Theravance up outright, flat to higher on hedge; Radian adds; Forestar, Hanwha improve

By Rebecca Melvin

New York, March 4 - Several convertible names kept pace with outsized gains in their underlying shares on Monday while the convertible market in general traded quietly as equity markets shrugged off early doldrums to trade higher into the close.

Theravance Inc.'s two convertible bonds traded higher on an outright basis and were in line to slightly higher on a hedged, or dollar-neutral, basis after the San Francisco-based biotechnology company's positive outcome for a respiratory drug stirred speculation that it may be a takeover candidate. Piper Jaffray put out a note that pointed to a potential acquirer for the company, which is 27% owned by GlaxoSmithKline plc. Theravance shares jumped 16%.

Radian Group Inc. was higher outright, and higher by about a point on a hedged basis, as the underlying shares of the Philadelphia-based mortgage insurer continued to surge. The shares, which have been on a run for the better part of three months, were upgraded by Keefe Bruyette & Woods to "outperform" from "market perform."

Forestar Group Inc.'s $125 million of 3.75% seven-year convertibles, which priced last month, were higher on a 10% surge in the underlying shares. The company was the subject of an article in the most recent Barron's.

The article said Forestar has a "rich portfolio of assets" that is trading at "just a fraction of its net asset value."

Solar names were in focus, with the convertibles of Hanwha SolarOne Co. Ltd., which are typically not seen in trade, moving higher in decent action despite lower shares.

Also higher on the day were the convertibles of AMR Corp. amid further snippets of integration planning suggesting that the planned merger with US Airways Group Inc. is moving ahead in a timely manner.

The AMR convertibles were up a little more than 0.25 point to 106.5 bid, 106.75 offered, according to a Connecticut-based trader.

Theravance in line to higher

Theravance's 2.125% convertibles due 2023 traded at 110.558 versus an underlying share price of $24.05 during the session.

Theravance's 3% convertibles due 2015, which didn't trade early on in the session or as actively, changed hands at 117.747 versus an underlying share price of $24.15.

The new paper traded very actively, while the old paper was not heard to have traded until very late in the day. The new Theravance bonds were seen trading on a 75% to 85% delta.

"Theravance was unchanged; they basically nuked up on an 85," a Connecticut-based trader said of the newer issue.

The old Theravance bonds were up a small amount, or about one-sixteenth of a point, if they were held on a theoretical delta of 75% to 80%, a New York-based trader said.

Shares of the San Francisco-based biopharmaceutical company surged $3.37, or 16%, to $24.29. That was up from $20.97 at the close before $250 million of the new convertibles priced on Jan. 18.

At that time, the new convertibles traded slightly weak in the aftermarket as investors weighed the negatives of the paper's 10-year maturity and the fact that the biotech, which uses plant-based sugars to produce oils for use in the chemicals and fuels industries, as well as or the nutrition, skin and personal care markets, is still burning cash.

The approval for the company's drug Anoro by year-end could lead to an eventual takeout, according to Piper Jaffray. Glaxo and Theravance have a partnership to develop respiratory drugs including Breo and Anoro, which are aimed at succeeding Glaxo's Advair drug.

The Food and Drug Administration's pulmonary-Allergy Drugs Advisory Committee will review the companies' Breo drug on March 7. Glaxo currently owns 27% of Theravance and may pay $51 a share for the remaining stake at about $3.6 billion, according to sources.

Radian adds on hedge

Radian's 2.25% convertible due 2019 traded up nearly 5 points to more than 115 on Monday, which was up on a dollar-neutral basis by almost a point, or 15 teenies.

"There's been a strong bid in that name. There are a lot of people looking at it," a New York-based analyst said, referring to the paper as trading on a 70% delta.

Radian's 3% convertibles due 2017 were seen trading up 3 points to nearly 114.

The stock closed up 70 cents, or 7.6%, to $9.87.

Gains on the securities are being made as mortgage insurers stand to benefit from returning strength in the housing market. But there are those that are skeptical of the magnitude of recent gains. "It'll be fine if they don't go bust in a year," the analyst said.

Forestar adds with shares

Forestar's 3.75% convertibles due 2020 traded up to 110 on Monday. That paper struggled to maintain par when it was released for secondary market trading in February.

But shares plummeted with the convertible bond deal and although shares were up on Monday it wasn't nearly enough to recover ground lost through the end of February.

Shares rose $1.82, or 10%, to $19.38.

The Barron's article referred to the Austin, Texas-based company's diverse mix of real estate, mineral and fiber resources businesses as somewhat perplexing to investors, and said that mix was part of the reason that shares are currently trading at a significant discount to net asset value.

The company develops residential and commercial lots and sells them to builders. But the disconnect between the current share price and value wasn't expected to last however. The article said that Forestar "is accelerating sales of its residential lots and investing the proceeds in higher returning ventures, including its oil and gas business and real-estate development properties." On the oil and gas side, Forestar leases land to operators in exchange for royalties. It also drills well.

Hanwha adds with lower shares

Hanwha's 3.5% convertibles due 2018 traded up to between 89 bid, 89.5 offered on Monday, from a previous level of 88.75. Meanwhile shares of the China-based maker of solar cells and modules dropped 6 cents, or 5%, to $1.10.

Solar shares were under pressure on Monday after Yingli Green Energy Holding Co. reported a fourth-quarter loss that was more than double what analysts expected. But Yingli shares ended unchanged.

Yingli said that its shipments last year surged 43% from 2011 to 2.3 gigawatts. With that volume it was able to narrow its loss, but not as much as expected. Revenue rose 13% to 2.9 billion yuan. Given the gains, Yingli now rivals, if not out sells, Suntech Power Holdings Co. Ltd.

"I'm still waiting to hear what happens with STP," a Connecticut-based trader said when asked about Hanwha's convertibles.

Suntech Power is also expected to report earnings, and its 3% convertible bonds are set to mature March 15.

Mentioned in this article:

AMR Corp. NYSE: AMR

Forestar Group Inc. NYSE: FOR

Hanwha SolarOne Co. Ltd. Nasdaq: HSOL

Radian Group Inc. NYSE: RDN

Suntech Power Holdings Co. Ltd. NYSE: STP

Theravance Inc. Nasdaq: THRX

Yingli Green Energy Holding Co. NYSE: YGE

© 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.