Convertibles, broader markets drop; Weatherford deal pulled, stock rebounds; biotechs down

By Rebecca Melvin

New York, Sept. 22 – U.S. convertibles were down on Tuesday amid a broad market downdraft, which was led by selling in commodities and which hit convertibles in many areas “across the board,” market players said.

There was higher volume and lower pricing in every area, a New York-based trader said. He was unwilling to single out specific trends or issues.

A cross current to the down trend was funds ready to be put to work after the planned Weatherford International plc mandatory deal was pulled late Monday. The company had been set to price $1 billion of exchangeable subordinated notes and common stock.

The fact that the deal was pulled was not that surprising, one New York-based trader said, “given the [Weatherford] stock moved down 17% yesterday.”

“That is definitely a risk with a move like that,” he said regarding canceling a deal after a tumble in the shares.

But the cash ready to allocate contributed to a sense that the market was “all over the place,” a New York-based trader said.

In Europe, the mandatory convertibles of Volkswagen AG dropped for a second straight day in active trade after Volkswagen admitted that it had installed software in its diesel-powered cars designed to deceive U.S. regulators about the cars’ emissions.

The Volkswagen 5.5% mandatory convertible notes, which mature in six weeks, fell another 14 or 15 points on an outright basis to about 73, which was down from 87 on Monday, according to a market source. The paper had been about 101 last week.

Among business development companies, Ares Capital Corp. saw its convertibles slightly weaker in active trade amid no particular news for the New York-based company.

Ares Capital’s 5.75% convertible due February 2016 was one of the most active issues of the session in the early going, changing hands at just under 101, which was down fractionally and matched slightly lower shares.

Ares Capital’s 5.125% convertibles due in June of 2016 change hands at 101.3, which was down 0.2 point, according to Trace data.

FireEye Inc.’s 1% convertibles, or the A tranche, fell 3 or 4 points on an outright basis to about 93 at the close, against shares that collapsed $1.68, or 5%, to $35.31.

FireEye, the Milpitas, Calif.-based network security company, priced an upsized $800 million of 20-year convertible senior notes in two tranches at the end of May, including $400 million of 1%, series A notes and $400 million of 1.625% series B notes.

The materials sector was lower on Tuesday, and the convertibles of Trinity Industries Inc. and United States Steel Corp. were notably lower on an outright basis. The shares of those companies also took a leg lower.

The biotechnology sector was lower on an outright basis for a second straight day, but the convertibles were mostly lower in line, or flat, on a dollar-neutral basis, a trader focused on health care and biotech said.

“Health care converts are holding up fine, I haven’t seen anything meaningful,” the trader said.

The weakness in biotech and health care was initially precipitated by “pricing concerns,” the trader said. Those concerns were ignited by a New York Times article on Turing Pharmaceuticals, and then exacerbated by Hillary Clinton’s calls for pricing reform, the trader said.

The Times article outlined examples of pricing gapping higher, including a huge jump in Daraprim, a 62-year-old drug that Turing acquired in August. The price was raised to $750 per pill from $13.50 by Turing.

The article created anxiety among investors, and then Clinton decided to come out with a plan to lower pharmaceutical costs. On Tuesday, she unveiled a plan that would include putting a monthly cap on the cost of pharmaceuticals for individuals.

Among health care names that saw big drops on Tuesday were Depomed Inc. and Horizon Pharma plc. Until recently the two companies had been mentioned together because Dublin-based biopharma Horizon had attempted to buy Depomed, but the Newark, Calif.-based pharmaceutical company had adopted a poison pill in response to the hostile takeover bid.

On Tuesday, Depomed’s 2.5% convertibles dropped to 142.5 to 143 as the common stock fell nearly 13% to $24.18, which was down $3.51.

Horizon’s 2.5% convertibles were seen down at about 113 from about 122 previously, as Horizon shares fell $3.47, or 12%, to $25.52.

Overall, the market was “all over the place” in terms of pricing and the issues that were in play, a trader said.

Weatherford canceled

Weatherford shares popped on Tuesday, settling up 90 cents, or nearly 11%, at $9.31.

The company canceled its planned offering of $1 billion of mandatory notes and common stock, saying that investor interest was “strong” but adding that it was “unwilling to sell securities at prices that do not reflect the value we have created at Weatherford.”

The company said it will continue its “resolute course of focusing on its core businesses and the efficiency of its operations,” according to a news release.

It added that it expects to have positive free cash flow this year and in future years, and has “ample” liquidity.

The decision to abandon the sales was announced after the close on Monday.

There were investors looking to allocate funds that had been reserved for Weatherford during a risk-off day, which contributed to some turbulence in the market, a trader said.

Weatherford, the international oilfield service company based in Baar, Switzerland, launched an offering of mandatory notes that had been expected to come with a coupon of 6.25% to 6.75% and with an initial conversion premium of 22.5% to 27.5%.

Mentioned in this article:

Ares Capital Corp. Nasdaq: ARCC

Depomed Inc. Nasdaq: DEPO

FireEye Inc. Nasdaq: FEYE

Horizon Pharma plc Nasdaq: HZNP

Trinity Industries Inc. NYSE: TRN

United States Steel Corp. NYSE: X

Volkswagen AG ETR: VOW

Weatherford International plc NYSE: WFT

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