PDL BioPharma drops after auditor news; Gilead remains weaker; secondary softness persists

By Rebecca Melvin

New York, Sept. 18 – PDL BioPharma Inc.’s 4% convertible due 2018 was a top trader in the convertibles market Thursday, and those notes dropped sharply on an outright basis along with the underlying shares after the Incline Village, Nev.-based biopharmaceutical company announced that its independent auditors Ernst & Young LLP resigned effective Sept. 11.

PDL BioPharma has two other convertible bond issues that weren’t actively traded. The focus in that name was the 4% convertibles, a trader said.

Gilead Sciences Inc.’s 1.625% convertibles, which have been trading below parity for some time, remained weak but stable at about 1.625 points below parity, market players said.

Biotechs have been in the same boat as the broader convertible market, trending weaker as the new issue calendar has gotten heavier, the trader said.

“A lot of things have been weak, Twitter came through, and people are finally getting over that. Alcoa came through. There’s been good issuance in good size, and when people need to lighten up, they do,” the trader said.

Twitter Inc. priced $1.8 billion in two convertible tranches last week, and the securities lagged in the secondary market.

But there were signs of recovery in the last day and a half with equities lifting, a trader said.

For example, Alcoa Inc.’s new $1.25 billion of 5.375% mandatory convertible preferreds, which debuted in the convertible market on Wednesday, recovered a bit, trading right around issue, after slipping below par on their first day of trading.

Overall, however, the market was still considered depressed, and given the peppiness in the equity markets on Thursday, the lack of correlation in the two markets was more pronounced.

“It’s been a tough couple of weeks. Convertibles have been bad, and it seems like the deals will continue,” a New York-based trader said.

In the primary market was a pair of small, new deals in the convertibles market on Thursday. Violin Memory Inc. launched an offering of $95 million of five-year convertible senior notes that was expected to price after the session close. The notes were talked to yield 4% to 4.5% with an initial conversion premium of 20% to 25%.

Shares of the Santa Clara, Calif.-based computer data storage company sank 10.5%. They ended down 9.5%.

Oncothyreon Inc. priced $20 million of series A convertible preferred stock, or 10,000 shares at $2,000 each, in a private offering, along with $20 million of common shares. The common stock of the Seattle-based biotechnology company gained 8.5%. They ended up 7.5%.

PDL BioPharma 4s drop

PDL BioPharma’s 4% convertibles due 2018 traded mostly around 99 plus on Thursday, which was down from 103 to 104 previously. PDL shares ended down 59 cents, or 7%, at $7.89, but that was well off the lows of early in the session.

“The stock came in and the bonds traded below par. They were one of the more active health care names,” a trader said.

The drop was caused by accounting concerns. In a release, PDL said it was “surprised” by the resignation of Ernst & Young. It said it did not have any disagreements with the accounting firm on practices, scope or procedures, or any reportable events that would have caused the resignation.

A convertibles trader focused on the biotech sector said he was not overly concerned. He said he didn’t think the company characterized the situation correctly, but nevertheless, he wasn’t concerned.

“It was not terribly surprising,” the trader said.

As a royalty streams company it has had some accounting issues related to valuing assets on their balance sheets, but “valuing royalty streams is not an easy thing. It’s not like shoes leaving the factory,” the trader said.

The PDL BioPharma 4% convertibles are not very long dated, and with its chunky coupon it is likely of interest as a yield play.

PDL also has 2.875% convertibles due February 2015 and a series of 3.75% convertibles due May 2015. Those in-the-money convertibles were not traded actively but were also indicated lower.

The PDL 2.875% convertibles were seen at 157.89 at the end of the session, down from 181.87, and the PDL 3.75% convertibles were seen at 132.33, down from 144.03, according to a market source.

Alcoa mandatories recoup

Alcoa’s 5.375% convertible mandatory preferred shares were seen closing right around par, with shares of the New York-based aluminum producer down 8 cents, or nearly 0.5%, to $16.20.

At the end of Wednesday, the new Alcoa mandatories were quoted at 49.75 bid, 50 offered with shares at $16.28.

“They are definitely hanging in there. The deal went better than people were saying; it was better than Twitter, which is saying something,” a New York-based trader said.

Twitter priced $2 billion of convertibles in two tranches last week, and they were weaker on a dollar-neutral basis for three days after issue.

“Alcoa is not as big of a disaster as people were thinking,” the trader said.

Allocations of the preferred shares tilted toward the outright side given tax withholding issues for anyone domiciled offshore, a syndicate source said.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Gilead Sciences Inc. Nasdaq: GILD

Oncothyreon Inc. Nasdaq: ONTY

PDL BioPharma Inc. Nasdaq: PDLI

Violin Memory Inc. Nasdaq: VMEM

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