Vivus quiet on debut; upsized Tesla jumps in gray market, talk tightened; Symantec trades

By Rebecca Melvin

New York, May 16 - Vivus Inc.'s newly priced 4.5% convertible bonds were quiet on their debut in the secondary market Thursday, with the bonds offered early at 101 and some trading at about par, market sources said.

The Vivus deal of seven-year convertible senior notes, which was upsized to $220 million from $200 million, priced at the midpoint to cheap end of talked terms, and terms were deemed attractive, but hedged participation was prohibited by a lack of stock available to borrow, sources said.

Also in the primary convertible market, Tesla Motors Inc.'s planned offering of five-year convertible bonds was upsized during marketing Thursday to $525 million plus a 15% greenshoe from an initially talked $450 million deal size. Price talk was tightened to a 1.5% to 2% coupon with a fixed 35% initial conversion premium, from original talk of a 2% to 2.5% coupon and a 30% to 35% premium.

Tesla was bid up in the gray market to 101.5 early and rose even higher after terms were tightened to 103 and 104.

"It's trading up in the gray market even after repricing. It's nutty," a market source said.

The Tesla paper was also seen as an outright play given absent stock borrow for hedged players.

Tesla shares jumped 8.7% Thursday.

Ryland Group Inc.'s 0.25% convertible senior notes traded in line with lower shares after expanding about a point on a dollar-neutral, or hedged, basis on their debut Wednesday. Shares slipped 1%.

The issue did well, a buysider said about the debut, despite what he considered relatively expensive terms. "I was very surprised," he said.

Elsewhere, Symantec Corp.'s 1% convertibles, which mature next month, were about 1.5 points lower outright in very active trade at about 127 bid, 127.5 offered, with the shares around $24.47. Hedged players were eying optionality in the issue, which trades at slightly less than parity and goes away June 15.

The major stock indices, which hugged the flat line much of the session, ended lower, snapping a string of all-time closing highs. The S&P 500 stock index dropped 8.31 points, or 0.5%, to 1,650.47; the Dow Jones industrial average shed 42.47 points, or 0.3%, to 15,233.22; and the Nasdaq stock index peeled back 6.37 points, or 0.2%, to 3,465.24.

Among the latest economic data, U.S. jobless claims jumped to the highest level in six weeks, rising to 32,000 last week and to a seasonally adjusted 360,000, the Labor Department reported Thursday. The less volatile four-week average rose by only 1,250 claims to 339,250.

The Labor Department also reported that the consumer price index fell 0.4% in April from March, pulled down by lower gas prices. Aside from gas, prices were largely unchanged, and excluding volatile energy and food costs, core prices ticked up 0.1% last month.

For the 12 months ending in April, overall prices rose 1.1%, the smallest annual gain in 2.5 years, and core prices rose 1.7%.

Meanwhile, the Commerce Department reported that U.S. housing starts fell in April to a seasonally adjusted annual rate of 853,000, a 16.5% drop from a 1.02 million pace in March. But applications for new construction permits jumped 14.3% to a rate of 1.02 million.

New Vivus quiet, flat

Vivus' newly priced 4.5% convertible was seen around par late in the session, according to a market source. Bookrunner Deutsche Bank Securities Inc. declined to comment on the deal's debut.

Shares of the Mountain View, Calif.-based pharmaceutical company traded down 37 cents, or 2.9%, to $12.54 on Thursday.

A "tough stock borrow" was behind the inactivity in the new deal, sources said.

"Between tough borrow and the Shutterfly, Ryland and Tesla deals, I think people may be overlooking it," a New York-based sellsider said.

The sellsider was referring to the Shutterfly Inc. and Ryland deals, which debuted on Wednesday, and Tesla Motors, which was expected to price after the market close Thursday.

Vivus priced an upsized $220 million of seven-year convertible senior notes late Wednesday to yield 4.5% with an initial conversion premium of 15%.

"It's pretty cheap, but there's' no borrow so we can't participate in it," a hedged player said. He liked the deal, however, and expected that by the second half of the year there were likely to be catalysts that would enable hedged players to get involved.

"It looks like it was placed to stay in long-only hands for a bit, but we think that there are certainly potential catalysts for the second half of the year," he said.

But even outright action in the secondary was muted. There was demand for the upsizing, but it looks like everyone who wanted it got it, he said.

"We'll see how the stock does," the hedged player said.

Vivus, which focuses on treatments for obesity and sexual dysfunction, will be watched for developments in direct marketing to consumers and potential prescription acceleration of its obesity drug. "That would be what everyone is waiting for and could drive the stock higher," he said.

He noted that there is also a proxy fight regarding the board of directors, which "is not good obviously, but we think it's much ado about nothing."

The Rule 144A offering priced at the midpoint of 4.25% to 4.75% coupon talk and at the cheap end of 15% to 20% premium talk.

There is an over-allotment option for up to an additional $30 million of notes, and proceeds will be used to commercialize products and develop product candidates and for general corporate purposes.

About $30 million of the proceeds will be used to pay the cost of a capped call transaction with an affiliate of one of the initial purchasers of the notes. The initial cap price is $20.00, boosting the effective premium from the issuer's perspective to 55%.

The notes are non-callable with no puts. They have net share settlement and contingent conversion if shares rise to 130% of the conversion price, and takeover protection.

Upsized Tesla gains in gray

Gains in the gray market for Tesla's planned $525 million of convertibles was motivated perhaps by the upsizing and by a surge in the underlying stock.

Tesla shares jumped $7.36, or 8.7%, to $92.20, and the upsizing makes the deal large enough to foster participation by large, outright investors looking to be involved in benchmarks, a market source said.

The planned paper traded at 104 in the gray market.

But determining an accurate valuation for the paper was tricky because of the stock borrow issue. Using a credit spread of 500 basis points over Libor and capping volatility at 45%, the paper looked rich at the midpoint of talk with a 5% borrow factored in.

"But there is no borrow; the borrow is non-existent," a market source said. As an outright deal, with regular borrow, the deal modeled very cheap.

Goldman Sachs, Morgan Stanley and JPMorgan are the joint bookrunners of the notes.

The notes are non-callable with no puts except a fundamental change-of-control put.

Proceeds will be used to repay a Department of Energy loan, for the bond hedge and for general corporate purposes.

Tesla, a Palo Alto, Calif., electric car maker, is pricing common stock concurrently with the convertibles. Chief executive Elon Musk has indicated his preliminary interest in purchasing about half of the offered shares.

The stock has been on a run but will remain volatile, while the credit should hold up. The bond floor is in the high 80s, the market source said, so investing in the convertibles seems like a good way to invest in the company.

"We're believers in the technology and think that electric is the way to go. But A, there's no borrow, and B, for fundamental players, you're going to be at the whim of the stock price, which will be all over the map," he said.

Mentioned in this article:

Ryland Group Inc. NYSE: RYL

Shutterfly Inc. Nasdaq: SFLY

Symantec Corp. Nasdaq: SYMC

Tesla Motors Inc. Nasdaq: TSLA

Vivus Inc. Nasdaq: VVUS

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