Incyte's new notes rise as old paper crumples; Priceline deal seen as rich; Novell gains on default potential

By Kenneth Lim

Boston, Sept. 21 - New issues continued to keep the convertible bond market active on Thursday, with Incyte Corp.'s newly priced 3.5% senior convertible due 2011 improving on its debut.

Investors, however, grumbled about how the new Incyte paper did well at the expense of the company's older 3.5% subordinated convertibles, which fell outright.

Priceline.com Inc.'s planned $300 million offering was quiet in the gray market, and widely expected to arrive near the cheap end of talk with the deal seen as just fair at the midpoint of guidance and hampered by a less-than-top-rate stock borrow.

Novell Inc. was up slightly after the company received default notices on its convertible and the company received a delisting notice as it continues to be delinquent in its financial filings.

Incyte deal climbs, old notes fall

Incyte's newly priced 3.5% senior convertible due 2011 gained about 1.5 points above its offered price on Thursday, but left in its wake the company's older 3.5% subordinated convertible, also due 2011, which fell about 3 to 4 points outright.

The new notes traded at 79.5 against a stock price of $4.50 on Thursday, while the older notes hit 75.75 versus a $4.40 stock price. Incyte stock (Nasdaq: INCY) fell 12.3% or 61 cents to close at $4.35.

Incyte priced its $132 million deal on Wednesday after the market closed, offering the 3.5%, up 126.2% senior notes at a discounted price of 78.

Price talk guided for a reoffered price of 77 to 79. The notes, which mature in February 2011, have par of $1,000, and yield 9.78% to maturity.

There is a greenshoe option for a further $19.8 million.

Piper Jaffray was the bookrunner of the Rule 144A offering.

Incyte, a Wilmington, Del.-based drug maker, said it will use the proceeds of the offering to redeem its outstanding 5.5% convertible subordinated notes due Feb. 1, 2007. Any remaining proceeds will be used for general corporate purposes.

The unusually structured deal, with its sizable discount and high conversion premium, was widely seen as a way to make the new convertible more attractive than Incyte's older paper.

"I liked the bond itself," a buyside convertible bond trader said. "I just didn't like the principle behind it."

The trader said that, when issued, the new convertible had a senior ranking, similar maturity and a discount to the older convertible. That, of course, made it more attractive. The trader reckoned that it may have been slightly cheaper for the company to issue a convertible this way, but noted that it took most of the shine out of the older paper.

"There's nothing good that came out of this for existing holders," the trader said. "I hope this doesn't set a precedent...because it just gives us another uncertainty."

But the trader thought the selldown in the older convertible may have been overdone. Biotech companies tend to have a "binary" set of outcomes, the trader said - either they survive and have no problems with liquidity or they go bust and cannot pay any of their convertible debt.

"With struggling biotechs, I'm not sure if senior makes that much of a difference...what I'm thinking now is getting some of the old ones," the trader said.

A sellside convertible analyst said a potential problem for Incyte was that they have a very early-stage pipeline, are a highly speculative play and will have to keep raising capital. Launching a deal that hurts existing investors may not go down well with the market, the analyst said.

Priceline deal fails to sparkle

Priceline's planned $300 million of convertible senior notes were quiet in the gray market on Thursday, with observers expecting the deal to come near the cheap end of talk amid less-than-prime stock borrow rates.

The two-tranche offering was expected to price Thursday after the close. The $150 million tranche of five-year notes was talked at a coupon of 0.25% to 0.75% with an initial conversion premium of 17.5% to 22.5%. The equally sized series of seven-year notes was talked at a coupon of 0.5% to 1% with an initial conversion premium also between 17.5% and 22.5%.

Priceline stock (Nasdaq: PCLN) gained 6.55% or $2.07 to close at $33.65 on Thursday after the deal was announced.

Each tranche has an over-allotment option for a further $22.5 million.

Goldman Sachs was the bookrunner of the Rule 144A offering.

Norwalk, Conn.-based Priceline.com, an online travel company, plans to use the proceeds to buy back up to $150 million of its common stock and to repay existing convertible debt that will become due in 2008. The company will also tender for all its outstanding convertible debt due 2010 and 2025 in a part-cash, part-exchange offer, although it did not specify in what proportions. Priceline will also enter into convertible note hedge transactions and fund general corporate purposes with the proceeds of the deal.

A sellside convertible bond analyst said it was difficult to work out a credit spread for the deal partly because Priceline did not provide enough details about its planned tender offers.

"They didn't say what percentage they would tender for in cash and what percentage with new notes," the analyst said. "They have a good growth model, but at the same time they're in a tough industry. But they are particularly bad at disclosure. They're not willing to say much."

Another convertible bond analyst expected the deal to come near the cheap end of price talk, saying that it only modeled fair at the midpoint of price talk. The analyst reckoned that the stock borrow rebate was "manageable."

But a buysider said the less-than-top-rate borrow was enough of an issue to dull the attractiveness of the deal. The company's buying back of $150 million of its common stock could also make the borrow worse.

"The borrow's a little off top rate...it makes it look not that attractive," the buysider said. "If you're subject to the whims of your prime broker, it becomes a difficult trade."

Novell up on possible default, delisting

Novell's 0.5% convertible due 2024 gained about 1.5 points outright on Thursday after the company received delisting and debt-default notices as it continues to be late in filing its financial reports.

The convertible traded at 93.75 against a stock price of $6.27 on Thursday. Novell stock (Nasdaq: NOVL) fell 1.41% or 9 cents.

"Novell is trading up a fair bit," a buyside convertible bond trader said. "On a dollar-neutral basis, it's up about three-quarters of a dollar."

Waltham, Mass.-based Novell said late Wednesday that it had received a default notice from Wells Fargo Bank for its $600 million of convertible due 2024 for failing file its financial reports on time. Novell, a developer of open-source software, said it "does not believe it has failed to perform its obligations under the indenture."

It also received a delisting notice from Nasdaq, and the company is requesting a hearing to stay listed. Novell delayed its filings in August amid an internal probe into its stock options granting practices.

The default notice arrived as a court ruling earlier in the week found that BearingPoint Inc. breached the terms of its indenture when it failed to file its financial statements on time. Observers said the BearingPoint ruling reinforces companies' obligations under their debt indentures, and may place pressure on companies like Novell.

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