New PDL BioPharma trades up outright, mixed on hedge; existing PDL up with exchange offer

By Rebecca Melvin

New York, Feb. 7 - PDL BioPharma Inc.'s newly priced 4% convertibles due 2018 traded up on an outright basis on Friday but were mixed on a hedged basis after the Incline Village, Nev.-based biopharmaceutical company priced the upsized deal of four-year senior notes at the midpoint of talk, according to a syndicate source.

On a hedged, or swap basis, valuations varied given that "there were a lot of moving parts involved in this deal," a New York-based trader said.

PDL BioPharma's existing convertibles, a series of 2.875% convertibles due February 2015 and a series of 3.75% convertibles due May 2015, strengthened after the company said it plans to exchange about $131.7 million of its 2.875% convertibles.

PDL's 3.75% convertibles were seen 1.5 point to 3 points above parity, compared with valuation below parity previously.

Elsewhere, WellPoint Inc.'s 2.75% convertibles due 2042 were off a couple of points, in line with the underlying shares amid questions over how national health care will affect the Indianapolis-based health benefits company.

Otherwise, trading was pretty quiet in a session that was described as "deal centric."

"All [the trading] has been deal centric; other than new deal stuff, there wasn't much," a New York-based trader said.

The week brought more than $1.86 billion in new issuance in four deals, which was a relief for market players, who have been watching deals so far this year trickle through at a pace of about one a week.

"I think that everybody that has been sitting tight, waiting for more robust deal flow, are feeling better," the trader said.

Equities rallied on the heels of the January jobs report, which revealed weaker-than-expected job growth last month, following as especially low gain in December. But the totals for October and November were revised up.

The Department of Labor reported 113,000 jobs were added in January, below the 180,000 forecasted. The unemployment rate fell to 6.6% from 6.7% in December, the Labor Department said.

Friday's rally extended gains notched Thursday on positive jobless claims data and erased a stock plunge on Monday when the Dow Jones industrial average sank 326 points, or 2%.

On Friday, the Dow Jones industrial average jumped 165.55 points, or 1.1%, to 15,794.08; the Standard & Poor's 500 index added 23.59 points, or 1.3%, to 1,797.02; and the Nasdaq composite gained 68.74 points, or 1.7%, to 4,125.86.

PDL BioPharma mixed on hedge

PDL BioPharma's new 4% convertibles traded up to 102 to 103 on an outright basis in the early going Friday when shares were higher by about 25 cents, or 3%, at $8.22, according to a syndicate source.

In the afternoon, the bonds were still fairly active and seen at 102.5 bid, 103.25 offered on swap against an underlying share price of $8.28.

Shares ended stronger, however, up 42 cents, or 5.3%, at $8.39.

On a hedged basis, the bonds were mixed as borrow rates were expensive and varied, ranging from about negative 2 to negative 6, a New York-based trader said.

"The issue with this is borrow; there is a dislocation rate for borrow," the trader said.

For a 100-basis-point difference in borrow, there was about a half-point difference in the performance of the bond, he said.

At the most inexpensive borrow rate of negative 2, the PDL BioPharma deal expanded about 1.5 points, assuming a 40% delta, he said.

Delta hedges ranged from about 20% to 45%, with some lighter, but swap guys going a little heavier, he said.

"There were a lot of factors," he said.

Part of the thinking is that borrow will improve given the exchange offer that includes the issuance of stock.

"These are the rates that they get today, I'm not saying this is going to be the borrow rate next week," he said.

Existing PDLs strengthen

Among the "moving parts" for the deal was the fact that the company is exchanging its 2.875% convertibles for what amounts to 3 points over parity. The bonds were trading below parity leading up to the exchange.

The company will issue a total of about 20.3 million common shares and pay cash of about $34.2 million under the exchange and purchase agreements with holders, according to the company's press release.

The company said there is no assurance the company will complete the purchase of any of its notes.

The 2.875% convertibles weren't seen in trade, but the 3.75% convertibles, which mature only a couple of months after the 2.875% convertibles, were "mirroring the premium" of the bonds being exchanged.

PDL BioPharma's 3.75% convertibles due May 1, 2015 were seen at 133.75 bid, which represented a 1.5-point to 3-point premium over parity; previously the bonds were below parity bid side.

Joint bookrunners of the new bond issue were RBC Capital Markets LLC and Wells Fargo Securities LLC, with Cowen & Co. and Janney Montgomery Scott LLC acting as co-managers.

The deal was upsized to $260.87 million from $250 million, and the greenshoe was upsized to $39.13 million from $37.5 million for a total consideration of $300 million.

The four-year notes were priced at the midpoint of talk, including a 15% initial conversion premium.

In connection with the offering, PDL entered into convertible note hedge and warrant transactions, or a call spread, with the underwriters that boosts the premium from the issuer's perspective to 30%.

A portion of the proceeds from the notes will pay the cost of the convertible note hedge transactions. Remaining proceeds will be used for working capital and general corporate purposes, including repayment, repurchase or redemption of outstanding debt or the acquisition of income-generating assets royalty streams.

The issuer is "flexible" in terms of what proceeds will be used for, a syndicate source said.

The notes are non-callable with no puts and have takeover protection and dividend protection at the current 15 cents per quarter dividend. There is also contingent conversion if shares exceed 130% of the conversion price and net-share settlement.

PDL is an Incline Village, Nev., biopharmaceutical company.

Mentioned in this article:

PDL BioPharma Inc. Nasdaq: PDLI

WellPoint Inc. NYSE: WLP

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