Auxilium lower outright, expands on hedge after outlook cut; primary should 'tread water'

By Rebecca Melvin

New York, April 30 - Auxilium Pharmaceuticals Inc.'s 1.5% convertibles fell outright but expanded on a dollar-neutral, or hedged, basis versus a negative jolt in the shares of the Malvern, Pa.-based specialty pharmaceutical company after it lowered full-year guidance, a New York-based trader said.

Tesla Motors Inc. was narrowly mixed to unchanged in active trade as shares of the electric car maker pulled into positive territory following a weak open.

Also among the most-actively traded names were Trinity Industries Inc., which saw its 3.875% convertibles due 2036 trade up multiple points to 167 amid a 4% rise in the underlying shares of the Dallas-based maker of rail cars, and LifePoint Hospitals Inc.'s 3.5% convertibles, which mature in two weeks and traded a little lower at 104.5.

Elsewhere, window dressing was a feature of the day as convertibles players added and/or trimmed positions to mark month end books.

"There was surprisingly not a lot of activity, a New York-based trader said. Even earnings reports didn't spark much trading response, he said.

The primary market remained quiet for a third straight day this week.

Primary stands even

Despite a lack of new convertible issues in recent sessions, year-to-date issuance is even with the same period of last year, and the expectation is that second-quarter new issuance will continue to tread water, a New York-based syndicate source said.

"I expect new issuance will be on par with last year, reaching about $40 billion to $50 billion," the source said.

"We saw $10.8 billion [in issuance] for the first quarter and another $3 billion through April, and we are one-third of the way through the year," he said.

Through April there was $13.86 billion in 39 deals, compared to $13.52 billion in 41 deals for the first four months of 2013, according to Prospect News data.

"But a lot is going to depend on the equity market," he added. On the heels of a big run up in equities last year, the convert market saw an outsized fourth quarter that exceeded the general pace of issuance. "But that was related specifically to equities," the syndicate source said.

With the recent revaluation going on in growth names, there has been some pullback in certain stocks, and concomitantly, there have been some opportunistic convertible issuers that have put things on hold for the time being, the syndicate source said. But overall, nothing about the economy or business has changed, and "conditions in the convert market are good," he said.

Interest rates are a little higher, but pricing is still very favorable for issuers, the syndicate source said referring to last week's Citrix Systems Inc. convertible, which came with a 0.5% coupon and a 50% initial conversion premium, and to Akamai Inc.'s convertible deal that price in mid-February with a 0% coupon and 50% premium.

Given that kind of pricing, eBay Inc.'s decision to take a $3 billion tax charge to repatriate funds rather than raise capital domestically through a convertible bond or even a straight bond raised some eyebrows on Wednesday.

"eBay was clear they haven't done the repatriation yet, but there is the potential because they want dry powder for M&A," the syndicate source said. "There is some sense that this is a watershed decision to pay a huge tax bill to bring funds back when rates are still very low. And the jury is still out whether others will follow suit; Apple did exactly the opposite the day before."

By and large, the convertible primary market can expect to see a steady stream of smaller cap companies, single B and BB credits, that aren't loading up for M&A, but using converts to refinance and/or fund operations, the syndicate source said.

"They are the classic convertible issuers, perhaps public only a year or two, that want the low covenants and low cash costs. They will continue to be the bread and butter of the convert space," the syndicate source said.

Auxilium expands on hedge

Auxilium's 1.5% convertibles due 2018 were seen at 118.5 bid, 119.25 offered with the underlying shares at $22.50. That was an expansion of about 0.75 point on a dollar-neutral basis, a New York-based trader said.

Auxilium shares fell $4.85, or 18%, to $22.52 on the day.

The outsized stock drop was related to Auxilium's downward revision to full-year revenue to $380 million to $420 million from $450 million to $490 million and was below estimates.

An East Coast-based buysider said that the lower guidance related to its testosterone therapy isn't a death knell for the company as "longer term Auxilium is trying to be urology focused" and is expanding in other areas in the face of losing market share in testosterone.

The Auxilium bonds fell from about 133 on Tuesday and went into Wednesday on a delta of about 68% to 70%.

The delta fell to closer to 60% on Wednesday, which is the high end of a balanced range, the buysider said.

Mentioned in this article:

Auxilium Pharmaceuticals Inc. Nasdaq: AUXM

LifePoint Hospitals Inc. Nasdaq: LPNT

Tesla Motors Inc. Nasdaq: TSLA

Trinity Industries Inc. NYSE: TRN

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