Navistar weaker on hedge after outlook cut; Dendreon drops 2 points on positive J&J drug study

By Rebecca Melvin

New York, March 8 - Navistar International Corp. was one of the most actively traded names in the convertible bond market on Thursday, and the bonds weakened about a point on a dollar neutral, or hedged, basis after the Warrenville, Ill.-based truck maker reported a wider first-quarter loss and cut its full-year earnings outlook.

Dendreon Corp. was also active, and it was lower by about two points on an outright basis. Meanwhile, Dendreon shares took a 7% hit after word that a trial of Johnson & Johnson's Zytiga prostate-cancer drug - a rival to Dendreon's Provenge drug - is being stopped early because it is clear it is increasing survival in patients.

In the new issue arena, market players took a look at Ares Capital Corp., which launched a deal for $150 million of five-year convertible notes set for pricing after the market close.

The Ares deal was a little bit rich at its talked coupon of 4.375% to 4.875% and initial conversion premium of 17.5% to 20%, a New York-based trader said. He was using a credit spread of 450 basis points over Libor.

But Ares' existing 5.75% convertibles were bid up by about 0.5 point initially on the news.

Otherwise, the session was somewhat quiet, sources said. The $1 billion of new issuance that priced Wednesday was not seen actively traded on Thursday. The 3.25% Helix Energy Solutions Group Inc. convertibles looked to be tucked away, and Priceline.com Inc.'s $875 million of 1% convertibles were not seen on Thursday.

Equities pulled higher for a second straight session following the sharp sell-off on Tuesday. The Dow Jones industrial average was up 70.61 points, or 0.6%, at 12,907.94 on Thursday. The S&P 500 index rose 13.28 points, or 0.98%, to 1,365.91. The Nasdaq stock market added 34.73%, or 1.2%, to close at 2,979.42.

Investors were cheered by headlines that Greece was moving closer to a bond swap deal with creditors that was likely to avert a default.

Navistar lower dollar neutral

Navistar's 3% convertibles due 2014 traded on Thursday at 108.25, which was down three points outright, according to Trace data. At the close, the 3% convertibles were seen at 108 bid, 108.5 offered versus $39.27, which was lower by about a point on a hedged basis, sources agreed.

Navistar shares pared losses into the close and ended down only 76 cents, or 1.9%, after being down as much as 7% early in the session.

"We saw some buyer support going into the close," a New York-based trader said of the convertibles.

The commercial and military vehicle producer reported a loss of $153 million, or $2.19 per share, for the three months ended Jan. 31. That compares with a loss of $6 million, or 8 cents per share, a year earlier.

Excluding one-time items, the company lost $2.08 per share, compared to a profit of 16 cents per share in the prior-year period. Analysts had been expecting a 20 cent per share loss.

Navistar said that health-care costs, a new foundry operation and a brake supplier issue hurt the results, which are typically softest in the first quarter due to seasonal weakness.

Revenue rose 11% to $3.05 billion on higher truck volume and topped estimates.

Navistar now sees full-year adjusted earnings of $4.25 to $5.25 per share. Its prior guidance was for adjusted earnings in a range of $5.00 to $5.75 per share. The company said that the outlook includes about $90 million of higher post-retirement health-care costs compared to last year.

Dendreon drops

Dendreon's 2.875% convertibles due 2016 traded at 80.75, which was down nearly two points on the day, and was seen at the close at 80.5 bid, 81 offered.

It dropped a couple of points outright on the J&J study, a source said.

The study, COU-AA-302, covered 1,088 men with mild to no symptoms from prostate cancer that had spread to other parts of the body and didn't respond to conventional therapy to stop hormone production. They were given Zytiga once daily plus the steroid prednisone twice daily, or else prednisone plus a placebo. Independent monitors said J&J's drug was so effective it should be given to all patients in a study, so the trial was stopped.

Ares seen slightly rich

Ares' planned Rule 144A offering of $150 million of five-year convertibles was seen about 0.25 point rich using a credit spread of 450 bps over Libor and a 20% vol.

The New York-based private equity firm's deal pulled other business development companies into trade like Apollo Investment Corp., the trader said.

The business development companies traded up and the prospects are good, he said, given that it's a new sector for convertible paper and the deals came after the 2008 debt crisis.

"We'll see if there is more from those guys," he said.

The joint bookrunners for the Ares deal are J.P. Morgan Securities LLC, Bank of America Merrill Lynch, Wells Fargo Securities LLC and Morgan Stanley & Co. LLC.

Proceeds will be used to repay outstanding debt, which may include borrowings under the company's revolving credit facility and other facilities, and for general corporate purposes.

Ares' existing 5.125% convertibles weren't heard in trade, but the existing 5.75% convertibles were bid up about 0.5 point.

"In general they went better as the new bonds came and priced a little aggressively," the trader said of the older Ares convertibles.

Mentioned in this article:

Apollo Investment Corp. Nasdaq: AINV

Ares Capital Corp. Nasdaq: ARCC

Dendreon Corp. Nasdaq: DNDN

Navistar International Corp. NYSE: NAV

Helix Energy Solutions Group Inc. NYSE: HLX

Priceline.com Inc. Nasdaq: PCLN

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