New NuVasive trades actively around par, adds on hedge; Jefferies flat on hedged basis

By Rebecca Melvin

New York, June 23 - NuVasive Inc.'s newly priced 2.75% convertibles traded right around par, or slightly under and over on their first day of trade Thursday, after the upsized $350 million registered deal came at the midpoint of talk late Wednesday.

The San Diego-based medical device company's new paper added on a hedged basis by 0.25 point to 0.5 point, depending on the delta, sources said, and trading in the name accounted for about 25% of the session's overall volume in the convertibles market.

"That's telling you where people's focus was," a convertibles trader said.

NuVasive's existing 2.25% convertibles, which are expected to be repurchased with proceeds of the new deal, traded at 104 versus an underlying share price of $32.40, a New York-based desk analyst said.

Bedford, Mass.-based medical device maker Insulet Corp., which launched a $110 million offering of five-year notes after the market close Wednesday, was supposed to price Thursday after the market close.

"An erroneous number went out," indicating that it was supposed to price Wednesday night, a syndicate source said. "But it was always supposed to be [Thursday]."

Jefferies Group Inc. traded actively Thursday but was flat on a hedged basis. The New York-based financial company released earnings on Tuesday, and independent research firm Gimme Credit published a note on the company reflecting on earnings, which were crimped by "muted" secondary trading activity.

"Jefferies has shown strong growth trends over the past few years, stepping into the void left by the disappearance of previously independent firms such as Bear Stearns and Lehman Brothers," Gimme Credit analyst Kathleen Shanley wrote.

After the market close, Micron Technology Inc. reported fiscal third-quarter earnings that shot down shares of the Boise, Idaho-based semiconductor company by 12% in after-hours trade.

The company missed expectations by a wide margin, earning just 7 cents a share for the period ending June 2, compared to an estimate of 16 cents a share. Revenue was lower, hurt by weakening prices of dynamic random-access memory chips.

Equities rallied into the close after the Dow Jones Industrial Average was suffering with triple digit losses earlier in the day.

It started as a "risk off" day following jobless claims that came in worse than expected, and underscoring Federal Reserve chairman Ben Bernanke's dour view for slower-than expected growth persisting in the second half, marked by higher unemployment and inflation.

Exacerbating investor jitters Thursday was the announcement from the White House and International Energy Agency that they are going to release 60 million barrels of oil in response to the ongoing disruption of oil supplies from Libya.

Half of the 60 million of reserves will come from the United States, with 30% coming from Europe and 20% from Asian countries. Promise on an additional 2 million barrels a day for 30 days, or a tenth of the U.S.'s daily usage, is significant and sent crude oil briefly below $90 a barrel.

The recent pull back has put convertible arbitrage players near the flat line in terms of performance for the year, and that means that those players are going to be less likely to participate in convertibles and more likely to watch the broader markets when things are rocky, sources said.

"We had a little bit of a correction, but valuations are still rich. [Arb players] are going to be nervous about performance and valuations," a Chicago-based convertibles trader said.

"You can still hide in a number of names, such as low premium ones that carry themselves within their life; these are better places to hide with limited downside in this environment," the trader said.

NuVasive toggles flat line

NuVasive's new 2.75% convertibles due 2017 traded at 100.25 versus an underlying share price of $32.25, which would have meant they richened about 0.5 point on a 60% delta hedge, according to one trading source.

The paper closed at 99.75 versus an underlying share price of $32.14, which put them up on a dollar-neutral basis by about 0.25 point on the bid side if tracking on an 80% delta, a second sellsider said.

"I didn't mind the pricing," a sellsider said, using inputs of 300 basis points over Libor and 30% to 35% volatility. And he thought the stock borrow was OK.

A second sellsider said, "It's a market," meaning that there were trades at different levels and different views on the name.

The stock held up pretty well despite the early weakness in the broader markets. NuVasive shares closed down 28 cents, or 0.86%, to $32.14.

Although the new paper didn't jump a couple of points on its debut, as has been normal in the convertibles new issue market, it still expanded on a hedged basis and it will likely "trade well over time," one trader said.

Any day you have a new deal on a big down day, you're going to have trouble," the trader said.

Trace volume indicated that NuVasive accounted for 25% of the day's volume.

The medical device maker priced the six-year convertibles at par at the midpoint of talk, which was 2.5% to 3% for the coupon and 27.5% to 32.5% for the initial conversion premium.

Bank of America Merrill Lynch and Goldman Sachs & Co. were the deal's bookrunners.

The new notes are non-callable with no puts.

NuVasive, a San Diego-based medical device maker, intends to use the proceeds for general corporate purposes and to repurchase $230 million of its existing 2.25% convertible senior notes due 2013. The company may also consider possible strategic acquisitions or investments.

Existing NuVasive's quieter

NuVasive's existing 2.25% convertibles traded at 104 versus an underlying share price of $32.40, which compared to crossing at 106 versus an underlying share price of $34.25 on Wednesday.

One source, whose firm didn't trade the paper Thursday, said that on Wednesday the existing NuVasive convertibles expanded on a 40% delta hedge. That was contrary to another source who said the paper on Wednesday contracted slightly.

Jefferies flat on hedge

Jefferies' 3.875% convertibles due 2029 traded at 101.25 versus an underlying share price of $20.62 on Thursday, and also at 101 versus a share price of $20.50, which compared to 101.75 versus a share price of $21.35 on Wednesday.

Jefferies shares closed down 31 cents, or 1.5%, to $20.69, which was off its lows for the day.

On a 40% delta, "nothing happened today", a New York-based analyst said. "On a dollar-neutral basis, our trader has it a wash."

The analyst said the paper closed near par.

Jefferies reported Tuesday that its net income to common shareholders was $81 million for the second fiscal quarter ended May 31, which was down from $87 million in the first quarter and down from $84 million in the year earlier second quarter.

"It had a strong quarter in investment banking with revenue of $328 million, up from $256 million a year ago, but secondary trading was lackluster, Gimme Credit analyst Shanley said Wednesday.

Noninterest expenses increased, reflecting higher compensation costs and expenses related to the pending acquisition of Prudential Financial's global commodities business.

During the second quarter, Jefferies raised $1.3 billion in capital, including $500 million in common stock and $800 million of seven-year notes, to fund the $430 million acquisition, along with other growth initiatives.

Mentioned in this article:

Insulet Corp. Nasdaq: PODD

Jefferies Group Inc. NYSE: JEF

Nuvasive Inc. Nasdaq: NUVA

Micron Technology Inc. NYSE: MU

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