High-grade names in focus; Lennar adds; Isis under pressure; Gevo to price $30 million

By Rebecca Melvin

New York, June 27 - The convertibles market was focused primarily on investment-grade names again on Wednesday with pricing tracking in line with the underlying shares, market players said.

Amgen Inc. and Gilead Sciences Inc. accounted for a large chunk of the day's volume, according to a New York-based trader.

These kind of high-grade names are favored even though they are expensive, the trader said, because they allow investors to quantify their losses if things head south.

Elsewhere, Lennar Corp., the No. 3 U.S. homebuilder, which has three outstanding convertible bond issues, reported better-than-expected earnings and its convertibles were indicated higher, but not by as much as the gain in the underlying shares, according to a New York-based analyst.

Isis Pharmaceuticals Inc.'s convertibles were active amid no particular news for the Carlsbad, Calif.-based drug maker as trades appeared to indicate paper moving into the hands of outright players from hedged investors.

Navistar International Corp. traded down slightly by about 0.25 point, in line with underlying shares to 91.125 and 91versus an underlying share price of $21.58.

The underlying shares of James River Coal Corp. rebounded 8% on Wednesday after a ratings downgrade dragged shares lower on Tuesday. But there was little to report in the convertibles of the Richmond, Va., coal company. The James River 3.125% convertibles were offered at 28 early in the session, which was within the previous range; and the 4.5% convertibles were offered at 36, which was the upper end of a previous range.

In the primary market, Gevo Inc. launched an offering of $30 million of 10-year convertible senior notes that was expected to price after the market close on Thursday. Gevo shares fell 22.5%.

Economic data out Wednesday was less bad than it has tended to be. Durable goods orders were up a better-than-expected 1.1% for May, according to the Commerce Department. Economists had expected orders to rise 0.4% last month. In addition, the National Association of Realtors said that existing home sales climbed last month from April.

The Nasdaq stock market ended up 21.26 points, or 0.7%, at 2,875.32; the S&P 500 stock index added 11.86 points, or 0.9%, to 1,331.85; and the Dow Jones industrial average gained 94.34 points, or 0.7%, to 12,627.01.

Lennar indicated higher

Lennar's newer 3.25% convertibles due 2021, which priced in November, were up 3.6% to 143.375 from 138.375 on an outright, indicated basis, a New York-based analyst said.

Lennar's 2.75% convertibles due 2020, which priced in 2010 and are callable in December 2015, were seen up 4% at 146.5 compared to 140.75. That issue is predominantly held on an outright basis.

Lennar's 2% convertibles due 2020 were seen up 2.5% to 121 from 118.

Shares of the Miami-based homebuilder were up $1.50, or 5.1%, at one point and ended higher by $1.31, or nearly 5%, to $28.70.

"Homebuilders are interesting; they are exhibiting lots of volatility," an East Coast-based buysider said. "They are all pretty well fully valued now, but if you pick your spots I think you can still trade around and do OK."

Sparking the rise in shares and convertibles was Lennar's fiscal second-quarter report, which showed that earnings soared from a year earlier amid higher home sales and a tax-related gain.

For the quarter ended May 31, the company reported a profit of $452.7 million, or $2.06 per share, up from year-earlier earnings of $13.8 million, or 7 cents a share. The most recent quarter included $1.85 a share from the reversal of a deferred tax asset valuation allowance. Excluding the one-time gain, earnings were 21 cents a share, which was better than the 17 cents per share that analysts were expecting.

Revenue climbed 22% to $930.2 million, which was better than the $886 million revenue that analysts were expecting.

Isis appears to shift

Isis' 2.625% convertibles due 2027 were seen in trade at 101.5 or 101.25 bid, 101.75 offered, sources said, which was down about 0.3 point on the day.

Isis shares added 21 cents, or 1.8%, to $11.80.

"Isis doesn't trade often but saw good volume," a convertibles trader said. "The stock and bonds have done well, and I just think there was some turnover in holders, with some guys taking profits."

A second source said that it appeared that there was a hedged seller into some outright buyers.

The source said that premium "is going to leak a lot now if the stock runs, but at 101.5 you still have a positive yield to put."

Gevo to price

Gevo launched a small, $30 million offering that was talked to yield a high coupon of 7.25% to 7.75% with a low initial conversion premium of 15% to 20%, according to a syndicate source.

Gevo is an Englewood, Colo., renewable chemicals and advanced biofuels company that is considered a high-risk play, a New York-based analyst said.

The deal was too small for some players to consider, but it was viewed as cheap.

It's likely to go to a select audience, a trader said.

The registered deal has a $5 million greenshoe, and Gevo also plans to sell common stock.

The bonds are non-callable for three years and then provisionally callable for two years at a price hurdle of 150%. After that they are freely callable. There is an investor put in year five.

There is also a coupon make-whole feature if conversion occurs after six months, subject to a cap of four years of coupons.

This feature has been seen in several recent new issues, particularly the smaller deals where liquidity issues come to the fore. And it is seen as something to help investors "get comfortable" with the offering.

Net proceeds from the offerings are earmarked to repay a portion of its outstanding long-term debt, to fund the cash consideration payable to complete a retrofit of its Luverne, Minn., plant and to fund partially the Redfield Energy retrofit.

Remaining proceeds will be for working capital and for other general corporate purposes.

UBS Securities LLC and Piper Jaffray & Co. are acting as joint bookrunners for the offerings, with Robert W. Baird serving as co-manager for the common stock offering.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Gevo Inc. Nasdaq: GEVO

Gilead Sciences Inc. Nasdaq: GILD

Isis Pharmaceuticals Inc. Nasdaq: ISIS

Lennar Corp. NYSE: LEN

Navistar International Corp. NYSE: NAV

James River Coal Corp. Nasdaq: JRCC

© 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.