Yahoo! drops outright, gains on hedge; new XenoPort pops; Performant shares crushed

By Rebecca Melvin

New York, Jan. 29 – Convertibles players remained focused Thursday on this week’s onslaught of earnings reports and eyed performance for January as the month-end loomed. One new issue in the market did pretty well, but was a small deal, allocated on a restricted basis and not widely traded, market sources said.

“It’s been a pretty good month; people are pretty happy,” a New York-based trader said, attributing the sanguine tone to stock volatility this past month that has helped convertibles and the fact that valuations held in.

As tracked by the HFRX index, the convertible arbitrage strategy was positive by 0.32% for the day, but down 0.62% for the month to date. Friday is the last day of January.

Yahoo! Inc.’s convertibles were down sharply on an outright basis, but much better on a dollar-neutral, or hedged, basis, a New York-based trader said.

The Yahoo! 0% convertibles were quoted at 106.5 versus an underlying share price of $42.50. That was down from 110 late Wednesday and 114 early Wednesday. But it was better on a dollar-neutral basis by about 1.25 points, the trader said.

Ryland Group Inc.’s older 1.625% convertibles due 2018 were seen better on an outright basis but may not have kept pace with the 8% jump in the underlying shares after the Westlake Village, Calif.-based homebuilder and mortgage finance company posted results that beat estimates.

Ryland’s convertibles were seen up at 132 compared to 130 Wednesday. Indications were for a higher bond price at 136 to match shares that were up 8% at $39.62.

Elsewhere, ServiceNow Inc.’s 0% convertibles due 2018 traded up to as high as 121 – a gain of 6 points, according to Trace data, while shares jumped 7% after the San Diego-based cloud IT services company reported earnings that beat estimates and guided higher for the current quarter and full year.

In the primary market, XenoPort Inc.’s new 2.5% convertibles traded up in the early going Thursday, according to Trace data, after the Santa Clara, Calif.-based biopharmaceutical company priced $100 million of the seven-year senior notes in an overnight deal with a 22.5% premium.

The XenoPort 2.5% convertibles were seen changing hands at 105.5, according to Trace data. Shares were up fractionally at $8.82.

“I heard they did well. But it was an ‘over the wall deal,’ and we didn’t see any of it,” a trader said.

Over the wall refers to allocations of the bond that are made among a small group of players. Several sources queried hadn’t seen the deal in trade.

A second convertibles deal in the market by Performant Financial Corp. is for an even smaller $80 million of notes that were seen pricing late Thursday or early Friday. Shares of the company were punished Thursday on the heels of the launch of the convertibles deal and concurrent offering of $50 million of common stock.

Performant Financial shares plunged $1.66, or 28%, to $4.21 on Thursday.

Yahoo! expands on hedge

Yahoo!’s 0% convertibles due 2018 were quoted at 106.5 versus an underlying share price of $42.50 at late morning, and that level “still worked,” at the end of the session, a New York-based trader said.

Yahoo! shares closed down $2.73, or 6%, to $43.73.

“Yahoo! was a definite focus of the community today,” the trader said.

The bonds expanded about 1.25 points, a second New York-based trader said.

“It’s all about Alibaba,” the trader said.

Alibaba shares sank 9% after the Chinese e-commerce giant reported disappointing revenue but quarterly earnings that were better than expected.

Yahoo! owns about 15% of the shares outstanding of Alibaba, so it took a hit on Thursday on the Alibaba loss.

Yahoo! reported its earnings late Tuesday and said at that time that it plans to spin off its Alibaba stake into a separate company. The timing of that deal is probably going to be around the end of the third quarter.

Yahoo!’s convertibles were at 114 versus an underlying share price of $50.00 early Wednesday, which was just ahead of a reversal lower in the shares.

Yahoo! posted disappointing results with revenue at $1.18 billion, falling short of estimates.

New XenoPort pops

XenoPort, a Santa Clara, Calif.-based biopharmaceutical company, saw its new 2.5% convertibles trade at 105.5, according to trace data. Shares were up fractionally.

XenoPort priced $100 million of seven-year convertible senior notes talked to yield a fixed coupon of 2.5% with an initial conversion premium of 22.5%.

Credit Suisse Securities (USA) LLC is the bookrunner.

The approximate initial conversion price is $10.72. The bonds are non-callable and will be settled in shares, with standard change-of-control protection via a make-whole table and dividend protection in the form of an adjustment to the conversion rate for any dividends paid.

Proceeds will be used to continue to commercialize Horizant, for further clinical development, including its XP23829 product candidate, and for general corporate purposes.

Performant shares sink

Shares of Performant Financial plunged $1.65, 28%, to $4.21 on the heels of news that the Livermore, Calif.-based company’s plan to price $80 million of five-year convertible bonds and $50 million in common stock.

The deal was talked at favorable terms for a yield of 4.75% to 5.25% and an initial conversion premium of 17.5% to 22.5%.

Morgan Stanley & Co. LLC and SunTrust Robinson Humphrey Inc. are joint bookrunners of the convertibles offering, which has a $12 million over-allotment option.

The bonds are non-callable.

Proceeds are earmarked to complete its acquisition of Premier Healthcare Exchange Inc., or if the acquisition is not completed, to repay debt under the company’s senior secured credit facility.

The company is a provider of technology to help identify and recover delinquent or defaulted assets and improper payments.

Mentioned in this article:

Performant Financial Corp. Nasdaq: PFMT

Ryland Group Inc. NYSE: RYL

ServiceNow Inc. NYSE: NOW

Yahoo! Inc. Nasdaq: YHOO

XenoPort Inc. Nasdaq: XNPT

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