US Airways, Toreador launch new deals, bringing calendar to five; Sepracor, Cephalon up

By Rebecca Melvin

Princeton, N.J., Sept. 20 - With four new deals launched in the convertibles market in two days one might have expected players to be a little more ebullient Tuesday. But the planned issues were seen as small, and at least two presented stock borrow difficulties, while another, launched by bankrupt airline US Airways Group Inc., was viewed with skepticism at best, according to sources.

The deals included $125 million of seven-year convertibles from Cyberonics Inc. and $125 million of 20-year convertibles from Wesco International Inc., both launched on Monday; $75 million of 20-year convertibles from Toreador Resources Corp., and $125 million of 15-year convertibles from US Airways, both launched on Tuesday.

In addition, a deal of mandatory exchangeables into shares of Genworth Financial Inc. was seen on tap after markets close Wednesday, following its launch last week by issuer Citigroup Funding Inc. Cyberonics was also expected to price Wednesday after the close.

In the secondary market, a handful of biotechnology names traded mostly higher, with several Sepracor Inc. convertibles gaining in line with a 3.5% jump in its underlying shares, while Cephalon Inc.'s 0% convertible B tranche gained 0.50 point on a 0.67% rise in its shares, traders said.

Amgen Inc. convertibles also traded in line with the company's shares, which were slightly better early but dropped late in the session.

The two convertible issues of Mercury Interactive Corp. edged closer to par ahead of a put seen soon related to a technical default after the company failed to meet financial filing deadlines, traders said.

Energy names were mostly lower, including Halliburton Co., which retraced gains notched Monday on a spike in oil prices.

"It was really pretty mixed. There was some strengthening and some [weakening]," a sellside desk analyst said, noting that the Dow Jones Industrial Average went negative immediately following word that the Federal Open Market Committee of the Federal Reserve hiked its target for the federal funds rate by another 25 basis points to 3.75%.

The committee, which said the affects of Hurricane Katrina did not pose a persistent threat, left the door open to future increases depending on the economy and inflationary pressures.

"It felt weaker," a New York-based sellside trader said, noting that while the interest rate increase was mostly expected, "it was the way they said it" that tempered markets.

Stock borrow hampers Cyberonics

At the cheap end of price talk, the $125 million of convertibles to be issued by Cyberonics was seen 3% to 4% cheap on an outright basis, according to a New York-based sellside shop analyst. But stock borrow is a problem, making the deal rich on a hedged basis, he said.

Factoring in the expensive borrow, and using a credit spread of 500 basis points plus Libor and volatility of 43%, the deal was seen as 2.625% rich at the cheap end.

Price talk on the seven -year bullet convertibles was 2.50% to 3% for the coupon and 27.5% to 32.5% for the initial conversion premium.

The Rule 144A deal, with a greenshoe of $18.75 million, was expected to price Wednesday after the close via bookrunner Merrill Lynch.

The convertible senior subordinated notes are non-callable for the life of the bond, and there are no puts.

Without the stock borrow issue, Cyberonics, a Houston-based medical device maker, was seen as a desirable play.

"I would have loved to have gotten involved. I love to buy volatile health care names. But I can't buy something that I can't hedge," a Connecticut-based buyside source said.

Another source referred to its dynamic aggressive chief executive as an attraction for investors.

Cyberonics shares on Tuesday closed down by $1.68, or 4.68%, at $34.22 but were seen off by as much as 8% during the session. The stock had plunged 5% in after-hours trade Monday as the deal hit the tape.

Proceeds from the $125 million offering, which also includes an $18.75 million greenshoe, after Cyberonics hedges the deal, are intended to fund the launch of its treatment-resistant depression product in the United States and Europe, relaunch its epilepsy product and expand its salesforce.

Cyberonics was making the offering on swap itself - using about $20 million of proceeds to buy back shares and purchase bond hedge warrants. The company said the stock and hedge transactions will effectively boost the conversion premium on the issue to 50%.

Toreador also has stock borrow issues

As an oil-and-gas play, Toreador was also attractive to many hedge players, but again the stock borrow was an issue for them and reportedly the deal wasn't going well, a Connecticut-based buyside source said.

Dallas-based Toreador is expected to price $75 million of 20-year convertible senior notes on Thursday after the markets close via bookrunner UBS Investment Bank.

The notes, talked to yield 5% to 5.5% with an initial conversion premium of 20% to 25%, are non-callable for three years and are provisionally callable in years three through five. There are puts in years five, 10 and 15.

Net proceeds will be used for general corporate purposes, including funding a portion of the company's 2005 and 2006 exploration and development activities.

No price talk yet for Wesco

Price talk didn't emerge late Tuesday as expected for the Wesco convertible deal, with a syndicate source saying that it would instead be released Wednesday. He didn't provide an explanation for the delay.

Nevertheless, convertibles players were looking at it Tuesday.

"It's a nice little company. We were trying to figure out comps for them this afternoon," a Connecticut-based buyside source said.

Wesco International, Inc. said it plans to raise about $275 million through concurrent offerings of $150 million of 12-year notes and $125 million of 20-year convertible notes, plus a greenshoe of $25 million of convertibles.

Bookrunners for the convertible senior debentures, set to price Thursday after the close, are Goldman Sachs & Co. and Lehman Brothers.

Credit questions weigh on US Airways

US Airways' effort to use convertible debt financing as part of a plan to emerge from bankruptcy protection was seen as strange by many convertibles players, and credit questions weighed heavily on their consideration of the 15-year convertible notes expected to price Sept. 28 via bookrunner Merrill Lynch.

"The timing of this is pretty unusual," a New York-based sellside desk analyst said.

Coming on the heels of two bankruptcy protection filings by major airlines, Northwest Airlines Corp. and Delta Air Lines Inc., last week, it was hard for people to take it very seriously.

A convertible arbitrage buysider said, "My boss wouldn't touch this with a 10-foot pole."

A New York sellside analyst said facetiously, "It looks like fair value at the cheap end, using 50% volatility and 2,500 [basis points] over Libor."

Price talk for the Rule 144A deal is for a coupon of 6.75% to 7.25%, with an initial conversion premium of 25% to 30%.

The convertibles are being offered concurrently with an offering of up to 9.78 million common shares, for a proposed maximum aggregate of $172.5 million, according to a filing with the Securities and Exchange Commission.

Arlington, Va.-based US Airways is planning to exit bankruptcy this month by merging with America West Holdings Corp.

America West agreed to buy the company in May, and a federal judge approved the restructuring plan including the merger on Friday.

The notes are non-callable for five years and then callable in years six through 10, with a provisional 115% trigger. There are puts in years five and 10.

Proceeds of the convertible offering are expected to pay off an obligation to General Electric Co.

America West's existing 2.491% convertibles due 2023 were seen up a little more than a point at about 33.5, compared to 32 bid, 32.5 offered on Monday. Its stock on Tuesday gained 43 cents, or 5.73%, to $7.94.

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