Yahoo! slips on hedge; U.S. Steel gains; XenoPort, Performant Financial offerings on tap

By Rebecca Melvin

New York, Jan. 28 – Yahoo! Inc.’s convertibles moved higher on an outright basis early Wednesday in tandem with better shares, but they contracted on a dollar-neutral, or hedged, basis. And that same paper came off on an outright basis later in the session amid a reversal in shares as well as the broader equity markets.

Initially, the Yahoo! convertibles were boosted by news that the Sunnyvale, Calif.-based internet company is spinning off its remaining stake in Alibaba Group Holding Ltd. in to a separate company. Shares were up initially by 5%.

But a turnaround in shares coincided with a reversal in the overall equity market and on the heels of the company’s disappointing fourth-quarter earnings on lower revenue. Shares closed lower by 3%.

Moving in the opposite direction, United States Steel Corp.’s convertibles surged on an outright basis and they expanded by about 0.5 point on a dollar-neutral basis as shares of the Pittsburgh-based steelmaker popped 11% on lower fourth-quarter net income that beat estimates.

Meanwhile, Electronic Arts Inc.’s 0.75% convertible due 2016 surged on an outright basis but was seen in line to just slightly better on a dollar-neutral basis as shares of the Redwood City, Calif.-based video game publisher surged 13% on strong earnings.

“All trading at the moment is earnings related,” a New York-based trader said early Wednesday.

Elsewhere, there was also trading of FXCM Inc., which jumped 4 or 5 points to 70 after the New York-based foreign-exchange broker said that it is forgiving about 90% of its clients’ negative balances incurred when the Swiss Franc spiked and requesting payment from remaining clients, mostly institutional, high net-worth and experienced traders, who incurred negative balances representing about 60% of the total.

After the market close, two small deals were launched for pricing on Thursday. XenoPort Inc. launched an overnight offering of $100 million of seven-year convertible senior notes. Performant Financial Corp. launched a deal for $80 million of five-year convertibles bonds in a registered offering that is coming together with about $50 million of common stock.

Yahoo! contracts on hedge

Yahoo!’s 0% convertibles due 2018 were quoted at 114 versus an underlying share price of $50.00 at late morning. Shares were up at that point by 1% to 2%. The price action represented a contraction of the value of the paper on a relative value basis by 0.375 point, a New York-based trader said.

Meanwhile, shares reversed course and traded off into the close, ending lower by $1.53, or 3.2%, to $46.46, and the bonds were seen changing hands at around 110.

A second trader said that the Yahoo! convertibles were trading actively before the market open, “probably on people looking at a conversion adjustment on the Alibaba spinoff,” he said.

Yahoo! revealed a plan to spin off its Alibaba stake, which will own all of Yahoo!’s remaining shares in the Chinese internet e-commerce giant and assume no debt in the deal. The Alibaba stake, which represents about 15% of the company, is valued at about $40 billion.

But the company also posted disappointing results with revenue of $1.18 billion, falling short of estimates.

U.S. Steel expands on hedge

U.S. Steel’s 2.75% convertibles were seen at 116.25 versus an underlying share price of $23.00 around midsession, a level that represented an expansion on a dollar-neutral basis of about 0.5 point compared to 111 bid, 111.75 offered, with shares at $21.27 at the end of Tuesday.

The convertibles were seen as high as 120 by the end of the session, according to Trace data.

Shares ended higher by $2.31, or 11%, to $23.58.

The company reported net income of $275 million, or $1.83 per share, which was lower compared to $297 million, or $1.93 per share, reported in the year-earlier period but better compared to analysts’ estimates of 87 cents per share.

The company expects that low oil prices will be a drag on its tubular and flat-rolled segments going forward, but it “is encouraged by the potential that improved consumer spending could provide to overall flat-rolled demand,” according to its release.

Electronic Arts active

Electronic Arts’ 0.75% convertibles due 2016 were 169.375 versus an underlying share price of $53.50 near the end of Wednesday. That compared to 155 versus an underlying share price of $48.50 on Tuesday.

The new level was a 15-point move up on an outright basis but only flat to slightly better on a dollar-neutral basis, or better by about 0.25 point, assuming a 91% delta, a New York-based trader said.

“Over the course of the day, they looked a little better,” the trader said of the bonds. But he added, that it was not a dramatic change.

He said he assumed a delta of 91% and said investors hold the bonds at deltas of 91% and 94% and even higher.

“It was a big day in the stock, which was up $6,” he said. While the bond traded around 0.875 point to a point over parity.

Electronic Arts beat estimates for its fiscal third quarter, as strong video game sales boosted results.

XenoPort, Performant to price

XenoPort, a Santa Clara, Calif.-based biopharmaceutical company, plans to price $100 million of seven-year convertible senior notes talked to yield a fixed coupon of 2.5% with an initial conversion premium of 22.5%.

Credit Suisse Securities (USA) LLC is the bookrunner.

The approximate initial conversion price is $10.72. The bonds are non-callable and will be settled in shares, with standard change-of-control protection via a make-whole table and dividend protection in the form of an adjustment to the conversion rate for any dividends paid.

Proceeds will be used to continue to commercialize Horizant, for further clinical development, including its XP23829 product candidate, and for general corporate purposes.

Performant Financial plans to price $80 million of five-year convertibles bonds in a registered offering that was talked to yield 4.75% to 5.25% with an initial conversion premium of 17.5% to 22.5%, according to market sources.

Performant Financial also plans to price $50 million of common stock.

Morgan Stanley & Co. LLC and SunTrust Robinson Humphrey Inc. are joint bookrunners of the convertibles offering, which has a $12 million over-allotment option.

The bonds are non-callable.

Proceeds are earmarked to complete its acquisition of Premier Healthcare Exchange Inc., or if the acquisition is not completed, to repay debt under the company’s senior secured credit facility.

The Livermore, Calif.-based company is a provider of technology to help identify and recover delinquent or defaulted assets and improper payments.

Mentioned in this article:

Electronic Arts Inc. NYSE: EA

FXCM Inc. Nasdaq: FXCM

Performant Financial Corp. Nasdaq: PFMT

United States Steel Corp. NYSE: X

Yahoo! Inc. Nasdaq: YHOO

XenoPort Inc. Nasdaq: XNPT

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