Cubist stacks up well on debut; Novell holds up against weak guidance; Trinity gains in the gray

By Kenneth Lim

Boston, June 1 - The convertible bond market had an active session on Thursday, with the freshly priced convertibles from Cubist Pharmaceuticals Inc. generating the most buzz after receiving strong interest earlier in the week.

"There was a lot of demand for the Cubists," a buy-side convertible bond trader said.

Novell Inc.'s convertibles firmed up on a dollar-neutral basis as the stock tumbled after the open-source software developer disappointed Wall Street with its third-quarter guidance.

Meanwhile, Trinity Industries Inc.'s new deal traded slightly above par in the gray market as analysts and observers described the deal as fairly interesting. The offering was priced within talk after the market closed.

Otherwise the secondary market saw decent activity Thursday, market sources said.

"It was a good active day, very active, especially in Cubist in the morning," a sellsider said.

Cubist deal climbs on debut

Cubist Pharmaceuticals' newly priced 2.25% convertible due 2013 had a strong debut on Thursday on the back of keen interest during marketing.

"They were very active in the secondary this morning, although they priced at the aggressive end," a sellsider said.

The convertible, which was priced with an initial conversion premium of 30% late Wednesday, was seen at 100.875 bid, 101.875 offered before the market opened Thursday, and continued to stay above par as the stock slid during the session. Cubist stock (Nasdaq: CBST) closed at $23.25 on Thursday, down by 1.77% or 42 cents.

"The Cubists traded well," a buy-side convertible bond trader said. "It opened up and it's still north of par."

Demand for the new convertible was strong during marketing for the convertible on Wednesday, with bids above 101 seen in the gray market. The deal arrived at the rich end of price talk, which guided for a coupon of 2.25% to 2.75% and an initial conversion premium of 25% to 30%. The size of the deal was increased to $325 million and an over-allotment option for a further $25 million, from the original $275 million and a $41.25 million greenshoe.

Goldman Sachs was the bookrunner of the registered off-the-shelf deal.

Cubist, a Lexington, Mass.-based biopharmaceutical company, said it will use the proceeds of the deal to redeem its outstanding $165 million of 5.5% convertibles due 2008. Any remaining proceeds will be used to market Cubist's intravenous antibiotic drug Cubicin, to build the company's product pipeline and for working capital.

Cubist has said that it may be interested in licensing an approved or late-stage product. A sell-side analyst said that if the product is approved, then the company's credit should be fine. But if Cubist licenses a late-stage product that should fail to gain approval, "credit would suffer a bit."

Novell firms against poor guidance

Novell's 0.5% convertible due 2024 improved on a hedged basis on Thursday but fell about four points outright as the stock tumbled on the company's disappointing third-quarter guidance.

The convertible was seen trading at 87.875 against a stock price of $6.38 on Thursday, a buy-side trader said. Novell stock (Nasdaq: NOVL) fell 14.62% or $1.13 to close at $6.60.

"The stock got shellacked," the trader said. "But the bonds opened up nicely."

Waltham, Mass.-based Novell said Wednesday after the market closed that it earned $3 million, or 1 cent per share, in the second quarter, against a net loss of $16 million, or 4 cents per share, in the year-ago period. But the open-source software developer expects net income of 3 cents per share in the third quarter, less than the 4 cents per share expected by analysts.

Credit Suisse equity analyst Jason Maynard downgraded Novell stock to neutral from outperform after the results and guidance were announced. Although total revenue and earnings per share was in line with his estimates, Maynard pointed out in a research report that license sales missed his forecast while Novell's Celerant business, which picked up the slack, was just sold by Novell.

"While we like the moves to divest Celerant and repurchase stock, however the cost cutting has largely been cosmetic," Maynard wrote. "We would like to see a bit more urgency and paranoia around their situation before we would consider revisiting the stock."

Novell has missed its opportunity to tap its restructuring efforts, and management is not moving fast enough to make headway in the open-source Linux market, Maynard wrote.

"Despite the best efforts of industry partners like IBM it seems that the turnaround task is much too daunting given the structural problems with the company," the analyst wrote. "We had hoped that management would take more decisive and immediate steps to address the cost structure and deliver higher operating margins, but in our opinion they are not moving fast enough."

A convertible fund manager whose firm has a position in the convertible was not concerned about Novell's credit.

"It's [the convertible] still bid a couple points higher than where we accumulated it," the buysider said. "The balance sheet is powerful, plenty of cash on hand, lots of free cash flow...money good at least, big recovery potential at best."

Trinity gains slightly ahead of pricing

Trinity's $450 million offering of 30-year convertible subordinated notes traded slightly above par in the gray market on Thursday as onlookers described the deal as fairly interesting despite having a long put.

The convertible was largely quiet in the gray market for most of Thursday, but late in the day a trade at 100.25 was seen. Trinity stock (NYSE: TRN) closed at $58.03, down by 6.91% or $4.31.

The offering priced within talk after the market closed, at a coupon of 3.875% and an initial conversion premium of 35%. Price talk was for a coupon of 3.5% to 4.25% and an initial conversion premium of 35%.

There is a greenshoe option for a further $50 million.

JP Morgan, Banc of America and Wachovia Securities were the bookrunners of the registered off-the-shelf deal.

Trinity, a Dallas-based maker of railcars, inland barges and energy equipment, will use the proceeds of the deal to expand its railcar leasing business, possibly repay or repurchase part of its outstanding debts and for other general corporate purposes.

"It looks pretty good at the midpoint," a sell-side convertible analyst said. "It seems to be a solid little company. They had a good conference call."

There is positive carry, which could be good for hedged investors, but with a volatility around 27% to 32% used on the Street, Trinity is not a high-volatility name, the analyst said.

"The only thing that isn't nice is the 12-year put," the sellsider said.

Another analyst said that using a credit spread of 250 basis points over Libor and volatility in the mid-to-high 20s meant the offering was two to three points cheap at the mid-point of talk. Even discounted for the long put and the subordination, the deal was still interesting, the analyst said.

A buy-side convertible bond trader also noted the 12-year put as a concern.

"I don't like the 12-year structure, but I think it's OK," the trader said. "It's attractively priced, but it needs to be with a 12-year structure. At 350 bps over Treasuries, even on a 27% volatility, it still looks interesting."

The offering will likely work out for outright investors, the trader said.

"From an outright perspective, for the outright holder, it's going to trade very much like a stock, with a high delta," the trader said.

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