Deutsche analysts suggest switching out of the COR 5% into 4.5%

By Ronda Fears

Nashville, Tenn., April 23 - Now that Millennium Pharmaceuticals has inserted an extra put into the COR Therapeutics convertibles it assumed in that merger, Deutsche Bank Securities Inc. convertible analysts suggest the short-term trade would be out of the 5% due 2007 into the 4.5% due 2006.

On Monday, Millennium Pharmaceuticals announced a change in the terms of the two legacy COR Therapeutics convertibles it assumed as part of the merger, adding an extra put to both bonds in one year, payable in cash only.

The 4.5% issue will be putable at 109.5 and the 5% issue at 108.5 on April 29, 2003.

The 4.5% issue closed Monday at 101.625 and the 5% issue at 103.

So, there is upside to both issues, but the Deutsche analysts prefer the 4.5% issue because it has senior ranking and more call protection.

"To us, the short-term trade would appear to be out of the 5% into the 4.5%," said Deutsche analysts Jeremy Howard, Jonathan Cohen and Robert Barron.

"We feel that the 5% was trading at a premium because of the potential for short-term gamma trading. But now that the effective put date has shifted out a year, we would be switching into the 4.5%."

The Millennium filings clearly state that the 4.5% bond is senior to both the 5% bond and the Millennium 5.5% convertible note due 2007, the analysts pointed out.

The 4.5% is junior only to Millennium's $51 million capital lease obligations.

"But the fact that the puts are co-terminus implies a narrower spread differential than would otherwise be the case," the analysts said.

Thus with the new puts and credit spreads of 675 basis points over Libor for the 4.5% issue and 750 bps for the 5% issue, the Deutsche analysts said they were confident that both converts should trade on at least a 45% implied volatility. That would bring fair value to 105.39 for the 4.5% issue and 104.17 for the 5% issue.

So there would be upside to both bonds from where they were trading before the puts were added.

The analysts also noted that the conversion price is lower on the 5% issue at $34.21, versus $40.61 for the 4.5% issue, but the 4.5% bond also has call protection to June 2004, versus March 2003 on the 5% bond.

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