Onyx up in gray; UAL boosted by oil, report; Transocean drops on results; Rayonier plans deal

By Kenneth Lim

Boston, Aug. 5 - Onyx Pharmaceuticals, Inc. made an early move up in the gray market Wednesday with its coming $200 million offering seen as cheap.

UAL Corp. took off for the second day in a row as its common stock rose on lower oil prices and a positive research report from Barclays Capital.

Transocean Ltd. slipped after the company missed analysts' estimates with a second-quarter earnings drop.

In the primary market, Rayonier Inc. announced a $150 million exchangeable notes offering slated for pricing after the market closes on Thursday.

Onyx bid up in gray

Onyx's planned $200 million of seven-year convertible senior notes was seen as high as a point above par in the gray market Wednesday ahead of pricing the next day.

The deal is talked to yield 4% to 4.5% with an initial conversion premium of 20% to 25%, with pricing set for Thursday after the market closes.

Bookrunner Goldman Sachs & Co. has an over-allotment option for an additional $30 million in the registered offering.

There is a concurrent public offering of 4 million common shares with a greenshoe of 600,000 shares.

Proceeds will be used to build and diversify the company's pipeline of in-licensing product candidates, for strategic investments and acquisitions, fund clinical trials, sales and marketing and for general corporate purposes.

Onyx is an Emeryville, Calif.-based biopharmaceutical company that focuses on cancer treatments.

The offering was seen at 100.75 bid in the gray market in the afternoon, but the bid price had moved up to 101 later in the day.

One sellside convertible trader said the deal modeled about 6% cheap using a credit spread assumption of 1,000 basis points over Treasuries and a volatility of about 35%.

Onyx common stock closed at $31.18 on Wednesday, lower by 14.69% or $5.37.

"Looks like it is cheap enough," the trader said.

A convertible analyst said the common stock's drop was because of the large size of the capital raise. The fundraising should boost the company's balance sheet immediately, but the cash may not last long.

"If they sell the common at market, they could raise another $130 million or so from the common, so that's a nice amount of cash to have," the analyst said. "The only problem is it sounds like they might spend it pretty soon, so it's really going to depend on what they do with the money."

Looking to buy another product could be a good move for Onyx, which is mainly dependent on a single compound at the moment, the analyst said.

"If they can find a good deal, this could turn out to be good for the company because it lowers their dependency risk on a single product," the analyst said. "But it really depends on what they end up buying, how they finance it and all that other stuff."

UAL climbs further

UAL's 4.5% convertible due 2021 changed hands at about 43.25 against a common stock price of $5.375 on Wednesday, in line with sharp gains in the stock.

Shares of the Chicago-based parent of United Airlines closed at $5.92, up by 18.4%, or $0.92.

"I did see the stock was running up," a sellsider said. "I guess maybe people are optimistic about oil prices."

UAL this week reported a 4% year-on-year drop in July traffic, although the decline narrowed compared to June. The airline also reported better occupancy rates as it trimmed its total capacity.

In a research note Barclays analysts Venu Krishna, Maneesh Deshpande and Kannan Venkateshwar said the convertible could be attractive on a hedged basis.

Despite current concerns about upcoming debt maturities and the airline's ability to use its cash on hand, UAL should be able to weather the short term if macroeconomic conditions do not deteriorate further, the analysts wrote.

"If the macro environment does improve, we believe the company is highly levered to these improvements and would therefore benefit substantially," the analysts wrote.

Investors can set up a hedge using a long put or a short position in the stock. They can also use the 5% convertibles due 2021 and putable in February 2011 as a hedge.

"While we believe an outright long exposure remains risky over a long horizon, we recommend going long the 4.5% converts (putable in June 2011) on a hedged basis to capture the potential upside from survival with limited downside in a liquidity event," the analysts wrote.

Transocean falls with earnings

Transocean's convertibles tracked the common stock lower on Wednesday after the company missed Street expectations in its second quarter.

The 1.625% convertibles due 2037 were about a point lower at 95.75, while the 1.5% series B convertibles due 2037 eased about 0.5 point to 93.5. The 1.5% series C convertibles due 2037 changed hands at 91.5, also 0.5 point lower.

The common stock ended the day 3.4% or $2.73 lower at $77.60.

Transocean is a Switzerland-headquartered offshore drilling contractor.

"RIGs are very active on the earnings," a convertible trader said. "Volume is fairly well spread out among them."

The company on Wednesday reported second-quarter net income of $806 million, or $2.49 per share, a drop from the $3.31 per share of a year ago. The earnings included a one-time writedown of 30 cents per share from the value of rigs and other items. Analysts were expecting earnings in the $3.03 per share area.

Rayonier plans offering

Rayonier subsidiary Rayonier TRS Holdings plans to price $150 million of six-year exchangeable senior notes Thursday after the market closes to yield between 4.75% and 5.25% with an initial conversion premium of 17.5% to 22.5%, market sources said.

The notes will be exchangeable into the parent's common stock. Rayonier stock closed at $42.29 on Wednesday, up by 1.24% or $0.52 before the deal was announced.

There is an over-allotment option for an additional $22.5 million.

The bookrunners are Credit Suisse, JPMorgan and Merrill Lynch.

Proceeds will be used to repay debt and to fund exchangeable note hedge and warrant transactions.

Rayonier is a Jacksonville, Fla.-based forest products company.

Mentioned in this article

Onyx Pharmaceuticals, Inc. Nasdaq: ONXX

UAL Corp. Nasdaq: UAUA

Transocean Ltd. NYSE: RIG

Rayonier Inc. NYSE: RYN

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