Dendreon to price $500 million convertibles; Allergan active amid possible short covering

By Rebecca Melvin

New York, Jan. 13 - Seattle-based biotechnology company Dendreon Corp. launched a $500 million offering of five-year convertible bonds after the market close Thursday that was seen pricing ahead of Friday's open.

The Dendreon deal's talked terms weren't the most attractive with a coupon of 2.375% to 2.875% and an initial conversion premium of 40% to 45%, but the deal was still seen as 2.5% cheap at the midpoint, using a credit spread of 500 basis points over Libor and a 37% vol., according to a sellside analyst.

News of the new deal, for which the market is very hungry, eclipsed Thursday's secondary market action, which was dominated by the typical, commodity-type names in trade like EMC Corp., which accounted for fully 10% of volume on Wednesday.

There was some good two-way flow in a few convertible names like Allergan Inc., however, according to a New York-based sellside trader, who thought that market players were shorting the name or covering shorts following the call earlier this week by Teva Pharmaceutical Industries Ltd. of its 1.75% convertibles, or Teva D convertibles.

"After the TEVA call, a lot of people are covering their shorts because [Allergan's] next," the trader said. The Allergan 1.5% convertibles are currently callable.

The trader said that trading action in the Teva convertibles, which lost about 3 points on a hedged basis after the call, also persisted for a third session since the call.

Automotive suppliers TRW Automotive Holdings Corp. and BorgWarner Inc. were seen a little lower with their underlying shares, which came under pressure along with the broader markets after initial jobless claims data came in higher than expected at 445,000 claims, which rose from the prior week and were higher than the 415,000 claims analysts had been expecting.

In addition, the producer price index for December climbed a sharper-than-expected 1.1%. Core prices, excluding volatile energy and food costs, increased just 0.2%.

Intel Corp. was also a name in focus Thursday ahead of the Santa Clara, Calif.-based chipmaker's earnings, which came out after the bell. Intel shares were higher in after-hours trade after the company reported fourth-quarter profit that was up 48% at $3.4 billion.

Dendreon to price

Dendreon planned to price its registered, off-the-shelf deal, which launched after the market close on Thursday, early Friday.

Friday's action was expected to see a burst of activity in the morning but tail off quickly ahead of the long holiday weekend for Martin Luther King Jr. Day.

It was predicted by one sellsider that given the terms, the first trades would be below par.

The Dendreon deal has a $75 million greenshoe and was being sold via bookrunner J.P. Morgan Securities LLC.

The convertibles are non-callable for life.

Proceeds are earmarked to fund investment in the company's manufacturing facilities. Dendreon may also use proceeds to acquire strategic assets.

In connection with the offering, JPMorgan plans to distribute in a registered offering up to $250 million of shares of common stock to facilitate the hedging of notes by buyers of the bonds.

Dendreon will not receive any proceeds from the stock sales.

Using a credit spread of 500 bps over Libor and a 37% vol., the deal was looking 2.4% cheap at the midpoint of talk, according to a Connecticut-based sellside analyst.

The credit and vol. inputs were provided by the bookrunner, and the analyst suggested a lower credit spread at something like 375 bps over could be defended given that the company has such a large market capitalization and low debt.

The company's market capitalization is about $5 billion and its debt includes a small, extant convertible, with just $27 million or $28 million left outstanding, and sundry leases, for a total of $627 million.

Still, the company could be called a one-drug business, and it's risky, the analyst said.

That debt level is "versus $953 cash, although they are burning through cash like crazy," he said.

But even if the market cap is cut by 25%, the debt to market cap is still 29%, the analyst said.

It was difficult to get over the terms, which include a low coupon and a very high premium. "It's very unattractive," the analyst said. "I'm not putting it on the pad."

The fact that the market is starved for new paper might mean that the paper richens on release for secondary dealings, and therefore it might make for some good action.

The deal is coming complete with a stock borrow facility for hedge players, and one source said he heard that the stock was pricing at $35.13 and that investors could sell their stock there and buy the bonds outright.

Dendreon shares closed Thursday at $36.60, which was down 51 cents, or 1.4%. The shares were 2% lower in after-hours trade at $35.90.

Allergan sees good flow

Allergan's 1.5% convertibles due 2026 were last at 114.667, which was down 1.2 points on the day, according to Trace data.

Shares of the Irvine, Calif.-based maker of Botox settled at $70.83 on Thursday, which was down 11 cents in light volume.

The paper, which is callable, traded Tuesday at 114 versus a share price of $70.00.

Short positions have been taken in it, a New York-based sellside trader said. And on the heels of the Teva surprise call earlier this week, market players seem to be wary of being caught flat footed again.

Mentioned in this article:

Allergan Inc. NYSE: AGN

BorgWarner Inc. NYSE: BWA

Dendreon Corp. Nasdaq: DNDN

EMC Corp. NYSE: EMC

Intel Corp. Nasdaq: INTC

Teva Pharmaceutical Industries Ltd. ADRs: TEVA

TRW Automotive Holdings Corp. NYSE: TRW

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