Clearwire slumps on debut as hedge players steer clear; Vertex below par; Cameron rises

By Rebecca Melvin

New York, Dec. 3 - Clearwire Corp.'s newly priced 8.25% exchangeables - a deal that was upsized to $650 million from $500 million - slumped out of the chute Friday to about 98 bid, 99 offered amid a borrow problem and flagging broader markets.

The pressure may have come from hedge funds trying to get out of allocations that they didn't want given the poor borrow, market sources said.

"We don't know who got the allocations, but if hedge funds got some, they probably wanted to get out of it. There's no borrow on this thing, so hedge players probably wouldn't want it at any price," a New York-based sellside analyst said.

Back in established issues, Vertex Pharmaceuticals Inc. was active in trade and moved lower by about 0.75 point, amid no particular news. Cubist Pharmaceuticals Inc. was another name active in trade, with one sellside analyst suggesting that the trades in these names may have had more to do with year-end and portfolio adjustments than any particular trading event.

Cameron International Corp. convertibles were also in trade and continued pushing upward along with their underlying shares as they have recovered from last spring and summer's Gulf of Mexico oil leak disaster.

For Friday's session, convertibles looked to be in line, dollar neutral to slightly better, a New York-based sellside trader said. Initially, the stock markets were heavy after disappointing jobs data, but they rallied into the close to end in the green.

"It looked better for choice," the analyst said, referring to select names being stronger, but not a broad-based rally in convertibles.

Overall, the convertible bond market saw a pick up in primary market activity in the past week, with four new deals launching and pricing for a total of $1.45 billion in new paper.

In addition to the Clearwire new issue, the week's deals included Omnicare Inc.'s $500 million of 3.75% convertibles, Ixia Inc.'s $175 million of 3% convertibles and China Medical Technologies Inc.'s $125 million of 6.25% convertibles.

Also two new deals were launched for pricing later this month. They were UBS AG's $180 million of exchangeables into Stillwater Mining Co. and Swift Holdings Corp.'s $300 million of mandatories.

Clearwire weakens

Clearwire's newly priced 8.25% exchangeables due 2040 slumped out of the chute to 99.5 and were soon heard at 98 bid, 99 offered by midmorning.

The paper was initially said to have had a plus 0.375 point bid early Friday, but given difficulty borrowing the underlying shares, few if any convertible arbitrage players were involved, resulting in a lack of support for the pricing, market players said.

"My guess is it's very cheap, so hedge funds fluffed their orders up. Then the company upsized to fill it, which should be no surprise: they need money," a West Coast-based sellside trader commented regarding the deal.

"On top of that, you've got a down market after the payroll numbers, so the flippers are getting aggressive," the trader said.

Shares of the Kirkland, Wash.-based wireless broadband services provider were up a little, helping things out, ending up 13 cents, or 2.2%, at $6.03, following a 13.5% slide Thursday after the deal was launched.

Clearwire priced an upsized $650 million offering of the 30-year exchangeable notes at par late Thursday.

The Rule 144A and Regulation S deal was initially expected to be $500 million in size.

Pricing came at the midpoint of talk, which was 8% to 8.5% for the coupon, with an initial conversion premium of 17.5% to 22.5%.

There is a $100 million greenshoe.

Concurrently, Clearwire priced $175 million of first-priority straight notes due 2015 and $500 million second-priority straight notes due 2040.

Long duration eyed

Other strikes against the Clearwire deal were its relatively long seven years to the put, a low CCC credit rating and the fact that there was more than $600 million of other debt issued that is senior to the convertibles.

"So you're at the bottom of the cap structure," a sellsider said. But all those issues could have been surmounted if not for the overarching problem that the stock was not hedgible, the sellsider said.

"The negative stock borrow means it's not cheap," the sellsider said. "It's a very tough borrow; the public float is small."

The sellsider suggested that the difficult borrow represented a negative 5 points to 8 points to valuation.

There are investors who would be comfortable with the credit however. And in the convert universe a similar name is Level 3 and Global Crossing.

"It would be familiar to the high-yield crossover type buyers," a sellsider said.

The pricing at 8.25% with a 20% initial conversion premium was sufficiently aggressive, a sellsider said. "Other high yieldy names have come in the last few years. There's any combination of coupon and premium to get these things to work."

Bigger issue to come?

Clearwire could issue up to another $760 million of the exchangeables depending on whether shareholder pre-emptive rights are exercised.

Thirty-one percent of Clearwire stockholders representing about 85% of the company's voting power have waived their pre-emptive rights to participate in the deal. The remaining rights, if exercised, could result in Clearwire Communications issuing up to an additional $760 million in exchangeables, or growing total deal size to about $1.4 billion.

This scenario is not common for convertibles. But "a case where large inside/affiliate holders had similar rights was Infinity World in an MGM deal from earlier this year, but it wasn't focused on as much because their ownership percentage was significantly lower, below 10%, I believe," a New York-based syndicate source said.

Vertex slips below par

Vertex Pharmaceuticals' 3.35% due 2015 traded at 100 versus a share price of $33.50 early in the session, but they were seen closing out the day at about 99.25, a New York-based sellside analyst said.

Shares of the Cambridge, Mass.-based drug maker spent some of the day in the red but ended higher by 12 cents, or 0.36%, at $33.49.

The convertibles had most recently stood at about par, but the paper had been as high as 104 bid, 105 offered since issue a few months ago.

The trading action in the name probably had more to do with year-end and managers adjusting their portfolios than with some event, an analyst said.

Cameron continues to run

Cameron's 2.5% convertibles due 2026 traded at 146 versus a share price of $51.00, according to a New York-based sellside desk analyst, and they were last seen on Trace at 147, which was up nearly 4 points outright on the day. The paper is continuing a strong run since the stocks and bonds collapsed midyear after the Gulf of Mexico oil leak disaster stemming from the explosion of a BP plc-operated Transocean rig.

Shares of the Houston-based oil and natural gas equipment provider lifted 47 cents, or nearly 1%, to $51.36 in light volume Friday.

"We like Cameron," a New York-based sellside analyst said of the convertible bond.

Since the convertibles and stock took a hit related to the Macondo incident, this analyst's firm has come out in favor of Cameron's fundamental picture, since it makes the equipment that will be used in wells to prevent similar accidents from occurring.

"Blowout preventers are going to be more heavily used and required by regulators. Cameron is going to be the beneficiary coming out of this," the analyst said.

At this point implied vol. is back in line with option vol., but valuation had been very depressed with implied vol. trading at a 10-point discount to option vol., the sellsider said.

It's been a strong performer since, but it's relatively short-duration paper with an upcoming call in June that the company is likely to use, the sellsider said.

Mentioned in this article:

Cameron International Corp. NYSE: CAM

China Medical Technologies Inc. Nasdaq: CMED

Clearwire Corp. Nasdaq: CLWR

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Ixia Inc. Nasdaq: XXIA

Omnicare Inc. NYSE: OCR

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

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