Convertibles mostly recover with shares; new Intercept convertible gains in active trade

By Rebecca Melvin

New York, June 30 – Trading of Intercept Pharmaceuticals Inc.’s new 3.25% bond dominated the convertibles space on the last session on the month on Thursday, expanding a good 3 points on a dollar-neutral, or hedged, basis and accounting for about 30% of the day’s trading volume, a New York-based trader said.

The new Intercept Pharmaceuticals bonds were quoted at 102.75 bid, 103.5 offered on a swap basis, against shares at $142.68, the trader said at the end of the session.

The stock recovered some ground, ending the day down 4.8% compared to a 7.2% decline in the early going when the bonds were quoted at 101 bid, 101.625 offered versus an underlying share price of $137.00.

Back in established issues, Tesla Motors Inc.’s convertibles were weaker. The Tesla 1.5% convertibles, which are the most affected by tight borrow given their heavier delta, were suffering the most. The Tesla 1.25% convertibles due 2021 traded a bit, according to Trace data. And that paper was down 0.5 point on an outright basis to 82.337.

Tesla shares had traded down initially on Thursday but were last positive by $2.22, or 1%, at $212.41 at the end of the session.

SolarCity Corp.’s 2019 bonds recovered some ground on Thursday, ending the session at 71 compared to 66 on Wednesday, when they had dropped 5.5 points, according to Trace data. But the SolarCity convertibles are still trading lower than they had been compared to the initial pop on news that Tesla Motors is attempting to buy the company.

“There is uncertainty about whether the deal could go through,” a Connecticut-based trader said.

Otherwise, the market was pretty quiet, market sources said, as the markets quiet down ahead of the long holiday weekend for U.S. Independence Day. As for how the convertibles market held up following last week’s broader market downdraft and subsequent recovery this week, one trader said, “All things considered, the convert market performed very well in this Brexit sell-off. The sell-off was orderly and there was not a whole lot of selling, period. Things came in valuation-wise by about 0.75 point, but then the larger-cap market ripped right back up.”

The larger capitalization issuers recovered to where they had been trading before the British people’s vote to leave the European Union last week, the trader said. But the smaller cap, lower credit quality, longer-dated paper remains lower.

“Stuff is still down” in convertibles that fit that profile, the trader said. In addition, dealers are still unwilling to stick their necks out too far even in the larger market cap names, but all in all, the market is in good shape, he said.

According to Hedge Fund Research, its relative value, convertible arbitrage index is down just 0.07% for June. But the index remains higher for the year to date, up 0.93%.

The day’s focus was definitely Intercept Pharmaceuticals, sources agreed, accounting for the lion’s share of activity in the secondary market. And otherwise, “everything is just recovering from the downdraft,” a trader said. In distressed names, Chesapeake Energy Corp. was a bit better, Cobalt International Energy Inc. is lower and Whiting Petroleum Corp. is steady with its underlying shares yet to rebound.

New Intercept gains

Intercept Pharmaceuticals’ newly priced 3.25% convertibles due 2023 were quoted at 102.75 bid, 103.5 offered on a swap basis, against shares at $142.68 at the end of the session.

The stock had recovered some ground, ending the day down 4.8% compared to a 7.2% decline in the early going when the bonds were quoted at 101 bid, 101.625 offered versus an underlying share price of $137.00.

On an outright basis, the bonds changed hands at 100.5 with shares near their lows. But on a swap basis, the new Intercept Pharmaceuticals bonds expanded by a point or more.

The New York-based biopharmaceutical company priced $400 million of the seven-year convertible senior notes at the midpoint of price talk before the market open. The paper came with an initial conversion premium of 32.5%.

There is a $60 million greenshoe for the deal that was sold via joint bookrunners RBC Capital Markets LLC, UBS Investment Bank, BofA Merrill Lynch, Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC.

The bonds are non-callable until July 6, 2021 and then are provisionally callable if shares exceed 130% of the conversion price. There are no investor puts besides a takeover protection put. There is also dividend protection.

Settlement will be in cash, shares or a combination of cash and shares. The notes mature July 1, 2023.

In connection with the pricing of the notes, Intercept Pharmaceuticals entered into capped call transactions with option counterparties.

Proceeds will be used to fund the purchase of a capped call transaction, for commercialization and continued clinical development of Ocaliva and for general corporate purposes and working capital.

New York-based Intercept is a biopharmaceutical company focused on novel therapeutics to treat non-viral, progressive liver diseases with high unmet medical need.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Cobalt International Energy Inc. NYSE: CIE

Intercept Pharmaceuticals Inc. Nasdaq: INPT

SolarCity Corp. Nasdaq: SCTY

Tesla Motors Inc. Nasdaq: TSLA

Whiting Petroleum Corp. NYSE: WLL

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