Human Genome's new $430 million deal prices at 99, edges higher; MF Global adds a little

By Rebecca Melvin

New York, Nov. 2 - Much of Wednesday's action in the convertible bond market was dominated by a very quickly marketed $430 million issue from Human Genome Sciences Inc., which was offered at 99 and closed around par, with the underlying shares paring losses by day's end.

The new Human Genome deal, which launched and priced before the market open, seemed to set the tone for the overall convertibles market, which seemed to strengthen a bit going into the close, compared to a heavier, better-for-sale tone earlier, market sources said.

Better for sale means offers are abundant and the bid is generally nebulous.

There was also continued activity in MF Global Holdings Ltd., which was also a little better on the day.

The MF 3.375% convertibles closed up at about 48 bid, compared to a 44 to 44.25 before the session opened, a New York-based trader said.

Pioneer Natural Resources Co. was also something of a trader on Wednesday and gained outright with a slight improvement on a dollar-neutral basis after the Irving, Texas-based oil and gas exploration and development company reported better-than-expected earnings for the third quarter.

Early in the session, a New York-based sellsider said: "Things were better last week. They have cooled down this week."

But a second trader said later, "I felt it got a little better by the end of the day. It was a boring day if you weren't involved in the new deal. But some things were better, some things were lower. It was kind of a sideways day, and bouncing around."

There were also earnings of convertibles names due out after the market close and early Thursday that market players were also watching , the trader said. Transocean Ltd. was one of those.

The broader markets continue to watch the situation in Greece and what is going to happen with that nation's planned referendum on the bailout package backed by the European Union and International Monetary Fund.

Human Genome comes at 99

Human Genome's new 3% convertibles due 2018 were trading at 100 bid, 100.5 offered during the session versus an underlying share price of $9.85, a syndicate source said.

Another source said he saw them at 100.5 bid versus a share price of $10.00.

At the close, the new paper, which was initially offered at 99, following 98.5 to 99 offer talk, was marked 100 versus the closing share price of $9.91, the syndicate source said.

"I think it came back a little bit at the end with the shares better," a New York-based sellside trader.

Earlier, the paper contracted on a hedged basis using about an 80% hedge, one sellsider said.

Human Genome launched and priced the upsized $430 million of seven-year convertibles at the cheap end of talked terms, which were 2.5% to 3% for the coupon and 30% to 35% for the premium.

It came "faster than a drive by," which may account for it being upsized, pricing at the cheaps and at a discounted offering price of 99.

Human Genome's existing 2.25% convertibles due 2012, which will likely be repurchased using the proceeds of the current deal, came in slightly, behaving in the opposite manner compared to the new paper.

The existing 2.25% notes traded early at 103 versus an underlying share price of $9.85, and they went out at 102 versus the $9.91 close.

New paper looks cheap

Using a credit spread of about 800 basis points over Libor and a 42% volatility makes the paper look about 4 points cheap, according to one sellsider. He said fair value was 104 versus an underlying share price of $10.00.

He said using a spread of 600 bps over Libor, which was a value put out by the underwriter, was too aggressive given that the deal is from a biotechnology company, which is considered a riskier credit, and the maturity is seven years out, longer than a typical five-year deal.

A second source said he thought a good valuation would include an input of 750 bps over for the credit spread and 38% to 45% for the vol.

"I think they are fine.... [I'm] happy to have a new issue regardless," the New York-based trader said.

Indeed, new deals in the convert space have been few and far between. But interestingly the last string of new deals has been in the health care space.

Human Genome is a Rockville, Md.-based biopharmaceutical company that provides therapies for serious diseases such as lupus and heart disease.

The registered offering, which was sold via bookrunner Citigroup Global Markets Inc., was initially going to be $400 million in size. The greenshoe was upsized to $64.5 million from $60 million.

The convertibles are non-callable for life with no investor puts. There is standard takeover and dividend protection.

Proceeds will be used for general corporate purposes, including the repurchase, or pre-funding, of an existing issue of 2.25% convertibles that mature August 2012.

Proceeds will also be used to fund the price of a capped call spread, which boosts the conversion premium from the issuer's perspective to 180%.

In October, Burlington, Mass.-based Nuance Communication Inc. priced $690 million 2.75% 20-year bonds; Tarrytown, N.Y.-based biopharmaceutical Regeneron Pharmaceuticals Inc. priced $460 million of 1.875% five-year paper; and Silver Spring, Md.-based biotech United Therapeutics Corp. sold $250 million of 1% notes.

Pioneer Natural gains

Pioneer Natural's 2.875% convertibles due 2038 traded up on Wednesday and were last seen at 155.5 bid, 156.5 offered versus the closing share price of $91.16.

That was up from about 139 bid on Tuesday, making for a big move on an outright basis.

"There was a little activity in PXD. The stock ended up 12.5% today after earnings," a New York-based trader said.

On a hedge of 115%, given the type of structure the bond is and which most people were on, the paper improved by about 0.5 point dollar neutral as well, the trader said.

"A lot of guys on hedge were just trading the stock around today," the trader said, but it "was better bid and depending on how much stock you sold on the way up, it improved."

Pioneer Natural said that higher production at its Eagle Ford shale assets helped it beat estimates. Profit rose for the quarter ended Sept. 30 to $351 million, or $2.95 a share, from $112 million, or 94 cents a share, for the year-earlier period.

Excluding items, it earned $1.35 a share, and analysts, on average, had expected earnings of 87 cents a share, on revenue of $642.2 million.

Mentioned in this article:

Human Genome Sciences Inc. Nasdaq: HGSI

MF Global Holdings Ltd. NYSE: MF

Pioneer Natural Resources Co. NYSE: PXD

Transocean Ltd. NYSE: RIG

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.