Thompson Creek's $200 million unit deal looks cheap; Vertex adds dollar neutral; GM up

By Rebecca Melvin

New York, May 7 - Thompson Creek Metals Co. Inc. launched a $200 million offering of three-year convertible tangible equity units that was seen pretty cheap by convertibles players on Monday ahead of final pricing expected after the market close.

The Thompson Creek deal wasn't viewed as overly compelling, however, due to expensive stock borrow, small deal size and the fact that it's a three-year mandatory, which is a structure many market players don't participate in, sources said. Nevertheless, the favorable pricing and scarcity of new issuance meant the deal would likely be successful, players said.

Shares of Thompson Creek slid 90 cents, or 16%, to $4.63 in heavy volume on the New York Stock Exchange.

Back in established issues, Vertex Pharmaceuticals Inc. popped and the convertibles were better by about 0.5 point on a dollar-neutral, or hedged, basis after the Cambridge, Mass.-based biopharmaceutical announced phase 2 trial interim data that showed significant benefit for cystic fibrosis patients taking a drug combination including its Kaydeco drug.

General Motors Co.'s mandatory convertible preferred was trading and a little higher, a trader said, noting that it's a common name to short in the convertibles market.

The convertible market overall was pretty quiet, sources said, as stock markets mostly rose after early weakness, shrugging off concerns about weekend election results in Europe, which brought a socialist leader to the office of French president and more parliamentary seats to left and right fringes in Greece that are hostile to the Greek debt bailout deal.

The Dow Jones industrial average ended the session down 29.74 points, or 0.2%, at 13,008.53, but the Standard & Poor's 500 index ended in the green, up 0.48 point to 1,369.58, and the Nasdaq Composite index added 1.42 points to 2,957.76.

Thompson Creek looks cheap

Pricing of 8 million Thompson Creek units at $25 each was talked at a 6.25% to 6.75% yield and a 15% to 20% initial conversion premium.

At the midpoint of talk, using a credit spread of 500 basis points over Libor and a 3-point volatility skew, the paper was seen at fair value of $26.60, according to one New York-based convertibles analyst.

Volatility inputs were seen at anywhere between 35% to 50%, according to one sellsider, and the skew is the point difference between the vol. set on the high and low strikes of the mandatory.

A second source came up with a $26.90 valuation using the 500 bps spread and 3-point vol. skew. But a third source was using a much higher credit spread of 800 bps over Libor and a 4-point vol. skew.

The 800 bps was more in line with the valuation of a fourth source, who said, "We're having a tough time with a 500 [bps] spread for such a small company. I agree with starting at 800 over."

Thompson Creek is also pricing $200 million of seven-year straight notes. But neither offering is contingent upon completion of the other.

Thompson Creek is a mining company with an $800 million market cap. It is a top producer of molybdenum but is using proceeds of both the straight bond and unit offerings to complete construction of a copper and gold mine in Canada and for working capital purposes.

There is a greenshoe of an additional $30 million, or 1.2 million of units, for the registered deal, which is being sold via J.P. Morgan Securities LLC as active bookrunner and Deutsche Bank Securities Inc. and RBC Capital Markets LLC as passive bookrunners. Co-managers are Standard Bank, Societe Generale and UBS Investment Bank.

The equity units, or tMEDS, are non-callable with no puts and feature takeover protection. They will be listed on the New York Stock Exchange under the symbol TC PR T.

Each unit is composed of a prepaid stock purchase contract and a senior amortizing note due May 15, 2015.

Each purchase contract will automatically settle on May 15, 2015 for Thompson Creek common stock.

Thompson Creek is based in Vancouver, B.C., and Littleton, Colo.

Deal structure

The Thompson Creek deal structure is similar to last week's NextEra Energy Inc. deal, which was for $600 million convertible equity units. But NextEra wasn't a tMED structure. Nevertheless, the bigger difference between the two is between the companies themselves: NextEra is a Florida-based electric utility.

Of Thompson Creek, a New York-based convertibles strategist said, "This is a very small company and the mandatory represents a giant chunk of the overall market value."

Moody's Investors Service said it assigned a Caa2 rating on the Thompson Creek equity units and downgraded the company's corporate family rating and probability of default rating to Caa1 from B3. It also assigned a Caa2 rating to the proposed new $200 million senior unsecured notes due 2019 and affirmed the Caa2 rating for unsecured debt issued under the company's shelf registrations.

The outlook is stable, Moody's said. Over the intermediate term, the ratings reflect Moody's expectation that the company's leverage, excluding the equity component of the units, will be in the seven times to 10 times range in 2012 and in the four times to seven times range by the end of 2013, depending on when the gold and copper mine, called Mt. Milligan, comes on line.

Borrow issues

While stock borrow was available, it was expensive to borrow, resulting in a "negative rebate," one sellsider said, meaning that the borrower would have to pay to borrow the shares instead of getting paid to borrow the shares.

The sellsider said, "Given that it's such a small deal, some people won't play, and given that it's a mandatory, some people won't play, and given the stock borrow, some people won't play, and it's not cheap enough to want [to] play."

Vertex adds on hedge

Vertex Pharmaceuticals' 3.35% convertibles due 2015 traded up to 131 and change, which was an outright gain of nearly 18 points.

A market was quoted at 129.75 bid, 130.25 offered versus an underlying share price of $56.25 on Monday.

That was up about 0.5 point on a dollar-neutral basis if a 50% to55% delta was in place, a New York-based trader said.

Vertex shares surged $20.71, or 55.4%, to $58.12 in ultra-heavy volume.

Sparking the fire in the securities was interim analysis of data from an ongoing phase 2 study of Vertex's VX-809 and Kalydeco drug treatment that showed 46% of patients experienced at least 5% absolute improvement in lung function from baseline, and 20% of patients experienced at least 10% absolute improvement.

Vertex said pending final data and discussions with regulatory agencies, it plans to start a pivotal study of VX-809 and Kalydeco to treat the underlying cause of cystic fibrosis in adults with two copies of the F508del mutation.

Final phase 2 trial results are expected around mid-year.

Mentioned in this article:

General Motors Co. NYSE: GM

NextEra Energy Inc. NYSE: NEE

Thompson Creek Metals Co. Inc. NYSE: TC

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

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