Protein Design Labs plunges, Millennium set to rise on drug results; Thoratec, Tower deals emerge

By Ronda Fears

Nashville, May 17 - Tower Automotive Inc.'s new deal surfaced for a one-day marketing effort Monday and the auto parts maker had to pony up a bigger coupon before the deal was printed, but syndicate officials said it seemed to be working out well in the final hours of the day. Thoratec Corp. also tossed a deal into the mix, for Tuesday's business.

In secondary dealings, traders mentioned that Chubb Corp. joined Aon Corp. as it got a subpoena Monday from New York Attorney General Eliot Spitzer in his latest quest - to unearth shady insurance dealings. The convertibles of both insurers dropped on the news.

Several biotech names were active, too. Protein Design Labs Inc. fell sharply on a negative trial result announced Sunday, while Millennium Pharmaceuticals Inc. was poised to take off Tuesday on positive results announced after the closing bell.

But for the most part, the market was for sale Monday as stocks resumed a downward path and Treasuries saw a buying spree that caused yields to dip. The killing of a key member of the new Iraqi government was a major factor that escalated concerns about geopolitical instability. Other factors causing convertible players to put out offers were oil prices, which hit a new record of $41.55, and the drop in the U.S. dollar.

"It [the convertible market] is all for sale," said a fund manager on the West Coast.

"I think many [hedge fund players] are trying to take down a little leverage. At least volatility is back," he added. "Hope I can survive."

Hedgers' pain showing

Hedgers have been talking of some pain for several weeks with rates backing up, but the degree of the pain has been difficult to gauge. On Monday, the Merrill Lynch convertible hedge index posted the fourth consecutive weekly decline, losing 0.58% net of a 2% annual management and a 20% performance fee for the second week of May.

That loss takes the year-to-date net return into negative territory for the first time in 2004, putting the index down by 0.11% before hedging out interest rates.

"Note that shorting sufficient two-year Treasuries (rho hedge) to reduce the index duration from 1.7 to 0.75 has been an effective hedge against rising yields in 2004," said Tatyana Hube, a convertible analyst at Merrill.

Year-to-date, the rho hedge would have returned 1.3% compared to a loss of 1.45% on the hedge index from rising yields, she said. Adding back the 104 basis points - 130 basis points minus the 20% performance fee - would take the net return for the index to a gain of 0.93% year to date.

Tower finds bids on new talk

Tower Automotive's anticipated $100 million deal launched before the opening bell for a full day of marketing, but by early afternoon buyside market sources said the Novi, Mich.-based automotive components maker was forced to pony up a fatter coupon as potential buyers balked on the credit.

That move, adding 75 basis points to the yield range, brought out a bid of 0.75 points over issue price for it in the gray market, buyside market sources. Prior to the revised price talk, there was nothing seen on it in the when-issued market.

Before the market opened Monday, Tower Automotive launched the $110 million of 20-year convertible notes with price talk for a 4.5% to 5.0% coupon and a 30% to 35% initial conversion premium.

Early in the afternoon, the yield range was revised to 5.25% to 5.75%.

"It looks odd, because they were able to tighten terms on the bank facility," said a convertible trader at a hedge fund in New York.

"A lot of people are just a little leery of this credit with auto sales expected to drop off, and the proposed coupon for this credit in a rising interest rate environment."

Last week, Tower Automotive's new $565 million bank facility was a blowout. In that, the $140 million 5.5-year second lien synthetic letter-of-credit facility was tightened to Libor plus 700 basis points from Libor plus 750 basis points, the $375 million five-year first lien term loan B was priced at Libor plus 425 basis points and the $50 million five-year revolver at Libor plus 425 basis points.

Credit a deal-breaker for some

A fund manager who likes the Tower Automotive story acknowledged it was destined for a difficult marketing pitch.

"This deal is essential for Tower, but it isn't essential for speculators, so it isn't a cakewalk," he said.

For some potential buyers, the Tower Automotive credit story was a deal-breaker.

"We're not touching it, just because of the credit," said a buyside market source in New Jersey. "The credit has just been deteriorating."

Aside from a Moody's downgrade on Friday, analysts expressed concern about demand for vehicles winding down as interest rates tick up, in addition to automakers easing off promotions while steel prices remain high.

Moody's cut the Tower Automotive 6.75% convertible trust preferreds to Caa3 from B3 as well as the 5% converts but boosted the outlook to stable from negative afterward. Moody's noted very weak credit protection measures over the next two years and further potential liquidity concerns with the roll-out of several new business launches.

A sellside market source, from London, said that he was modeling the new Tower Automotive convertible with a credit spread of 1,100 basis points over Libor and using a 50% stock volatility to get it about 1.5% cheap at the middle of the revised price talk. He also noted a "crappy borrow" on the stock, but said the volatility could arguably be discounted to the 45% are because of the long-dated, seven-year put.

"It looks okay, but the company has to execute - something they haven't been able to do in the last couple years during a roaring auto market, and now we're entering a rising rate environment for an industry that has relied on 0% financing," the sellside market source said.

"It's dicey, but that's why it's trading 1,100 over - and a small ratio could end up working in the deal's favor if the stock gets a little tick up."

Thoratec deal for Tuesday

Thoratec, a Pleasanton, Calif.-based maker of products for patients with congestive heart failure, is pitching $125 million of 30-year convertible discount cash-to-zero notes talked to yield 2.0% to 2.5% with a 37.5% to 42.5% initial conversion premium. It is slated to price after Tuesday's close.

Three years of coupon payments are collateralized with Treasuries, and the issue also is being sold on swap with $60 million of proceeds earmarked to buy back stock sold short by note purchasers.

It will pay a cash coupon on the face amount for seven years and then become an accreting zero-coupon convertible. At the middle of yield talk, the issue price would be 59.773 and a cash coupon of 1.3449% would be paid on the face amount for seven years, market sources said.

Thoratec shares closed Monday off 39 cents, or 2.65%, at $14.35.

PDLI off 2 on swap, 10 outright

Protein Design Labs reported Sunday that its drug daclizumab was not effective in fighting a severe bowel disorder in a mid-stage clinical trial. Based on the results of the trial, PDLI said it does not plan to further develop the drug for ulcerative colitis but is looking at its potential use in asthma and multiple sclerosis.

On the news, traders said the PDLI 2.75% convertible due 2023 dropped to 123.25 bid, 123.75 offered - down about 2 points on a dollar-neutral hedge and down about 10 points outright. PDLI shares lost $2.38, or 10.69%, to close at $19.89.

"We remain firmly committed to the development of novel therapies in inflammatory bowel disease with the ongoing development of our Nuvion antibody product for the potential treatment of patients with severe ulcerative colitis who failed to respond to treatment with intravenous steroids," said Steven Benner, M.D., senior vice president and chief medical officer of Protein Design Labs.

"Based on recent encouraging Phase I results, as well as potential time to market, we continue to view Nuvion as our highest priority program.

"We are also committed to further development of daclizumab in additional indications, with top priority now in patients with chronic, persistent asthma. Our current plan is to follow the positive Phase II data in this setting reported earlier this year with a follow-on study."

PDLI has scheduled a webcast at 11 a.m. ET on Wednesday to discuss the results and its ongoing development strategies.

Millennium higher after-hours

After the close, Millennium Pharma announced successful results from a Phase III trial of its Velcade chemotherapy treatment for patients with multiple myeloma. Millennium said the drug, being co-developed by a unit of Johnson & Johnson, produced a statistically significant survival rate.

Millennium's 5.5% convertible due 2007 was quoted flattish at 100.75 bid, 101.75 offered as the stock closed up a penny at $13.56. But the stock was $2.04 higher, or 15%, in after-hours trading and traders said that will likely be a catalyst for a few convertible buyers.

The company did not say when it would seek marketing approval for the drug. But further details are to be discussed in an industry meeting June 6 in New Orleans.

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