Medicines expands on hedge after court opinion; McDermott nearly flat in gray market

By Rebecca Melvin

New York, April 1 - The Medicines Co.'s 1.375% convertibles due 2017 plunged on an outright basis, but expanded on a dollar-neutral, or hedged, basis Tuesday after a disappointing court opinion set investors on edge about the prospects for the Parsippany, N.J.-based drug company's patent infringement case versus Hospira Inc.

McDermott International Inc.'s planned $250 million of mandatory convertibles, which were seen pricing after the market close Tuesday, were flat to just slightly higher in the gray market - at plus 0.10 point bid - prior to final terms being fixed.

Market interest in the new McDermott issue was diminished due to lack of downside protection that mandatories provide, a market source said.

Jarden Corp.'s two convertible bond issues traded Tuesday, with the newer Jarden convertibles, which priced last month, quoted around par to slightly below but still better on a dollar-neutral basis by about 0.875 point since issue, a syndicate source said.

The Jarden 1.125% convertibles were seen at 99.625 bid, 100.125 offered late Tuesday, which was better on a hedged basis, a syndicate source said. "On a delta-adjusted basis, the bonds would have been 99."

Equities started the second quarter on a strong note, with the S&P 500 stock index hitting a record high following positive economic data Tuesday.

The Institute for Supply Management showed that manufacturing companies expanded faster in March than before, with its index rising to 53.7% from 53.2%. The upbeat report raised hopes that the U.S. economy is still on track for recovery. Treasury prices, which were surprisingly strong in the first quarter, came off following the report.

Still, all eyes are starting to train on Friday's jobs report for a reading on the health of the labor market. According to one poll, economists are expecting 200,000 jobs to have been added in March, up from 175,000 in February.

Pace of new issues

While new issuance for the first quarter was essentially on par with the first quarter of 2013, some market players were disappointed that volume didn't match the end of 2013., and they were evaluating how new issuance will pan out for the remainder of the year.

A strong credit market hurt the convertible primary market in the first quarter, one market source said, and he said that a weaker credit market would help convertible issuance going forward.

"I was pretty bullish in the fourth quarter: I thought there would be a lot of issuance this year, but there have not been as many deals. Part of the reason is that the credit markets have been so strong, so how the credit markets hold up in the second quarter will be a determining factor for new convertible issuance," the market source said.

"If credits widen, that's where the opportunities will be," he said. And the market needs more pace, "if we are going to get close to or beat 2013."

For the first quarter of 2014, convertible new issuance totaled $11.24 billion in 32 deals, which was just shy of first quarter 2013 when $11.58 billion in 35 deals priced, but well off the fourth quarter of 2013, when $19.16 billion in 56 deals priced.

Equities, which were just slightly positive for the first quarter and pushed higher on Tuesday, were not seen as a determining factor for the convertible primary market.

"From what I hear, stocks are at a good enough level that they [issuers] would be comfortable selling here," the source said.

Meanwhile, many believe that as long as interest rates are held near zero by the Federal Reserve's accommodative policies, stocks will continue to go up.

The Nasdaq stock market gained 69.05 points, or 1.6%, to 4,268.04; the S&P 500 stock index ended up 13.18 points, or 0.7%, at 1,885.52; and the Dow Jones industrial average rose 74.95 points, or 0.5%, to 16,532.61.

Medicines gains on hedge

Medicines' 1.375% convertibles due 2017 traded at 112.25 bid, 112.75 offered versus an underlying share price of $24.20 during Tuesday's session when the Medicines' stock was down about 15%.

That was down nearly 10 points on an outright basis but better on a dollar-neutral basis by about 0.25 point to 0.75 point depending on one's delta coming into the day, according to one trading source.

A second source said that the paper traded at 111.875 bid, 112.375 offered versus a share price of $24.00, which was up 1.5 points coming into the day on a 75% delta.

Medicines shares ended down $4.40, or 15.5%, at $24.02 on Tuesday.

A judge in the U.S. District Court of Delaware issued a trial opinion in the company's case saying that two key patents on Medicines' Angiomax bivaliridin drug are valid but that Hospira did not infringe the asserted claims.

McDermott edges par

A gray market in the planned McDermott $250 million of tangible equity units was seen at 100.10 bid, which was essentially flat to just higher.

Several sources said that their firms hadn't produced valuation reports on the deal.

The vast majority of convertibles came in the form of senior notes in the first quarter, with only a handful of instruments of a differing capital structure rank. Tangible equity units are a form of mandatory, and an issuer will pursue this form of convertible to shore up its balance sheet, a convertible syndicate source said.

A mandatory gives you 100% equity credit, while a preferred gives you only 50% equity credit from S&P, but 100% equity credit from Moody's, he said.

For investors, whether an issue is a mandatory or an equity unit is inconsequential. The investor still collects a coupon and gets equity at the end of the term. But credit buyers will not be interested in either form.

McDermott shares were down 48 cents, or 6%, at $7.24 at late morning, and they settled lower by 81 cents, or 10.4%, at $7.01 on Tuesday.

Mentioned in this article:

Jarden Corp. NYSE: JAH

McDermott International Inc. NYSE: MDR

The Medicines Co. Nasdaq: MDCO

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