Cubist's two new tranches add on debut; Liberty exchangeable softens; Affymetrix slips

By Rebecca Melvin

New York, Sept. 5 - There were pockets of pressure in the convertible bond market Thursday with interest rates pushing up, but two new issues from Cubist Pharmaceuticals Inc. traded up on their debut in the secondary market after the upsized $700 million of senior notes priced at the tight end of revised talk.

Cubist's 1.125% convertibles due 2018, or tranche A, were trading about a point higher on average compared to the longer-dated Cubist 1.875% convertibles due 2020, or tranche B. The As were quoted at 105.25 bid, 105.75 offered with the underlying shares at $64.06 at midafternoon. The Cubist Bs were seen at 103.75 bid, 104.25 offered with shares at the same level.

At the close the As were quoted at 104.75 bid, 105.75 offered versus a share price of $63.98 and the Bs were quoted 103.375 bid, 104.375 offered versus the same share price.

On a dollar-neutral, or hedged, basis, the Cubist As were seen up about 4 points, with the Bs starting to lag as shares rose, and called up about 2 points delta neutral, according to a Connecticut-based trader.

Elsewhere, some action was reduced due to staff absences due to the Rosh Hashanah holiday. But Liberty Interactive Corp.'s 1% exchangeable debentures, which debuted in the convertible secondary market Wednesday, were under a little bit of pressure early in the session with interest rates pushing up, a New York-based trader said.

Affymetrix Inc.'s 4% convertibles continued to trade actively and gained in the early going with the underlying shares of the Santa Clara, Calif.-based clinical research company, but those shares came back in and the convertible was seen a little lower on a dollar-neutral basis, while remaining flat on an outright basis.

Qihoo 360 Technology Co. Ltd.'s 2.5% convertibles, which priced a week ago, were higher again with the underlying shares of the Beijing-based PC and mobile internet-security company ending up 2.8% on the day.

Equities held small gains but bonds slipped as rates pushed up amid positive economic reports that raised expectations the U.S. Federal Reserve is likely to begin tapering its stimulus program sooner rather than later and ahead of the August jobs report due out Friday.

A new report on the U.S. service sector from the Institute for Supply Management handsomely beat estimates, climbing to 58.6% in August from 56.0% in July, to the best level since the index was created in 2008.

The report helped push the yield on the 10-year Treasury rose to 2.97%. Later, the 10-year Treasury was yielding 2.941%, which was up 4.3 basis points from late Wednesday.

The Nasdaq stock market added 9.74 points, or 0.3%, to 3,658.78; the S&P 500 stock index tacked on 2 points to 1,655.08; and the Dow Jones industrial average edged up 6.61 points to 14,937.48.

Cubist adds

Cubist's 1.125% convertibles due 2018, or the As, were quoted at 104.75 bid, 105.75 offered with the underlying shares at $63.98.

Cubist's 1.875% convertibles due 2020, or the Bs, were quoted at 103.375 bid, 104.375 offered with shares at $63.98.

The new paper was active and "moved around a little bit. But a lot of it was trading outright, so it wasn't tick-for-tick with the stock" a syndicate trading source said. "It was more dictated by customer flows."

The A tranche added about 4 points on hedge, and the Bs were called 2 points up on a dollar-neutral basis.

The B tranche was favored by the issuer for its longer tenor and it was upsized by $100 million during marketing, a syndicate source said.

Shares of the Lexington, Mass.-based biopharmaceutical company gained $1.77, or 2.9%, to $63.98.

The deal was seen as a little rich ahead of final terms being fixed. Still the deal priced at the tight end of revised talk.

Tranche A, which matures in 2018, was for $300 million, which was unchanged from the initially talked deal size, and priced with a 1.125% coupon. Talk was tightened during marketing to 1.125% to 1.625% from 1.625% to 2.125%.

Tranche B, which matures in 2020, was upsized to $400 million from $300 million and came at a 1.875% coupon, which was the tight end of the 1.875% to 2.125% range, which was tightened from 2.125% to 2.625%.

Both tranches have an initial conversion premium of 32.5%, which was the tight end of initial 27.5% to 32.5% talk.

Joint bookrunners were Morgan Stanley & Co. LLC, Barclays and RBC Capital Markets LLC.

In connection with the deal, the company entered into convertible note hedge and warrant transactions with initial purchasers of the bonds. The call spread raised the initial conversion premium from the issuer's perspective to 55%.

Proceeds will be used primarily to fund the company's previously announced acquisition of Optimer Pharmaceuticals Inc. and to pay the $51 million net cost of the call spread. Remaining proceeds will be for general corporate purposes.

Affymetrix comes in a little

Affymetrix's 4% convertibles traded up to 127.453 versus an underlying share price of $6.43 during the session.

The indicative context was still 123.75 bid, 124.50 offered versus a share price of $6.17, according to a New York-based trader, who said the bonds seemed to have come in half a point from the trade on Wednesday.

On Wednesday, the Affymetrix convertibles traded at 123.25 versus a share price of $6.06 and were called better by a point from last week on a delta of 85%.

Affymetrix shares ended the session down a penny at $3.67 in active trade after intra session gains to $3.74.

Mentioned in this article:

Affymetrix Inc. Nasdaq: AFFX

Cubist Pharmaceuticals Inc. Nasdaq: CBST

HSN Inc. Nasdaq: HSNI

Liberty Interactive Corp. Nasdaq, LINTA, LINTB

Qihoo 360 Technology Co. Ltd. Nasdaq: QIHU

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