Knight extends strong gains on capital infusion; Isis moves up with shares, launches deal

By Rebecca Melvin

New York, Aug. 6 - Knight Capital Group Inc.'s existing convertible bonds shot up again on Monday on word that the electronic trading firm came through a tenuous weekend with a $400 million capital infusion - namely in the form of privately placed convertible preferred debt.

The Jersey City, N.J.-based financial company was able to recapitalize in a moment of stress after a massive trading glitch last Wednesday left it with a $440 million trading loss and crisis of confidence that thrust the company's fate into question.

Knight's existing convertibles moved up by about 10 points to the upper 80s and accounted for a good chunk of Monday's trading action, sources said.

Meanwhile, the new Knight convertibles are unlikely to see any action in the secondary market, and are essentially a form of stock given the low strike price on the new debt; but the news encouraged market players given that convertibles were used to remedy Knight's situation favorably.

Isis Pharmaceuticals Inc.'s convertibles moved up with the underlying shares after the Carlsbad, Calif.-based drug maker reported better-than-expected second-quarter results. After the market close, the company launched a $175 million offering of convertible notes that will be used to repay those existing convertibles, which were up in the 106 context.

United States Steel Corp. was also higher and fairly active, a New York-based trader said, along with the underlying shares amid strength in the broader markets and in both the oil and metal sectors.

In the primary market, Exelixis Inc. launched $225 million of seven-year convertibles near the market open, and the primary market saw more action after the market close.

In addition to the Isis deal, Hornbeck Offshore Services Inc. launched $260 million of seven-year convertible notes, which were talked to yield 1.5% to 2% with an initial conversion premium of 32.5% to 37.5%.

"It's funny; people will come to the convert market when they need it. We saw it with KCG - even though it's a private deal - and now with Exelixis," a West Coast-based trader said prior to the market close.

Knight extends bounce

Knight Capital's 3.5% convertibles due 2015 traded up about 10 points to about 88 to 88.25 on Monday, which was up from 78 on Friday and up from 67 late Thursday.

But Knight shares fell 98 cents, or 24%, to $3.07.

The bonds lifted because the company is no longer in danger of default following the $400 million cash infusion of convertible preferred debt that a group of investors purchased over the weekend. But they didn't go up to par because the 73% stake in the company that the investors now hold doesn't trigger a change of control put for the bonds, a convert analyst said.

The preferreds have a very low strike that can be exercised immediately given the $3 share price, and so they are essentially stock and represent a dilution concern for existing shareholders.

The preferreds were purchased by Blackstone Group LP, rival market maker Getco and financial services company TD Ameritrade Holding Corp., Stifel Nicolaus, Jefferies Group Inc. and Stephens Inc.

"It's very interesting that it was a convertible security that came to the rescue," a trader said. "It works in distressed situations."

Other companies have done similar private deals using convertible preferreds, including Sun Microsystems and Netflix, the trader said.

"The stock is through where the strike price is. I'd love that, of course," he said.

"I'm glad to see that it got done. The company is back to being solvent and back to business, and at the end of the day it was an error; it was not fraud or a conspiracy theory," the trader said.

Last Wednesday, Knight Capital's trading orders in 140 to 150 New York Stock Exchange-listed stocks ran amok due to what was described as a software glitch.

Isis trades up after earnings

Isis' 2.625% convertibles due 2027 traded up a couple of points with the underlying shares to 105.75 bid, 106.75 offered versus a share price of $13.15.

Isis shares added $1.11, or 9%, to $13.19.

The paper had been shifting to outright hands, given that it had risen above par and is callable.

The company was not expected to call the bonds given its lack of spare cash, but it announced that it will issue new paper to buy back the older notes.

"They moved up with the stock; they didn't open up dollar neutral," a trader said.

A move beyond that level would be risky given the possibility of a call.

For the second quarter, the company reported a loss of $1.2 million, or a cent per share, which compared to a $17.9 million, or 18 cents a share, loss the prior year.

Revenue jumped to $47.3 million from $24.8 million.

That was better than expected as analysts on average were calling for a loss of 10 cents a share on $40.1 million of revenue.

Exelixis looks pretty good

The planned $225 million Exelixis deal was being talked to yield 3.75% to 4.25% with an initial conversion premium of 25% to 30%, according to a syndicate source on Monday.

"Fours up 27.5% is reasonable," a trader said, referring to the midpoint of price talk.

He suggested that the credit was going to be pretty wide and the vol. high for the South San Francisco, Calif.-based biotechnology company that develops small molecule therapies for the treatment of cancer, so valuing the paper was "going to require some work."

The new paper is being brought by Goldman Sachs & Co., as bookrunner, with Cowen & Co. as joint lead manager and three co-managers.

The deal, for which there is a $33.75 million greenshoe, is being priced concurrently with 20 million shares of common stock.

The notes are non-callable until Aug. 15, 2016, and there is a takeover put. There is contingent conversion at a price hurdle of 130%.

Isis launches

Isis launched late Monday an offering of $175 million of convertible notes that will be used to repay its existing 2.625% convertibles due 2027.

The Rule 144A Isis deal has a $26.25 million over-allotment option and is being sold via bookrunners Barclays, Goldman Sachs and J.P. Morgan Securities LLC.

The notes are non-callable for four years and then are provisionally callable subject to a 130% price hurdle. There are no puts, but the paper has takeover and dividend protection.

Hornbeck to retire some debt

Hornbeck Offshore will use its $260 million of seven-year convertible bonds to retire its existing 1.625% convertibles due 2026, to purchase a bond hedge and for general corporate purposes.

Both deals are pricing after the close Tuesday.

Price talk on the Rule 144A Hornbeck offering was for a 1.5% to 2% coupon and a 32.5% to 37.5% initial conversion premium.

Bookrunners of the deal are Barclays, JPMorgan and Wells Fargo Securities, and there is a $40 million over-allotment option.

The notes are non-callable for life with no puts. There is takeover and dividend protection.

Hornbeck is a Covington, La.-based provider of offshore supply vessels to the oil and gas industry.

Mentioned in this article:

Exelixis Inc. Nasdaq: EXEL

Hornbeck Offshore Services Inc. NYSE: HOS

Isis Pharmaceuticals Inc. Nasdaq: ISIS

Knight Capital Group Inc. NYSE: KCG

United States Steel Corp. NYSE: X

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