Trinity gains on debut; Novell improves further on volatility, takeover speculation; Encysive gains outright

By Kenneth Lim

Boston, June 2 - The convertible bond market ended the week on a quiet note Friday, with activity for a handful of names spilling over from the previous session.

"It's so freaking quiet today," a convertible bond trader grumbled.

Trinity Industries Inc.'s newly priced $450 million of 3.875% convertibles due 2036 were among the busiest names on Friday, achieving a good debut after the deal priced within talk. The convertibles, which were described as cheap at the mid-point of price talk, gained more than a point outright.

Novell Inc. continued to improve on a hedged basis as the stock continued to fall a day after the company reported lacklustre earnings and provided guidance that disappointed Wall Street. Adding to interest in the name on Friday was speculation that the company could be a takeover target.

Encysive Pharmaceuticals Inc. surged on an outright basis of the company said that a drug had received a key recommendation for approval in Europe, increasing the probability that the product will be approved for sale in the continent.

Cubist Pharmaceuticals Inc.'s new 2.25% convertible due 2013, which priced late Wednesday, was also seen trading Friday but volume was much lighter, a convertible bond trader said. The convertible was seen at 100.25 bid, 101 offered against a stock price of $23.33 on Friday, largely flat from the day before. Shares of Lexington, Mass.-based Cubist (Nasdaq: CBST) closed at $23.37, up by 0.52% or 12 cents. Cubist is a biotech company that recently won approval to expand the marketing of its key drug, Cubicin, in the United States.

In general the market was slower on Friday, a sell-side convertible bond trader said.

"It's a pretty quiet day," the trader said. "We were pretty busy this morning trading the Trinities, but in the afternoon everything was quiet."

Trinity climbs on debut

Trinity Industries' new 3.875% convertibles due 2036 sprinted off the blocks on their first session in the secondary market, climbing as high as 1.375 points above par after the deal came to market within price talk.

"I think that the pricing is fine...it's still a good piece of paper for this point in time," said a sell-side convertible bond trader who noted that the convertible was very actively traded.

The convertible traded at 100.25 early Friday in pre-market activity, and was marked at 100.75 bid, 101 offered against a stock price of $58.40 later in the day. The convertible closed at 101.375 against a $58.50 stock price. Trinity stock (NYSE: TRN) gained 0.81% or 47 cents to close at $58.50 on Friday.

"They seemed to trade up this morning, and hung in there pretty well," a California-based convertible bond trader said.

Dallas-based Trinity priced its 3.875% convertibles late Thursday with an initial conversion premium of 35%, within talk that guided for a coupon of 3.5% to 4.25% and an initial conversion premium of 35%. The notes were offered at par. Trinity is a maker of railcars, inland barges and energy equipment.

Analysts and traders voiced reservations about the new convertible's long 12-year put structure during marketing, and the note was seen trading up a quarter-point in the gray market on Thursday.

"I think people who brought the deal ought to be happy, people who bought the deal ought to be happy," the California-based trader said.

Novell firms on stock volatility

Novell continued to firm on a dollar-neutral basis Friday as the stock tumbled for the second session in a row as convertible investors remained confident in the company's credit and chased volatility opportunities, market sources said.

The open-source software developer's 0.5% convertible due 2024 was less than a point lower outright at about 87.625 bid, 88.125 offered against a stock price of $6.25, but was "considerably better" on a dollar-neutral basis, a sell-side convertible trader said. Novell stock (Nasdaq: NOVL) closed at $6.25, down by 5.3% or 35 cents.

"They got better again today, it seems like there's a buyer out there," the trader said..

Novell stock fell on Thursday after the company's second-quarter results disappointed analysts. Waltham, Mass.-based Novell's guidance for its third quarter also fell short of Street estimates, prompting a sell-down in the stock and a stock downgrade from Credit Suisse.

On Friday, Standard and Poor's equity analysts Gary McDaniel and Scott Kessler maintained their sell recommendation on the stock, citing the possibility of a share price slide now that Novell's stock repurchase program has ended and no new buybacks are on the horizon.

Despite the pessimism on the stock, Novell's convertibles have improved on a dollar-neutral basis. The convertible bond trader said Novell "guided lower, the stock got hit, this is exactly what's supposed to happen to converts...that's how convert guys make money."

Novell's convertible has also benefited from renewed speculation that Novell could be a takeover target. Talk of Novell being acquired emerged in April when Oracle Corp. chief executive Larry Ellison said his company had considered but decided against bidding for Novell to counter rival Linux vendor Red Hat Inc.

"People think IBM and Oracle are now going to direct all their Linux business to Novell, maybe one of those guys decides, screw it, I'm just going to buy Novell," the trader said. "Sun Microsystems has also been thrown out as a potential buyer, and there's even speculation that some private equity shops may be taking them out."

"A lot of it has to do with people speculating on these guys being bought," the trader added.

All that uncertainty in the name is adding volatility to Novell's stock, and that provides opportunities for convertible investors, the trader said.

"Is it earnings or the volatility players chasing after names that could see more volatility? I think all those things contribute to what's going on at Novell," the trader said.

Encysive climbs on approval

Encysive Pharmaceuticals' 2.5% convertible due 2012 climbed about 8 points outright on Friday after a European panel recommended its high blood pressure drug Thelin for approval.

"It's a pity I wasn't in it," a sell-side convertible bond trader said.

The convertible traded at about 79 against a stock price of $6 on Friday. The lightly-traded convertible previously changed hands at about 70.75 on May 25 when the stock closed at $4.45. Encysive stock (Nasdaq: ENCY) ended the day at $5.88, up 36.11% or $1.56.

"That's not a name that necessarily trades," the trader added.

Houston-based Encysive said Friday that Europe's Committee for Medicinal Products recommended that the European Agency for the Evaluation of Medicinal Products approve the once-a-day tablet version of Thelin for treating pulmonary arterial hypertension. The agency is expected to make its decision within 90 days.

The U.S. Food and Drug Administration stopped short of giving Thelin full approval in March, and investors feared then that Encysive, a biopharmaceutical company, may have to conduct expensive additional trials. But Encysive stock surged on May 25 after the company said it submitted a complete response to the FDA, raising hopes that approval may be possible without further tests. The FDA is expected to respond this month.

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