Gilead lower outright, mixed on hedge; Transocean, MF Global lower; 3D Systems prices

By Rebecca Melvin

New York, Nov. 21 - Gilead Sciences Inc. was a big focus of the day in the convertible bond market Monday, with its trio of convertible bonds dropping outright, but mixed on a hedged basis, after news that the Foster City, Calif.-based biopharmaceutical company has agreed to buy Princeton, N.J.-based Pharmasset Inc. for nearly $11 billion, or an 89% premium to Pharmasset's closing share price on Friday.

The Gilead Bs and Cs did better on swap, but the Ds lost some, a New York-based trader said. The longest-dated Gilead convertibles, or the 1.625% convertibles due 2016, are referred to as the D convertibles.

Transocean Ltd.'s convertibles were lower in the wake of another deepwater oil spill off the coast of Brazil that may cause Transocean to be banned from deep water drilling in that region.

A drilling project triggered a leak of as much as 3,000 barrels in eight days in the Campos Basin off Rio's coast, an area where more than 80% of Brazil's crude is produced.

MF Global Holdings Ltd. saw its three convertibles issues take a leg lower to roughly 29 on news that its shortfall in customer funds may be more than $1.2 billion, which is more than double previous estimates.

Elsewhere, risker credit names were lower again on a risk off day in the broader markets that left the major stock indices lower for a fourth consecutive session.

Weighing on sentiment were signs of a worsening situation in the euro debt crisis and failure of the U.S. congressional committee tasked with coming up with a plan to cut America's federal budget deficit.

Regarding Europe, Moody's Investors Service warned that France's credit rating could be hurt if elevated rates persist for an extended period in the midst of weaker economic growth prospects.

In the United States, investors were concerned that the Congressional committee's inability to make cuts could result in a second downgrade of the U.S. credit rating.

The Dow Jones industrial average ended down 249 points, or 2%, to 11.547.31; the Standard & Poor's 500 stock index lost 23 points, or 1.9%, to 1,192.98; and the Nasdaq Stock Market tumbled 49 points, or 1.9%, to 2.523.14.

Meanwhile, 3D Systems Corp. priced a private placement of $152 million of 5.5% convertible senior notes due 2016 with an initial conversion premium of 27.5%, which was bought at a discount to par of 98 by primarily long-only, fundamental investors.

Giilead down outright

Gilead's 1.625% convertibles, or the D tranche, due 2016 dropped 6 points outright to 106 and traded between 105 and 108 during the session Monday. The deal also came in on a hedged basis.

"The D is the longest dated, and they came in because [the Pharmasset deal] is a big transaction and they might have to raise more money to complete it," a New York-based sellside trader sad.

Gilead shares ended the session down $3.62, or 9%, at $36.26 on Monday.

Pharmasset is developing a drug code-named PSI-7977, which Gilead believes could become part of the first all-oral regimen for hepatitis C, with potential U.S. regulatory approval in 2014. Pharmasset also has other potential hepatitis C drugs in the pipeline.

The $11 billion price tag for Pharmasset highlights stiff competition among drug makers in advance of new treatments for hepatitis C.

The Gilead 1%, or C tranche, convertibles due 2014 that priced at the same time as the D tranche were seen at 103.825, which was down 4.5 points, according to Trace data. The Gilead 1% convertibles were 111 on Oct. 25.

These two tranches together formed a $2.5 billion offering that priced in July 2010.

Gilead's 0.625% convertibles due 2013 traded at 108.5 versus an underlying share price of $35.85 on Monday, which was down compared to 116.5 versus an underlying share price of $40.65 on Friday, a New York-based sellside analyst said.

The Gilead 0.625% bonds had 14.4 points of premium over parity on Monday compared to 10 points the other day, the analyst said.

Transocean slips

Transocean's 1.5% convertibles due 2037 traded last at 96.875 bid, 97 offered, which was down about 0.25 point to 0.375 point on the day.

Shares of Switzerland-based Transocean ended the session down $1.94, or 4%, at $45.53 on Monday.

Transocean "came in on another oil spill off the coast of Brazil," a trader said. "They are not sure if it's leaking or not, but they are potentially banning Transocean from doing business there and that is causing spreads to push out wider."

3D prices at a discount

3D priced $152 million of 5.5% five-year convertible senior notes in a private placement at a discount to par of 98, according to a syndicate source.

Two of the last three issues priced in November also came at discounts to par. They included Air Lease Corp.'s $200 million of 3.875% convertibles, which came at a discount of 96, and Human Genome Sciences Inc.'s $494.5 million of 3% convertibles, which came at a discount of 99.

"To me, it means that customers are finally balking at crappy pricing," a New York-based source said about the discounting that appears to be a new trend in convertibles.

He said that it appeared that investors weren't willing to accept aggressive pricing, especially if there were not good opportunities to borrow the shares of companies with weaker credits.

Proceeds of 3D's offering were intended to fund a previously announced purchase from the Contex Group of Z Corp. and Vidar Systems for $137 million in cash, subject to customary closing conditions and regulatory approvals.

Lead placement agent of the private S-2 offering was Barclays Capital Inc. with Canaccord Genuity and Needham & Co. LLC acting as co-placement agents.

The bonds have net share settlement. They mature Dec. 15, 2016.

Based in Rock Hill S.C., 3D Systems is a three-dimensional modeling, prototyping and manufacturing services company.

Mentioned in this article:

Gilead Sciences Inc. Nasdaq: GILD

MF Global Holdings Ltd. NYSE: MF

3D Systems Corp. NYSE: DDD

Transocean Ltd. NYSE: RIG

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