Pharma Resources gains to 104 despite complaint; Bristol-Myers jumbo seen offered at par in gray

By Ronda Fears

Nashville, Sept. 25 - While there was lots of excitement in the convertible market, with several issues spiking or spiraling lower on earnings and other news, most of the attention was focused on the new issues in circulation.

Flextronics International Ltd. found buyers in the wake of the shocking nearly $1 billion jury award against it in the contract dispute with Beckman Coulter and Cephalon Inc. spiked higher on promising prospects for its new sleep disorder drug.

Bisys Group Inc., however, fell sharply on an earnings warning and the new CKE Restaurants Inc. convert dropped 3.75 points, buyside traders said, as lots of holders flipped it for the new issues just coming into the market.

Pharmaceutical Resources Inc., Exult Inc. and MemberWorks Inc. put $335 million of new converts in play and all were higher in the immediate aftermarket.

But the Bristol-Myers Squibb Co. $1 billion floater, set to price after the closing bell, was at the forefront of the market's attention. Reactions were widely mixed on the buyside, but signals in the gray market showed no bids on the deal and offers fell steadily throughout the day.

"You'd have to be crazy to buy it in the gray," said one manager in New York, who runs a multi-strategy convertible fund. "You're not going to make any money on this."

Early in the session there was an offer at 100.375 over issue price and right at the close there was an offer at 100, according to buyside traders. One trader said he saw an offer in mid-afternoon at 99.875.

The 20-year convertible floaters, being issued with warrants, are talked to yield three-month Libor minus 50-75 basis points and a 60% to 65% initial conversion premium. JPMorgan and Goldman Sachs & Co. are running the Rule 144A deal.

"Obviously, no one has gotten the message or learned their lesson yet," said a convert trader at a hedge fund in New Jersey. "It'll get placed on name and because it's investment grade, but I thought, or had hoped, that maybe we'd gotten beyond the lunacy pricing."

There were buyers, though, and they were very enthusiastic about the deal.

"We love the Bristol-Myers convert. It's got a very high bond floor and low volatility," said a manager at a huge hedge fund in New York.

"Right now, people don't understand these types of securities. In time, they will, but meanwhile we're happy to pick these up."

While he insisted the Bristol-Myers issue - which is very similar to Wells Fargo & Co.'s $3 billion floater that sold at 3-month Libor minus 25 bps, up 110.75% in April - could be set up to make money, he would not be specific.

Another buyside source agreed that it would be a defensive security to hold, due to the high bond floor and low vol, and said there might also be a fair amount of outright convertible funds buying it for exposure to the stock and the investment grade credit. But he said that with such a high dividend on the common stock, which creates a negative carry to start with, he felt the terms were too rich to buy it.

The manager of a big outright fund in New York said, indeed, he liked the name and the credit, but would wait for better terms - either a sweetening at-issue or in the aftermarket.

Deutsche Bank Securities analysts put the Bristol-Myers convertible 0.34% rich to 1.35% cheap, at the midpoint of guidance, using a credit spread of 25 bps over Libor and a 23% stock volatility.

Lehman Brothers analysts put it 1% rich, at the middle of price talk, using a credit spread of 30 bps over Libor and a 20% stock volatility.

Both valuations accounted for the 4.1% common dividend yield.

While overall interest in the Bristol-Myers issue might be described as less than exciting, buyside players say demand is raging for new paper. Certainly, other new issues in play seemed to indicate that sentiment.

Pharmaceutical Resources sold an upsized $160 million of seven-year convertible notes, on a call spread, at par to yield 2.875% with a 35% initial conversion premium, and at the tighter end of talk of 2.75% to 3.25%, up 33% to 37%.

After the deal terms emerged, right before the open, Pharmaceutical Resources confirmed a report in Thursday's Wall Street Journal that named the company as one of 13 drug firms in a complaint being filed in Massachusetts alleging price gouging on generic medicines in the state's Medicaid program.

Two other convertible names - Watson Pharmaceuticals Inc. and Teva Pharmaceutical - are involved in the Massachusetts complaint. Watson's convert lost 2 points and the stock dropped 2.35% while Teva's converts fell 3.5 to nearly 5 points as the stock dropped 3.82%.

Still, the new Pharmaceutical Resources convertible ended the day at about 104 bid, 105 offered, according to a buyside trader. The stock closed down $2.03, or 3.09%, to $63.72.

MemberWorks' new deal also did well, even though many players lamented a lack of comparables on the credit before it priced. One buyside trader said it was obviously priced to sell, though.

MemberWorks sold $75 million of seven-year convertible notes, on swap, at par to yield 5.5% with a 35% initial conversion premium - at the middle of talk of a 5.25% to 5.75% coupon and at the aggressive end of premium guidance for 30% to 35%.

The new MemberWorks convert was closed by bookrunner Bear Stearns & Co. at 104.125 bid, 104.625 offered. The underlying stock ended up 90c, or 3.01%, to $30.80.

Exult's new issue seemed to show the effect of pricing aggressively. The company sold $100 million of seven-year convertible notes at par to yield 2.5% up 40% - at the tight end of price talk of 2.5% to 3.0%, up 35% to 40%.

The new issue was closed at 100 bid, 100.5 offered by bookrunner Goldman Sachs & Co. Exult shares closed down 27c, or 3.21%, to $8.13.

Elsewhere in the secondary market, traders said the market held its own against the further drop in stocks although there were a few "backsliders" on specific news.

The shocking jury award against Flextronics for nearly $1 billion sent the convertibles 6 points lower, while the stock lost $1.10, but buyers stepped in and at the end of the day traders said the issue richened nicely against the stock decline.

Beyond Flextronics' specific situation at hand, market watchers said it raises concern about disclosure and the definition of a "material" event. (See full report on Page 1)

Flextronics' 1% convert due 2010 - a $500 million issue sold in late July - was pegged at the close at 114 bid, 115 offered. That's 6 points behind where the issue closed Wednesday. Flextronic shares moved steadily lower throughout the session, ending down $1.10, or 7.33%, to $13.90.

Bisys was marked aggressively lower in tandem with the stock, which fell $3.72, or 22.32%, to $12.95, traders said, after the company issued an earnings warning.

The firm is loosely lumped in the insurance sector but also has interests in education and information services and back-office outsourcing for mutual-fund companies. After Wednesday's close, the company lowered its fiscal first quarter earnings forecast to 15c a share from 22c, and said fiscal 2004 earnings will likely be in the range of 80-85c a share, whereas analysts were expecting on average $1.08 per share, according to First Call.

But traders said Cephalon and Lucent Technologies Inc. spiked higher on positive business buzz.

Cephalon reported a positive development in its plans to market a sleep disorder drug for broader applications than narcolepsy, and the converts gained nicely as the stock rose $1.23, or 2.69%, to $46.90.

Cephalon's new 0% converts rose, with tranche A adding 2 points to 97.875 bid, 98.375 offered and tranche B gaining 2.25 points to 97.25 bid, 97.75 offered. The 2.5% due 2006 was up 1.25 points to 94.5 bid, 95 offered.

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