New JDS Uniphase jumps after pricing on rich end; Merrimack extends slide; AMR wanes

By Rebecca Melvin

New York, Aug. 16 - JDS Uniphase Corp.'s newly priced 0.625% convertible notes traded up Friday on their debut in the secondary market after the Silicon Valley-based networking equipment company priced $575 million of the 20-year convertibles at the rich end and beyond the rich end of talk.

The new JDS bonds were the main focus of Friday's session, market players said.

"I was surprised that such a large deal could get done right now," a New York-based trader said, referring to the fact that summer vacation schedules are in full swing.

As for Friday's trading session, one trader said, "JDSU is the main focus for everyone." A second convertibles source said, "Other than that, it's a slow day."

AMR Corp.'s 6.25% convertibles due 2014 changed hands at 93, which was at the low end of Thursday's range, but down 23 points from early this week when news hit that the U.S. government wants to block the bankrupt carrier's proposed merger with US Airways Group Inc. on antitrust concerns.

Elsewhere, Merrimack Pharmaceuticals Inc.'s 4.5% convertibles, which priced July 11, extended their slide, dipping to 85 bid, 86 offered Friday, which was down another couple of points from Thursday, and deepening their tailspin since trading at 104.68 on Aug. 5. Shares of the Cambridge, Mass.-based biopharmaceutical company fell 5.4% on Friday.

But Goldcorp Inc. was better again and traded above 102 from 101.875 on Thursday. Shares of the Canadian gold and precious metals mining company have jumped about $5.00, or 25%, in the past week.

Dendreon Corp.'s convertibles were active this past week, but little changed at the end of it, trading at 65.125 on Friday compared to 65.375 on Monday. The bonds were in the low 70s a week ago prior to the Seattle-based biotechnology company's disappointing second-quarter results and warning that its Provenge cancer drug won't meet 2013 sales targets.

Volcano Corp. was quiet after trading a little stronger on Thursday. The Volcano 1.75% convertibles due 2017 were quoted at 98.125 bid, 98.625 offered versus an underlying share price of $21.57 on Friday, which backed off of strength on Thursday when the bond traded at 98.78.

Equities were mostly narrowly mixed but turned negative late Friday, a day after the largest, one-day drop in almost two months.

U.S. consumer confidence slipped in August, according to the preliminary reading of the Thomson Reuters/University of Michigan index, which showed consumer sentiment slipped to 80.0 from July's six-year high of 85.1.

Meanwhile, housing starts rose 5.9% in July, according to the Commerce Department, but missed economists' forecast for an 8.9% rise. The number of new housing permits rose 2.7%, just shy of economists' projections.

New JDS Uniphase jumps

JDS Uniphase's newly priced 0.625% convertibles due 2033 traded up to 103.5 to 104, with an early level quoted at 103.5 versus an underlying share price of $13.75.

JDS Uniphase shares were up 22 cents, or 1.6%, at $13.67 in ultra-heavy volume.

"It was a great deal; people are starved for paper," a West Coast-based trader said.

But activity in the new issue didn't have a spillover effect on the rest of the market. "Most are focused on JDSU," a second trader said.

"Making room for a new issue is not an issue these days," a New York-based trader said. That is in contrast to a few years ago when portfolio managers would have to move other paper to make room for a new deal.

JDS priced $575 million of the 20-year convertible senior notes beyond the rich end of coupon talk, which was 0.75% to 1.25%, and at the rich end of 35% to 40% premium talk.

There is an over-allotment option of $75 million for the Rule 144A issue, which was sold via joint bookrunners Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC, with co-managers Wells Fargo Securities LLC, Stifel Nicolaus & Co. Inc., Mitsubishi UFJ Securities (USA) Inc. and BNP Paribas Securities Corp.

The notes are non-callable until Aug. 20, 2018, and there are puts on Aug. 15, 2018, Aug. 15, 2023 and Aug. 15, 2028.

The bonds have contingent conversion if shares rise to 130% of the conversion price for a specified time. There is also takeover protection.

The company plans to use up to $100 million of the proceeds to repurchase some of its outstanding common shares. Remaining proceeds will be used to fund general corporate purposes, including potential strategic transactions.

Upon closing of the sale of notes, the company is terminating its existing $250 million revolving credit facility, which has no amounts outstanding.

JDS designs and makes products for optical communications networks, communications test and measurement equipment, lasers, optical solutions for authentication and decorative applications and other custom optics.

The deal modeled 2% cheap at the midpoint of talk using a credit spread of 350 basis points over Libor and a 38% vol.

JDS Uniphase had a 1% convertible due 2026 that has already been called.

Merrimack grinds lower

Merrimack's 4.5% convertibles due 2020 traded down to an 85 handle on Friday and were last at 86.3, which was down from 88 bid, 90 offered on Thursday and down from 104.68 on Aug. 5.

Merrimack shares fell 19 cents, or 5.4%, to $3.34.

The Merrimack 4.5% convertibles priced July 11 when the Cambridge, Mass.-based biopharmaceutical company issued an upsized $125 million of the seven-year notes at par at the midpoint of talked terms.

When asked about the move, one trader said he never got involved because he "couldn't justify the valuation."

The company disappointed investors with its second-quarter update in which there were failed interim outcomes for its lung and ovarian cancer studies for the company's core development candidate MM-121.

Bank of America downgraded the shares to "neutral" and cut its price target to $6.00 from $13.00 last week, citing "eroded conviction in the company's future pipeline data and management's ability to effectively communicate its objectives and strategy with investors."

"While the failed MM-121 interim analyses were disclosed in connection with the capital raise last month, it was not well understood by the market until the second-quarter report," Bank of America stated in a note.

"We see the potential for substantial upside to shares if upcoming trial results for MM-398 in pancreatic or MM-121 in breast cancer exceed expectations and would re-consider our rating following positive results and an understandable future development strategy," the note continued.

But key downside risks include additional trial failures and financing risk, Bank of America stated.

The registered, off-the-shelf convertibles offering was priced via joint bookrunners J.P. Morgan Securities LLC and BofA Merrill Lynch. Merrimack also priced a downsized $25 million of common stock, or 5 million shares at $5.00 per share, when the convertible deal was priced.

Mentioned in this article:

AMR Corp. Pink Sheets: AAMRQ

Dendreon Corp. Nasdaq: DNDN

Goldcorp Inc. Toronto: GG

JDS Uniphase Corp. Nasdaq: JDSU

Merrimack Pharmaceuticals Inc. Nasdaq: MACK

Volcano Corp. Nasdaq: VOLC

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