Reebok bounces to 102.25; OSI Pharma, cancer issues snap back; three deals at bat

By Ronda Fears

Nashville, April 27 - Credit spreads were tighter and the market richened but convertible traders said they stayed busy on Tuesday and noted a fair amount of the market was better bid. There was some whiplash, however, as several biotech issues snapped back after the wild runup sparked by the OSI Pharmaceuticals Inc. situation, and some analysts are suggesting investors could find some bargains in the biotech sector.

Reebok International Ltd.'s new issue bounced to 102.25 in the immediate aftermarket, and there were three other deals at bat after the close, including Conseco Inc.'s $500 million mandatory with the original price talk of a 5.75% to 6.25% dividend and 18% to 22% initial conversion premium, according to market sources.

Conseco's mandatory was the only one with any activity ahead of pricing to speak of, market sources said. The issue was bid 0.5 point over issue price with an offer at 0.6 point over in the gray market. Conseco shares ended Tuesday down 74 cents, or 3.21%, to $22.33.

Another small deal also emerged for Wednesday's business. Transkaryotic Therapies Inc., a Cambridge, Mass.-based biotech firm primarily focused on treatments for rare diseases caused by protein deficiencies, launched $80 million of seven-year convertible notes talked to yield 1.25% to 1.75% with a 20% to 25% initial conversion premium.

CNF Inc.'s convertible trust preferred dropped sharply on the company's plan to call the $129 million issue, and Regal Entertainment Group's convertible was weaker on its scrubbed junk deal in addition to another boost to its common dividend.

After a sharp dive in airline paper Tuesday, a crossover high-yield investor said some of the convertibles look good to hold onto, at least through the summer.

Reebok booted up to 102.25

Some skeptical market sources thought it was too optimistic that the proposed new Reebok convertible was offered at 2 points over issue price in the gray market. But the overnighter shot up more than 2 points out of the gate, and dealers said a good deal of the appeal was simply the market's raging appetite for new paper.

"The [convertible] market is really expensive right now so the best buying opportunity is in the new issues, and even those have been pretty tight recently," one dealer said.

Reebok sold the $300 million issue with a 2.0% coupon and 35% initial conversion premium - at the middle of yield talk for a 1.75% to 2.25% coupon and at the cheap end of premium guidance of 35% to 40%.

Bookrunner Credit Suisse First Boston took the new Reebok convertible out at 102.25 bid, 102.75 offered.

As part of the proceeds are earmarked to take out Reebok's 4.25% convertible, that issue dropped another point on Wednesday.

Reebok shares regained 37 cents, or 0.97%, to $38.34, and one buyside source noted that the stock was recommended as being at a nice entry point on the dip from hedge funds shorting the stock.

Standard & Poor's rated the new Reebok convertible at BBB with a stable outlook. The rating agency said that despite a continued competitive retail environment and the possibility of an National Hockey League strike, which might happen in September, it expects Reebok's credit protection measures to remain in the neighborhood of total debt to EBITDA of less than 2 times and funds from operations to total debt above 40%.

Medarex, Lithia Motors at bat

Medarex Inc. and Lithia Motors Inc. were at bat after the close along with Conseco.

Both of the smaller deals were rather cheap, too, by recent standards, but buyside sources said they didn't see much in the way of any gray market activity in those deals.

Medarex is pitching $125 million of seven-year convertible notes talked to yield 2.25% to 2.75% with a 25% to 30% initial conversion premium. Proceeds are earmarked to take out all or part of its 4.5% convertibles.

Merrill Lynch analysts put the Medarex deal 3.84% cheap at the midpoint of price talk, using a credit spread of 675 basis points over Treasuries and a 50% stock volatility.

Medarex shares closed Tuesday down 35 cents, or 3.21%, to $10.55.

Lithia Motors is marketing $85 million of 10-year convertible notes talked to yield 2.75% to 3.25% with a 35% to 40% initial conversion premium.

Merrill analysts put the Lithia Motors deal 3.2% cheap at the middle of guidance, using a credit spread of 325 basis points over Treasuries and a 32.5% stock volatility, plus accounting for a 1.01% common dividend yield.

Lithia Motors shares on Tuesday lost 53 cents, or 1.9%, to end at $27.41.

OSI Pharma gains choked off

The astronomical gains in the biotech sector, particularly those of issuers involved with cancer drugs, cracked under selling pressure from profit-takers on Wednesday.

Following the frenzied buying spree sparked by OSI Pharma's news Monday, traders said many holders were rethinking their positions and sold off some securities.

"It was some sense of returning to reality, with regard to OSIP," said a buyside trader. "They aren't there yet, in my opinion, but better after what happened yesterday."

OSI Pharma's 4% convertibles dropped 13 points back to 173.75 bid, 174.75 offered (after gaining 74 points Monday), and the 3.25% converts fell back by 12.5 points to 189 bid, 190 offered (after gaining 91.5 points Monday). The stock gave back $6.85, or declined by 7.52%, to close Tuesday at $84.25.

Seattle-based Corixa Corp., which has one product on the market in Canada and another in late-stage clinical trials targeting a range of cancers, pulled back, too, after riding the OSI Pharma wave Monday. The Corixa 4.25% convertible due 2008 dropped about 1.5 points to 105 bid, 106 offered, a buyside trader said. The stock lost 41cents, or 5.77%, to $6.69.

Some drug issues still cheap

While lots of the biotech pack rose in sympathy with OSI Pharma, analysts said there are still some potential bargains out there worth considering - namely Invitrogen Corp., Incyte Corp. and CuraGen Corp.

On that sentiment, one dealer noted that Abgenix Inc., which has a colon cancer drug in late-stage clinical trials, continued to gain ground on Tuesday. The Abgenix 3.5% convertible due 2007 added another 1.5 points to 102.5 bid, 103 offered, while the underlying stock rose 85 cents, or 4.8%, to $18.55.

If investors had been paying attention to one sellside analyst team, at one of the busiest convertible desks, they were sitting in a nice spot when the OSI Pharma craze swept through the market.

"We'd been recommending both OSIP issues for some time as more interesting alternatives to Imclone, which has kind of seemed like dead money out to the maturity date in March. You'd be better off buying that [Imclone] stock, I think. The other convert name in that same little niche is Abgenix, which we had also recommended recently," said the sellside convertible analyst.

"One other angle we're looking at is biotech converts trading below par issued by money losing companies. There are a few of those out there. Several of these issuers have recently returned to the market - Invitrogen, Incyte and CuraGen - and with the added cash from those new deals, the respective old ones looked a lot better from a credit standpoint."

Airlines good for summer ride

Airline paper has been diving steadily in recent weeks, but a crossover high-yield fund manager said Tuesday he is looking at the convertibles in that group - there are about a dozen or so - for possible positions to hold through the summer.

"Granted, you have to have a strong stomach, a strong tolerance for risk, but I think there's an argument to make for holding this paper this summer," the manager said.

"The economy is coming back, so I think more people are going to be taking vacations than last year. They have been putting off recreation too long, ever since 9/11. So, if you set aside the long-term concerns at these airlines and just look at what could happen this summer, then it's a lot better scenario, barring any new geopolitical threats."

The convertibles look particularly appealing, he said, because they are typically trading below the bond floors and, thus, offer some attractive current yields.

He used Northwest Air Lines Corp. as an example, noting the 7.625% convertibles at 86 have a current yield of almost 9%, and there is some 3.5 points of accrued interest.

All the airline convertibles took a sharp dive Monday and dropped slightly farther on Tuesday.

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