Tower Automotive drops; Isolagen gains 4.25 points; Delta convertibles pull back

By Ronda Fears

Nashville, Oct. 29 - Fresh paper from Isolagen Inc. and Option Care Inc., though small, continued to gain in the immediate aftermarket, rounding out one of the busiest weeks for convertible issuance in months. Still, year-to-date issuance is roughly half of that seen last year, running at $42.46 billion thus far by Prospect News' tally.

Capital markets sources say it has been difficult to woo issuers, particularly big cap names, to the convertible market since early July when the subject of a new accounting method for contingent convertibles first popped up. Since the rule was adopted Sept. 30, some have said it could likely be the end of big cap issuers coming to tap the convertible market, as they liked the anti-dilutive nature of the CoCos.

But other, more optimistic banker types say "next year will be better" in terms of issuance volume, asserting that some creative structure will be devised to meet the need of issuers.

Certainly, buyside sources say there is still raging demand for new paper, although many have been disappointed in the little to no incentives offered by issuers who have already begun seeking an exchange of their old CoCo convertibles in order to avoid having to report highly diluted earnings per share.

"Need - the mother of invention," one fund manager said, in response to the likelihood of new structures coming in the convertible market. "They [convertible origination officials] are all long a lot of pricey Connecticut real estate and have kids in private schools."

But he doesn't expect big cap names to come rushing back to the convertible market, or really any of the capital markets.

"I think there's less need for big issuers to do anything as they have a lot of cash," the fund manager said. We're "seeing the more marginal credits coming" to market with deals he is "not sure compensate truly for these risks."

Otherwise, traders said the secondary market was somewhat busy for a Friday as many investors did not want to be holding long positions over the weekend preceding the U.S. presidential election, particularly with the high alert for terrorism and a threatening broadcast from al-Qaeda.

Delta Air Lines Inc. was a notable decliner, following a string of gains, with the airline's convertibles losing 1 to 2 points each. Traders said they didn't see much action in the paper, noting hedge funds were leery about a long position over the weekend so there was heavy short selling.

Tower Automotive Inc., another distressed convertible name, also was lower ahead of the weekend, but its stock ended Friday's session slightly higher.

Avaya Inc.'s convertible was easier by about a half-point, at 56.5 bid, traders said, after the company said in an analyst call Friday that it expects revenue growth in fiscal 2005 of 25% to 27% above the $4.055 billion reported in fiscal 2004 ended Sept. 30, which was a 7% gain from fiscal 2003. Avaya also said it estimates improvement in operating margins to between 8.5% and 9% for fiscal 2005 from fiscal 2004's reported operating margin of 7.6%, and growth to a range of 10% to 12% for fiscal 2006.

"The drop in AV is just a technical retracement," and the convertible followed suit, said a trader in New Jersey. "It filled the gap yesterday, and now comes the technical sell-off, and we could actually see a little more, and there will be more pressure on the converts. I expect buyers will begin to step in at these levels."

Isolagen pumped up to 104.25

Isolagen Inc. sold $75 million of 20-year convertible subordinated notes at par to yield 3.5% with a 37.5% initial conversion premium - smack in the middle of guidance for a coupon of 3.25% to 3.75% and 35% to 40% initial conversion premium.

The Houston-based biotechnology concern, which specializes in autologous cellular therapies for soft and hard tissue regeneration, said it would use $13.3 million of proceeds to purchase up to 2 million of its shares from short-sellers participating in the note sale and $12.7 million to purchase up to 2 million shares of stock from insiders at $6.33 per share, a 5% discount from the closing price Thursday.

Right out of the chute, the Isolagen convertible - which had been quiet in the gray market - shot up to 102.5 bid. It was seen closing out the day at 104.25 bid, 105.25 offered, while the underlying stock ended up by 15 cents, or 2.25%, to $6.81.

"ILE looked risky to me, but I guess I underestimate vanity as such a strong human impulse," said a buyside source who passed on the deal.

Regarding Isolagen's business, he continued, "4k [$4,000] for a lifetime of seamlessly moderated collagen and everlasting youthful looks! PLUS you can still go to the Botox party and feign that you do not need a few shots! (The damn implants probably work post mortem too!) Happy Halloween! I need to re-evaluate and then simply buy Google and ILE."

Tower convertibles down

Tower's 5.75% convertibles had seen a bit of a pop alongside its stock on Thursday when the auto parts and components maker reported a narrower quarterly loss after having warned earlier in the month that it expected a loss twice as wide as prior forecasts because of rising steel costs and vehicle production cuts.

But the issue snapped back Friday on continuing concern about the Nov. 15 coupon payment, a trader said, noting that Standard & Poor's said Friday that it is keeping Tower's credit on negative watch despite the earnings news.

The 5.75s dropped 1.75 points to 48.25 bid, 50.25 offered, while the stock closed Friday up 2 cents, to 1.36%, to $1.49.

Credit analysts elsewhere remain skeptical, as well.

"Now the bonds have rebounded," said Shelly Lombard, bond analyst with GimmeCredit, in a report Friday, noting that Tower's straight bonds went from the high 60s to the low 70s. "But Tower still needs to get its banks' approval to securitize additional receivables to provide more liquidity. If that happens, Tower should be fine in the short term but its long-term prospects are still questionable."

The bonds would likely see another pop up if Tower secures the receivables funding and there could be additional upside next year as EBITDA improves, the analyst said, saying Tower's 9.25% and 12% bonds are covered at 4.5x EBITDA of $250 million.

"But without strong EBITDA growth Tower is headed for a restructuring, and in that scenario bondholder recoveries could be lower because of trade debt at the subsidiary level," Lombard said. "And bondholders would end up with most of their recovery in the form of equity."

Tower's third quarter net loss was $20.2 million, or 35 cents per share, compared with a net loss of $105.9 million, or $1.87 per share, in the 2003 period, when Tower took restructuring charges of $87.3 million. Revenue rose to $722.3 million from $623 million for the Novi, Mich.-based auto parts and components maker. Earlier this month, the company forecast a loss of 39 cents to 43 cents a share.

The company also said it had $145 million of cash and equivalents on hand at Sept. 30, compared with its statement earlier in October that it expected liquidity of at least $115 million at the end of the quarter.

For fourth quarter, Tower said it expects a loss of 10 cents per share to breakeven, excluding restructuring charges, on revenue of $830 million to $855 million. For 2004, the company expects a per-share loss for 2004 of from 40 cents to 50 cents.

S&P said in response to the earnings that it is keeping Tower's B+ ratings on negative watch as the agency expects the company's financial profile to remain weak for some time.

The company's bank debt had been doing well over the last couple of sessions and popped nicely Thursday on the earnings news, too. Early last week, Tower approached lenders week with an amendment to its credit facility that would allow for a $200 million accounts receivable securitization facility. Under its current credit agreement, the company can only get a $50 million secured accounts receivable facility.

Delta dives

As some traders expected, Delta paper declined Friday following a sharp run-up in the credit this week on events such as the tentative wage concession agreement that matches the company's target of $1 billion.

Delta's 8% convertibles were off by about 2 points, one sellside trader said, pegging the issue at 47 bid, 48.125 offered, while the 2.875% converts lost about 1.5 points to 49 bid, 50 offered.

"I didn't see much going on with it [Delta convertibles] today, though," the trader said. "Some guys are saying it's just that no one wants to be holding over the weekend, but I think we could see another drop come Monday unless they come up with a deal on the exchange or some other restructuring news."

The airline still has pending a debt exchange offer of $680 million for $1.56 billion of debt. The airline has not made any announcement about the early exchange deadline, which offered extra incentives. That expired this past Tuesday and no news is being interpreted that there were few, if any, takers.

The exchange offer deadline was extended to Nov. 14 from Oct. 14.

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