Existing Isis bonds, shares up; planned Isis looks slightly rich; Ascent Capital shares drop

By Rebecca Melvin

New York, Nov. 11 – Isis Pharmaceuticals Inc. was the name of the day in convertibles on Tuesday as many holders of the existing Isis bonds sold those bonds back to the company and weighed a planned $425 million of new Isis convertibles expected to price after the market close.

Bondholders were being paid roughly 6.5 points over parity to sell their bonds back in the open market, according to a New York-based trader.

Meanwhile, Isis shares zoomed up as hedged players bought back stock that had been sold short in association with being long the older bonds.

“It was a lot of stock to repurchase to unwind the stock shorts and deliver the bonds,” the trader said.

The new Isis deal, which was seen to be slightly rich at some valuations, given its low coupon range and depending on vol. and credit spread inputs, wasn’t heard in the gray market ahead of pricing. But a couple of traders thought that the deal would have to price at the midpoint or cheap end of talked terms, which was for a 0.5% to 1% coupon and a 30% to 35% initial conversion premium.

Other health care names were also in focus during the session, a trader said, mentioning Omnicare Inc. The Cincinnati-based provider of pharmaceutical services called its 3.75% convertibles due 2042, and there was activity in those bonds.

Allscripts Healthcare Solutions Inc.’s convertibles traded flat to weaker along with the underlying shares of the Chicago-based medical software company. The Allscripts 1.25% convertibles due 2020 were seen at 93.25 bid, 94.24 offered, a New York-based trader said at late morning. Allscripts stock and bonds plunged Friday after the company posted quarterly results that missed estimates.

Elsewhere, Ascent Capital Group Inc.’s shares fell sharply after the Greenwood Village, Colo.-based home security alarm company reported a third-quarter loss. The Ascent 4% convertibles due 2020 were indicated down to about 81.5 from 88.5, according to a market source, and the underlying shares plunged $10.89, or 17.5%, to $51.36.

Overall, trading was somewhat busier than expected for the Veterans Day holiday. There was “orderly, good two-way flow,” a New York-based trader said. But activity seemed to tail off in the afternoon.

Bond markets were closed in observance of Veterans Day, and stock markets were subdued.

Existing Isis jumps

Isis’ existing 2.75% convertibles due 2019 traded up and shares rose amid bond repurchases.

The existing bonds were seen at 312.5 with the stock at $51.08, one trader said. That was up from about 270 for the bonds on Monday.

After the market close, another sale went up at 314.29, a trader said, with the stock closing at $51.39.

One trader said the bondholders were being paid roughly 6.5 points over parity.

The company planned to repurchase up to $140 million of the outstanding 2.75% convertible senior notes through individually negotiated transactions with holders. Proceeds of the new convertibles deal would be used to fund the buybacks. Remaining proceeds would be used for drug development.

New Isis looks slightly rich

The planned Isis notes looked a bit rich to one convertibles trader, who said early Tuesday that 0.5% to 1% coupon talk was pretty low for the Carlsbad, Calif.-based drug development company, which isn’t supposed to have positive EBITDA until late 2015.

Using a credit spread of 500 basis points over Libor and 40% vol., the deal was seen worth 99, according to the trader. The valuation included talk for the initial conversion premium of 30% to 35%.

A second source said that 45% vol., which is what the underwriters went out with, was a more appropriate vol. for this deal.

And a third source concurred, saying that 40% underrepresented vol. for the company.

Another trader said that market players were likely going to be willing to use a tighter credit spread given that Isis has a market capitalization of $6 billion.

Depending on how the new deal does on Wednesday, “It was a big win for hedge funds,” one trader said, regarding the buybacks and the new deal.

As for pricing, he said, “I think they have to come closer to the cheap end, given the generic tape in convertibles lately.” He cited the LinkedIn Corp. offering of $1.15 billion of convertibles last week that came at the cheap end and beyond the cheap end of initial talk.

Isis planned to price $425 million of the seven-year notes via bookrunners J.P. Morgan Securities LLC, Stifel Nicolaus Weisel and BMO Capital Markets.

The Rule 144A deal has a $63.75 million over-allotment option.

The notes are non-callable for life with no puts. There is takeover and dividend protection.

The deal is coming with a call spread.

Mentioned in this article:

Allscripts Healthcare Solutions Inc. Nasdaq: MDRX

Ascent Capital Group Inc. Nasdaq: ASCMA

Isis Pharmaceuticals Inc. Nasdaq: ISIS

Omnicare Inc. NYSE: OCR

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