Planned Weatherford looks cheap; BioMarin down in line; Volkswagen drops hard outright

By Rebecca Melvin

New York, Sept. 21 – Convertibles players were sizing up Weatherford International plc’s offering of mandatory exchangeable subordinated notes on Monday after the company launched the deal early in the session for same-day pricing.

The Weatherford deal, which together with a secondary stock offering was expected to clock in at $1 billion in size, was looking between 1% cheap to 2.5% cheap, according to market sources.

There was no gray market in the planned Weatherford paper at late morning, sources said.

Elsewhere, there was some activity in biotechnology convertibles as biotech shares dropped, but the moves were mostly in line, a New York-based trader said.

BioMarin Pharmaceutical Inc.’s convertibles held in or even richened with equity weakness, the trader said.

The BioMarin A tranche, or the 0.75% convertibles due 2018, was seen trading down to 144.25 from about 151 previously, a trader said.

Shares of the Novato, Calif.-based biopharmaceutical company fell $8.56, or 6.6%, to $122.09.

“The bonds are holding in on swap relative to the equity,” the trader said.

However, much of the day’s focus was “really in Europe,” the trader said.

The mandatory convertibles of Volkswagen AG got smoked in active trade in Europe after the revelation that Volkswagen installed software in its diesel-powered engines designed to deceive U.S. regulators about the cars’ emissions, sources said.

The Volkswagen 5.5% mandatory convertible notes, which mature in six weeks, fell hard on an outright basis to about 87 from 101, and came on swap by 2 points to 5 points, depending on delta, a New York-based trader said.

The massive Volkswagen deal of €3.7 billion of mandatories caused “serious pain” especially to hedge funds globally, the trader said.

Shares of the German automaker tumbled on Monday. The fallout of the admission that Volkswagen deliberately cheated on emissions tests begins with halting some Volkswagen U.S. sales, recalling vehicles and possibly multi-billion dollar fines.

Volkswagen sold its mandatory convertible in 2012 under Regulation S via bookrunner JPMorgan to institutional investors in Germany and other countries other than the United States.

Weatherford cheap to fair

Weatherford, the international oilfield service company based in Baar, Switzerland, launched an offering of mandatories and common stock for combined proceeds of $1 billion. The deal size proportions were not yet determined.

The notes were expected to come with a coupon of 6.25% to 6.75% and with an initial conversion premium of 22.5% to 27.5%.

Although the new deal looked cheap, a New York-based trader said, the fact that there are already sizable mandatories existing in that sector from Southwestern Energy Co. and WPX Energy Inc. means the new paper will have to be considerably cheap to generate interest.

Southwestern Energy priced $1.73 billion of mandatory convertible preferreds in January with a 6.25% dividend, and WPX priced $350 million of 6.25% mandatory convertible preferreds in July.

A second trader said that interest was fixed on the stock trade and speculation of where the company would price the secondary offering.

It will come at a discount to the stock price, a New York-based trader said, and it really comes down to “the equity pricing and whether the company leaves something on the table for investors.”

A Connecticut-based trader said that the deal looked 1% cheap using a three skew.

A second source said that using that skew matched with a credit spread of 1,000 basis points over Libor and a 45% vol.

A third source said that the deal looked fair at the midpoint of price talk using a credit spread of 550 bps to 500 bps over Libor and a 50%/45% skew or a 45%/40% skew.

“It doesn’t change valuation much,” he said.

Volkswagen tumbles

Volkswagen’s 5.5% mandatory notes were seen between 87 and 89 at the end of trading New York time, according to sources, which was down from its previous level of 101.

The 2-point to 5-point slump on swap comes a mere six-weeks ahead of maturity.

“There were not a lot of European long-only plays. This really hit hedge funds globally,” a New York-based trader said.

The Justice Department has opened a criminal probe into the Volkswagen situation after Volkswagen chief executive Martin Winterkorn apologized on Sunday for cheating on the emissions tests.

Mentioned in this article:

BioMarin Pharmaceutical Inc. Nasdaq: BMRN

Southwestern Energy Co. NYSE: SWN

Volkswagen AG ETR: VOW

Weatherford International plc NYSE: WFT

WPX Energy Inc. NYSE: WPX

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