InterMune looks rich on revised terms; US Airways' premium comes in a point; Best Buy dips

By Rebecca Melvin

New York, Sept. 13 - Coupon price talk on the planned $100 million InterMune Inc. convertible was dropped sharply during Tuesday's session ahead of final terms being fixed after the market close, amid strong demand for the new paper, a syndicate source said.

Talk was revised to a coupon of 2.5% to 2.75%, down from 3.25% to 3.75% when the deal was launched Monday. The initial conversion premium was tightened to 32.5% from 27.5% to 32.5%.

The nearly full percentage point drop on the coupon was "intended to" turn off some potential players, a New York-based sellside trader said.

A syndicate source would not comment on the revision and when asked about potential upsizing said there was no talk on that.

Demand from convertibles players was bound to be very strong given the absence of any new paper for more than six weeks since market turbulence depressed potential issuers' activity starting at the end of July.

"Market supply and demand is out of whack right now," a New York-based sellside analyst said.

InterMune shares dropped 10% Tuesday after the Brisbane, Calif.-based biotech said it would price the $100 million of seven-year convertibles and 4 million shares of common stock. However, there was no activity heard on InterMune's existing 5% convertibles due 2015, which originally priced in June 2008.

US Airways Group Inc.'s convertibles moved up, with premium coming in a point on positive management comments at a Deutsche Bank conference on Tuesday; but Best Buy Co. Inc.'s convertibles dropped a touch below par with the shares down about $2 on weak earnings, a New York-based sellside desk analyst said.

Best Buy's 2.25% convertibles traded at 99.875 versus an underlying share price of $22.80, the analyst said.

Meanwhile, Amerigroup Corp. convertibles were better by about 0.375 point. And Global Industries Ltd., which was the name of the day Monday, added again on Tuesday, trading at 97 after surging about 32 points on Monday after news of a takeover offer for the Carlyss, La.-based offshore oil and gas drilling contractor.

InterMune talk revised down

InterMune coupon talk was sharply dropped to a 2.5% to 2.75% yield, from a 3.25% to 3.75% yield, and the initial conversion premium was tightened to 32.5% from 27.5% to 32.5% on Tuesday, according to a syndicate source. The issue was still expected to price as planned after the market close.

Market players were divided on valuations of the deal after the revision. One analyst had the planned bonds 3 points to 4 points rich, or expensive. He was using admittedly conservative inputs of 1,000 basis points over Libor for the credit spread and 45% vol. The rich valuation was in contrast to the 1 point to 6 points cheap view he had on the deal based on original talk.

A second New York-based analyst was on the other end of the spectrum, valuing the paper 4% cheap, using a credit spread of 600 bps over Libor. That spread was viewed as too tight by some.

A third source said he was using a credit spread assumption of 800 bps over Libor, and he said that valuation "looked aggressive for seven-year paper."

Given the supply and demand picture, however, aggressively priced paper would still get done handily, sources said.

"After weeks without a deal, you could sell a cage full of skunks if you labeled them convertibles," a New York-based trader said.

Dendreon Corp., which has 4.25-year paper outstanding, was used as a comparable for the valuation of one analyst, who had the credit spread of 1,000 bps over Libor and 45% vol.

"The reality is the vol. is through the roof," the analyst said.

Dendreon is a company of similar size - slightly bigger with $1.8 billion market cap, but with more debt, as opposed to InterMune's $1.4 billion to $1.5 billion debt. And like Dendreon, InterMune is starting a product launch. But Dendreon is probably close to a year ahead of InterMune in terms of the product launch. Dendreon trades at an implied credit spread of 950 bps or 940 bps over Libor, the analyst said.

"The credit is really based on sales projections; it's not supposed to be cash flow positive for two years," the analyst said.

With concurrent stock offer

The InterMune deal is coming with concurrent equity, which puts the deal at a slight advantage with outright players because it means that the convert's premium will likely be based on a discounted stock price.

"There are probably a couple of large equity investors, like one or two guys who put in a large order," giving the company the ability to re-price the issue, a New York-based analyst said.

Similarly, a second source said it "could have an anchor order from an outright."

InterMune is planning to sell 4 million common shares.

"It helps," a source said of the equity offering. "If they price the stock as usual at a discount of say $23.50 per share or $24.00 per share, then that's going to be where you strike your convertibles. And if the strike is $23.50, then that would be a 2.8% discount and it effectively reduces the conversion premium," the analyst said.

Given that scenario, "you're 2.5%, up 29%. And if you're an outright investors that gives you an initial boost on first-day trading," the analyst said.

"People like those kind of deals because it takes some of the risk out of the equation," he said.

The registered InterMune notes have a $15 million greenshoe and were being sold via joint bookrunners Goldman Sachs & Co. and J.P. Morgan Securities LLC.

The notes are non-callable until Sept. 20, 2015 and then provisionally callable subject to a 130% price hurdle. There are no puts.

Proceeds will be used to fund the commercial launch of InterMune's Esbriet drug in the European Union, to fund its Ascend trial and for general corporate purposes.

InterMune's existing 5% convertibles due 2015 weren't heard in trade and were last seen traded Aug. 16 at 155.19 when the stock settled at $25.29.

The existing issue was a small, $85 million issue with no calls or puts.

US Airways active

US Airways' 7.25% convertibles due 2014 traded at 143.5 versus an underlying share price of $5.60 on Tuesday, which compared to 128 versus an underlying share price of $4.85 on Monday.

That was 22 points of parity yesterday compared to about 21 points of parity on Tuesday.

US Airways shares jumped 20% after its president told analysts that it had not seen a slowdown in demand. Other airlines were also higher but on headlines that they will be reducing flights and seating capacity. American Airlines said it would reduce flights on low-demand days, and Delta Air Lines said it would reduce seating capacity next year.

Coming out of the Deutsche Bank conference Tuesday, there were "a bunch of headlines that volumes have remained strong in the last couple of months and airlines are anticipating an uptick," a New York-based analyst said. "A lot of people are hoping that that has broader positive implications for the economy, and it helped the tone."

Amerigroup adds 0.375 point

Amerigroup's 2% convertibles due 2012 traded at 111.25 versus an underlying share price of $41.89 on Tuesday. That looked 0.375 point better, a New York-based sellside trader said.

The paper had been much higher outright in recent weeks, but the underlying shares have been weak since the Virginia Beach, Va.-based managed health care company's last earnings report, the trader said. Shares of the company on Tuesday settled higher by 79 cents, or 16%, to $5.64.

"Short duration and high vol. make these extremely interesting," the trader said.

Mentioned in this article:

Amerigroup Corp. NYSE: AGP

Best Buy Co. Inc. NYSE: BBY

Dendreon Corp. Nasdaq: DNDN

Global Industries Ltd. Nasdaq: GLBL

InterMune Inc. Nasdaq: ITMN

US Airways Group Inc. NYSE: LCC

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