Existing Isis drops amid new deal, call; planned Isis price talk revised; Kodak falls

By Rebecca Melvin

New York, Aug. 7 - Isis Pharmaceuticals Inc.'s existing convertibles dropped in active trade about 3 to 5 points Tuesday after the Carlsbad, Calif.-based drug maker announced its offering new convertibles late Monday and called the old ones Tuesday.

The call took many market players by surprise.

"This issue has been callable since February, but people doubled that they would call it, even after yesterday," a New York-based trader said.

During marketing, price talk on Isis' planned $175 million of seven-year convertible notes was tightened to 2.75% with an initial conversion premium of 32.5%. That pricing was more aggressive than talk initially for a 3% to 3.5% coupon and a 27.5% to 32.5% premium.

"It squeezes out the juice," a West Coast-based trader said, but it was still seen a little above or below fair value and was expected to trade well in a market starved for more paper.

Isis was definitely a focus of the day, and there were many other focuses as well. But the existing Hornbeck Offshore Services Inc. convertibles weren't really heard in trade, despite the fact that the company is bringing a larger, $260 million of seven-year convertible notes at the same time as Isis is bringing its deal.

The existing Hornbeck convertibles were slightly lower with lower shares, but the move wasn't seen as significant, a trading source said.

Other focuses included Eastman Kodak Co., which was very active, and dropped back 4 or 5 points after a Wall Street Journal report said that opening bids for the bankrupt company's digital patents were much lower than the $2.6 billion that the company said they could be worth.

Meanwhile, the wild ride of Knight Capital Group Inc.'s existing convertibles seemed to be slowing some, but with the bonds continued to grind a little higher, and settled in around 89, which was up about a point on the day.

DryShips Inc. has been trading higher on investor demand and changed hands on Tuesday "just shy of 80," a New York-based trader said. Over the past two weeks, the DryShips convertibles are up about 5 points.

Their "move is well beyond any dollar-neutral movement would be," the trader said.

Chesapeake Energy Corp. was active after the Oklahoma City-based natural gas company reported earnings and the underlying shares soared 10%. The most liquid Chesapeake 2.5% convertible traded between 88.5 and 89 and outperformed the shares, adding about 0.5 point to a point on a dollar-neutral basis, depending on the delta, a Connecticut-based trader said.

BroadSoft Inc. was quiet despite a 34% surge in the underlying shares of the Gaithersburg, Md.-based communications software company, which reported quarterly results and guidance that beat expectations.

The BroadSoft convertible, which is a small issue, was bid at more than 34 on Tuesday, after closing down at 27.90 on Monday, according to a New York-based trader.

K-V Pharmaceutical Co. was down in the 3 bid, 4 offered range, which was down from 7, after the company filed for Chapter 11 bankruptcy as widely expected.

"There was speculation that they were going to file and they had traded at 7 for a few days," a trader said.

After the market close, Priceline.com Inc. came out with weaker-than-expected quarterly results and the underlying shares tumbled 16% in after- hours trading, Shares of the online travel company had ended the session higher by 2% at $679.80.

Old Isis trades down

Isis' existing 2.625% convertibles due 2027 came in about 3 to 5 points outright and on swap to about 102.25, amid some speculation, but then surprise that the bonds were called, sources said.

One trading source, who has been anticipating the call, had them "in" about 3 points on a dollar-neutral basis.

The company called the 2.625% convertibles on Tuesday at 100.75.

"I think guys didn't think they would call it because it is a biotech that needs cash, plus the low coupon, so the probability was low," one trader said.

"For people who got long yesterday," this was especially hard, a second market source said. He said the bonds have pushed up for about a week.

The company said during its conference call that it is calling the bonds next month, and traders were buying the convertibles against September options rather than selling against the common, a trader said.

"People just didn't think that the company would use so much of the money they were getting in the door or about $210 million if the shoe is exercised, to take out the old deal for $165 million," the trader said. "So net-net, they are only getting $40 million in the door."

Planned Isis pricing revised

Using a credit spread assumption of 800 basis points over Libor and a 43% volatility, the deal looked to value to 100.60, a tad on the cheap side after terms were revised midsession.

A second source, using the same credit spread, but a slightly lower volatility at 40%, had them 80 cents rich on revised terms.

On original terms, the second source using his inputs got the paper 1.5% cheap at the midpoint of original terms.

A third source used a credit spread of 700 bps, which is what the underwriters went out with, and a 40% vol. got them 2.5% cheap even after revised terms.

The pricing revision "squeezes out the juice, but it will still do well," a West Coast-based trader said.

Kodak drops about 5 points

Kodak's 7% convertibles due 2017 traded down nearly 5 points to 21.5 on Tuesday after a report said that the company has received bids ahead of an auction set for Wednesday.

"Preliminary bid numbers were leaked that were lower than expected. But they are just to get-in-the-door numbers" and aren't going to reflect the final numbers, a trader said.

But a second trading source said nevertheless, a preliminary $250 million bid was "nowhere near where the company said they were going to be."

"It doesn't surprise us. That would be a hit to the second liens and a doughnut for the unsecured," he said.

The bids from the two teams came in around $150 million to $250 million. But the initial bids could rise quickly if Apple and Google compete to keep the patents out of each other's hands amid a legal battle over the smartphone and tablet markets.

A bankruptcy judge had approved Kodak's request to keep bids and results secret until a winner is decided.

Mentioned in this article:

BroadSoft Inc. Nasdaq: BSFT

Chesapeake Energy Corp. NYSE: CHK

DryShips Inc. Nasdaq: DRYS

Eastman Kodak Co. Pink Sheets: EKDKQ

Hornbeck Offshore Services Inc. NYSE: HOS

Isis Pharmaceuticals Inc. Nasdaq: ISIS

Knight Capital Group Inc. NYSE: KCG

K-V Pharmaceutical Co. NYSE: KVA

Priceline.com Inc. Nasdaq: PCLN

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.