New Emergent BioSolutions rises on hedge; International Game drops; Exterran sees sellers

By Rebecca Melvin

New York, Jan. 24 - Emergent BioSolutions Inc.'s newly priced 2.875% convertibles traded up on both an outright and hedged basis on Friday after the Rockville, Md.-based specialty pharmaceutical company priced an upsized $215 million of the seven-year bonds at the midpoint of coupon talk and beyond the rich end of premium talk.

The new Emergent bond was seen as high as 104 in trade before the market open, according to a New York-based trader. But Emergent shares, which were higher at the open, slipped quickly, and at late morning a level on the bonds was quoted at 101.25 bid, 102 offered versus an underlying share price of $23.15. Shares were down 1.7% at that time.

Near the market close, the bonds were quoted at 102 bid, 102.5 offered versus Thursday's market close of $23.55 for the underlying shares. The shares closed at $22.85 on Friday.

International Game Technology's convertibles, which mature May 1, 2014, fell sharply to about 101 from 105. Shares of the Las Vegas-based gaming equipment company slumped amid disappointing earnings, revenue that missed estimates and guidance and performance going forward pegged to the low end of its previous range.

Overall, the U.S. convertibles market felt a little heavy as equities sold off aggressively in tandem with a two-day sell-off in equity and currency markets around the world.

There were sellers of Exterran Holdings Inc.'s 4.25% convertibles, one trader said, and those bonds came in to about parity plus 0.625 point, or 154 versus an underlying share price of $35.50. That was flat to weaker compared to where they had been trading.

Colony Financial Inc.'s 3.875% convertibles due 2021, which debuted in the market on Thursday, were still on players' radar screens, but volume was said to be very light compared to the prior session.

"They are still wrapped around 100," a New York-based trader said, referring to the fact that the new Colony bonds traded in line on a hedged basis after the Santa Monica, Calif.-based real estate investment trust priced $200 million of the new bonds in an overnight deal at the midpoint of talk.

Colony's older 5% convertibles due 2023, which priced last April, were steady at 105.5 to 106 early Friday.

New Emergent rises

Emergent BioSolutions' 2.875% convertibles due 2021 traded as high as 104 before the market open, according to a New York-based trader. But later the bond was quoted at 101.25 bid, 102 offered versus a lower share price of $23.15. Shares were down 1.7% at that point.

That level represented an expansion on a dollar-neutral, or hedged basis of 2.125 points, assuming a delta of 70%, traders agreed.

Near the market close, the bonds were quoted at 102 bid, 102.5 offered versus Thursday's market close of $23.55 for the underlying shares, which represented an expansion of 2 points to 2.5 points.

Before final terms were fixed, the deal was valued at 2.5 points cheap at the midpoint of talk, using a credit spread of 550 basis points over Libor and a 30% vol.

In actuality, the deal priced at the midpoint of coupon talk and beyond the rich end of the talked range for the initial conversion premium, or at a premium of 37.5% compared to talk, which was for a 27.5% to 32.5% premium.

"We need more of these kinds of deals," a New York-based trader said.

The Rule 144A offering was upsized to $215 million from an initially talked $200 million, with a $35 million greenshoe, which was upsized from $30 million.

BofA Merrill Lynch and J.P. Morgan Securities LLC were joint bookrunners for the deal.

The bonds are non-callable for three years and then are provisionally callable if shares exceed 130% of the conversion price. There are no puts.

Proceeds will be used to finance a previously announced acquisition and for general corporate purposes.

International Game falls

International Game's 3.25% convertibles due May 1, 2014 traded down about 4 points to about 101 from about 105 previously, while International Game shares skidded $2.60, or 15%, to $15.05.

"IGT came in a little bit as guys are realizing there is not much value in it. But the shares got absolutely smoked," a trader said.

For the quarter ended Dec. 31, the company said it earned 25 cents per share excluding one-time items, on revenue of $541 million. Analysts were expecting earnings of 30 cents a share on revenue of $552 million.

The outlook was not encouraging. "Given declining gross gaming revenue trends, we anticipate that the lower end of our previously announced guidance range is more likely, with potential further downside risk. We are in the process of implementing a number of measures, including cost reductions, to mitigate this risk," the company said in a news release.

Sellers in Exterran

Exterran's 4.25% convertibles due June 15, 2014 traded down to about parity plus 0.625 point, or 154 versus an underlying share price of $35.50, a New York-based trader said.

Market participants were selling the name on the view that there is little optionality left in the bonds ahead of maturity.

"It's one of those names guys aren't seeing any value to the option, and so they are getting rid of them," the trader said.

He said that market players are anticipating more value in issues with a little longer-dated maturity.

For the shorter-dated names, it boils down to one's view on the stock, the trader said. But for names like Exterran, IGT and Alcoa Inc., for example, all short-dated issues, the trend appears to be: get out of them.

"2014 is definitely a name-specific market," the trader said.

Mentioned in this article:

Colony Financial Inc. Nasdaq: CLNY

Emergent BioSolutions Inc. NYSE: EBS

Exterran Holdings Inc. NYSE: EXH

International Game Technology NYSE: IGT

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