Cummins gains as buyers step in; Alpharma deeply wounded by lower guidance; telecoms slide

By Ronda Fears

Nashville, Sept. 9 - Trading volume picked up somewhat Tuesday with considerable profit taking - but with a dearth of new issues in nearly a month there were plenty of buyers placing orders for the new Primus Telecommunications Group Inc. deal.

The Primus deal was upsized to $110 million from $75 million amid the warm reception and a buyside trader said it was bid 2 points over issue price in the gray market.

Meanwhile, biotech issues continued on an upward track Tuesday, in general, but not everyone believes in the rally. The Nasdaq biotech index was up 0.87% while the Nasdaq ended in the red, although that is considerably milder than gains seen in the biotech group over the last week.

Certainly, Alpharma Inc.'s lowered guidance gave some reason to pause from the recent buying frenzy. Alpharma shares plunged $4.21 on the day, or 18.56%, to $18.47. The 3% and 5.75% converts fell by around 10 points each.

Alpharma held a conference call Tuesday to discuss its lowered guidance, which was announced late Monday. The company now expects earnings per share of 10-15c for third quarter and 40-45c for fourth quarter before non-operating items, versus its previous estimates of 25-30c for third quarter and 50-55c for fourth quarter.

Alpharma said a major customer may discontinue a product that uses its bacitracin, and also blamed inventory reductions for the pullback in its outlook.

"That [Alpharma situation] is letting a lot of air out of the biotech rally but there still are several high-flyers," said a sellside convert trader.

To mention one, NPS Pharmaceuticals Inc. converts soared 5.75 points on news that its first drug application was filed Monday ahead of schedule, he said. The stock closed up $2.55, or 8.96%, to $31.

A lot of the biotechs in the convertible universe do not have a marketable product yet, a buyside trader pointed out, and a lot of that paper is busted.

"Most of the trading in the last few sessions has been in the biotech and tech space," said John Siebel, head of trading at Silverado Capital Management.

"Given the pain of the last year, though, I'm not about to just jump in to take this ride all over again."

A spike in Cummins Inc.'s convertible preferred, sparked by several blocks of buying, however, caused several heads to turn and existing holders to debate whether to take some profits or join the buying party.

By the end of the day, a sellside convert trader said it appeared that both occurred, as Cummins shares and the convert both came off midday highs considerably.

Supposedly, according to a sellside market source, one or two big shops had a big buyer on the preferred side of the Cummins story that began to look to pick up some of the converts late last week. There was a nice gain in the issue Monday, but it really spiked Tuesday.

Cummins' 7% convert ended Tuesday up 1.125 points at 62.625 bid, 62.875 offered but traded as high as 63.5 during the session. The stock also gained, closing up $1.51, or 3.13%, to $49.75. The stock, too, was higher for the early part of the session, hitting a new 52-week high of $50.90 at one point.

There wasn't any news on the tape and comparatively, Navistar International Corp.'s converts were hit, dropping about 2.5 points on a 2% decline in the stock, a buyside trader noted. The new converts of Wabash National Corp., another name in that industry sector, rose about 4 points to the 4% gain in the stock, he added.

"We know it [the Cummins convert] is kind of expensive, but relatively speaking, this is worth it," said a convertible trader at a hedge fund in New Jersey, who has a position in Cummins.

A convertible trader at one of the big sellside shops who makes a market in the issue pegged it about 7% to 8% rich, using a credit spread of about 600 basis points over Treasuries.

"It may be rich but relative to what's out there it's cheap," said the buyside trader.

"There's a decent current yield, the premium is fairly reasonable and there's call protection through June of '06. It's kind of a no-brainer when you look at what's out there."

There hasn't been any news on Cummins for more than two weeks. On Aug. 22, Standard & Poor's affirmed its ratings, with a negative outlook, saying that while unfunded retiree obligations are a concern, the cash requirements appear to be manageable.

Cummins' exposure to unfunded pension obligations increased by $250 million, to about $650 million, at the end of December from about $390 million in December 2001. In addition, Cummins had unfunded other post-retirement employee obligations of about $645 million at the end of 2002.

Thus, its total liability was just over $1.2 billion at year-end 2002, up 18% from year-end 2001.

Even considering the improving equity markets, which should cause a rebound in pension portfolio performance, Cummins is going to have to make relatively large cash contributions - about $100 million in both 2003 and 2004 - to reduce this exposure.

There were some convertible players cutting back on their exposure to telecoms, as Lucent Technologies Inc. and Nortel Networks Corp. dropped sharply on heavy selling.

After rising 13 points over the past week, Lucent's 2.75% due 2025 - the pick of its newest converts among hedge funds - the issue gave back 4.5 points to 96.875 bid, 97.375 offered, a sellside trader said. The 2.75% due 2023 also dropped, by 3.25 points, to 94.5 bid, 95 offered. Lucent shares closed down 15c, or 6.33%, to $2.22.

Dynegy Inc.'s new convert was another the trader mentioned giving up some of its recent gains.

Market sources said a couple of money manager names were showing signs of weakening on the heels of New York Attorney General Eliot Spitzer's expanded crusade against alleged corruption in mutual funds.

Franklin Resources Inc. and Affiliated Managers Group Inc. were mentioned along those lines.

"Anybody's name could pop up in the paper in a negative light," said one market source, noting that mention of high-profile Janus Capital Group Inc. in Spitzer's probe has unnerved many investors.

AMG stock is up something like 50% this year, he pointed out, so it wouldn't be unreasonable for some holders of the converts to look at lightening positions or taking some profits.

Meanwhile, nothing emerged on the new issue front, while Primus wrapped up its deal shortly after the closing bell rang.

With little new paper over the past month, buyers came out in full force to snap up the Primus convert - even though there was a slide in telecom paper Tuesday.

The book on the Primus deal was oversubscribed in excess of twofold, and it was upped from $75 million to $110 million, according to a convertible origination source at one of the deal managers.

The issue sold at par to yield 3.75% - at the middle of yield talk of 3.5% to 4.0% - and the initial conversion premium was set at 23% - on the cheaper end of guidance for 22.5% to 27.5%.

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