point for the next round of redemption notices targeting the midyear exit point. To say that players are sidelined is an understatement, as one buysider described the convertible market as "paralyzed." Another's observation was that it was "painfully slow."

Already participants say there are strong signs that broad-based liquidations are under way, yet there are buyers rooting around, albeit in a small way, and they have some of the best market color on the liquidations taking place.

One vignette shared by a convertible hedge fund manager in Chicago on Wednesday went something like this: "There was something we've been trying to buy for two weeks now and only managed to get hold of $4 million bonds. Then, all of a sudden yesterday we got a hit for $15 million, with $10 million behind it today."

Bidders for biotechs

Bidders have been desperately seeking biotech paper, but oftentimes to no avail because many of these convertibles are small and "trade like molasses," as one buysider put it. This week the space has been particularly active, traders said, due to some give in those names although the broader biotech indexes were slightly higher Wednesday.

Xoma Ltd. was a prime example, with bids for nice sized chunks - $10 million - seen this week for the 6.5% convertible due 2012, one market source said. It is a $60 million private placement injected into the market in February at par and was pegged at Wednesday's close at 82 bid, 85 offered, while the stock slipped 3 cents to settle at $1.37.

A couple of holders in the convertible said they were not willing to sell out but were going to sit tight, given the very nice current yield on those bonds.

deCode Genetics Inc. was another, but there were some trades put together that moved the 3.5% convert from 74.5 to 81.5 on Wednesday, a sellside trader reported. deCode shares closed Wednesday up 32 cents, or 4.44%, to $7.52.

On Wednesday, Iceland-based deCode said it has started clinical testing on its third experimental drug, a treatment for asthma. The company said it has started enrolling 160 patients into an eight-week phase II study, which is expected to report results in the autumn. The company also has clinical trials in progress on a drug to prevent heart attacks and a pill to treat narrowing of arteries in the legs.

Cephalon Inc. convertibles also were active, still seen in the 94 neighborhood, while the stock lost 52 cents on Wednesday, or 1.17%, to 44.09.

Scientific Games lures players

Bids have gotten hits all week for Scientific Games Corp.'s convertibles, but a sellside trader said the company's announcements Wednesday about a couple of contracts helped matters.

The 0.75% issue added 2.25 points on the day to 95.5 bid, 96.5 offered, he said, while the underlying stock rose $1.13, or 5%, to $23.83.

Scientific Games announced Wednesday that it was awarded a two-year extension of its instant ticket and related services contract, valued at $11 million, with the Missouri Lottery and that it has signed a seven-year, $21.5 million contract for new online terminals and maintenance services with Staatliche Toto-Lotto in Germany.

XM, Sirius radio race wavers

The race for satellite radio presence is dominated by Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc., and there are arguments for both players, peppered with concerns that some of the bigger media names may try to horn in on the game. Analysts argue that the race for subscribers is the same as any other business - profitability comes down to cost-effectiveness.

Sirius and XM both have convertibles, and while some convertible players have made their picks others are playing both sides.

"Whether you like the Sirius or XM bonds better, the satellite radio space is attractive," said a sellside desk analyst. "We find people who like one or the other, but I personally think that the XM story is better. Those bonds are not really that cheap, but I think they look better than any of the Sirius issues."

XM's 1.75% convertibles are up about 2 points so far this week, at about 85 bid, 86 offered, after reporting Monday that its subscribers passed the 4 million threshold. XM also said it was on track to hit its goal of 5.5 million subscribers by year-end.

Sirius reported last month that it had 1.4 million subscribers and expected to have 2.7 million by the year-end.

"We're still believers and hold the SIRI convert paper (as it comes in, unfortunately)," said a buyside source. "We also have a big position in XMSR high yield, and this has also come in, but we still think they make it long term - we just hope we're right."

Sirius convertibles have moved opposite to XM this week, losing around 2 points with the 3.25% issue at about 121 bid, 122 offered and the 2.5% issue at about 134 bid, 135 offered.

"Both XM and Sirius provide investors with their respective calculations of the cost to acquire each subscriber and the percentage of subscribers who turn off service, or 'churn.' However, XM and Sirius define and report these critical metrics of subscriber acquisition cost and churn differently," said CreditSights analysts Darcy Travlos and Matt Karner in a report.

"On an apples-to-apples basis, XM is acquiring subscribers in a more cost-effective manner."

In this past quarter, for example, the analysts found that the all-in cost for XM to add a subscriber was $101, compared to $294 for Sirius.

Beverly convertibles steady

Beverly Enterprises executives provided another update on its auction Wednesday, saying the process is moving into round two, but traders said the 2.75% convertibles remained steady on the news.

"These are on hold just like the rest of the market," one trader remarked.

The convert was indicated at 166.5 bid, 167.5 offered at the close. Beverly shares ended up 11 cents, or 0.90%, at $12.35.

In a prepared statement, the company reported that on Monday its board met to review bids and was able to identify several potential investors that will proceed in a second round of the auction process, some of whom the company said have indicated that they would continue Beverly as nursing home operating company in its present form.

The company did not say how many bidders made it to the second round or name any of the participants. In February, Beverly rejected an unsolicited offer of $11.50 per share, or roughly $1.5 billion, from a group of investors led by Formation Capital LLC, and Formation Capital was involved in the first round of bidding.

William Floyd, chief executive of Beverly, told company employees: "I cannot provide any specific information about prices or financing arrangements ... Under probably any scenario, there will be some positions eliminated."

Static Medicare budget a plus

Beverly's Floyd added, "I expect that the interest in the second round will continue to be robust - especially in light of the very favorable Medicare funding proposal announced last week by CMS."

The Centers for Medicare and Medicaid Services made a proposal after the markets closed Friday to keep the Medicare budget intact, alleviating some concerns that the Bush administration would seek to cut Medicare benefits by more than $1 billion.

Such a reprieve on Medicare benefits gave Beverly and several other nursing home operators a bounce this week, including convertible issuers Manor Care Inc. and Genesis Healthcare Corp.

Floyd said that after presentations in June, Beverly's board will ask for final bids and financial arrangements and then select the purchaser.

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