Cobalt drops outright, contracts on hedge; Frontline trades at 69.5; Orexigen on tap

By Rebecca Melvin

New York, Dec. 2 - Cobalt International Energy Inc.' convertibles dropped outright and contracted on a dollar-neutral, or hedged, basis in active trade on Monday as shares of the Houston-based oil and gas exploration company fell 16.6%.

Cobalt's s 2.625% convertibles due 2019 fell outright by more than 6 points to 93.125 bid, 93.625 offered and contracted 0.25 point to 0.375 point on a dollar-neutral basis, a New York-based trader said, calling the delta around 50% from 60% previously.

Investors were disappointed that the company found more natural gas than expected in its latest Lontra well off of Angola.

The 4.5% convertibles of oil tanker company Frontline Ltd. traded at 69.5 as the underlying shares of the Hamilton, Bermuda-based company surged another 10% following a 16% jump on Friday.

Frontline's third-quarter loss reported last week was not as large as expected. It reported a net loss of $36.4 million, or $0.46 per share, compared to a net loss of $120.3 million, or $1.54 per share, in the second quarter.

Elsewhere in the secondary market, trading was light as the post-Thanksgiving holiday week got underway at a slow pace, market players said.

"It's the same names as always. I don't see any stories," a second New York-based trader said.

Another source said it was "one of the slowest days in a while."

U.S. financial markets saw a shortened trading session on Friday following a full close Thursday in observance of Thanksgiving.

In the primary market, Orexigen Therapeutics Inc. launched a convertible senior note for $100 million. The deal was talked at a coupon of 3% and a 30% initial conversion premium at the midpoint of talk.

Very late in the day a further two deals were announced, $200 million of seven-year convertible notes from RPM International Inc. that are set to price after the close Tuesday and $125 million of seven-year convertibles notes from GT Advanced Technologies Inc. which are scheduled for Wednesday.

Cobalt tumbles

Cobalt's 2.625% convertibles due 2019 traded down to 93.125 bid, 93.625 offered versus an underlying share price of $18.40.

Shares of the Houston-based oil and gas exploration company fell $3.25, or 14.8%, to $18.94.

"I would have expected these bonds to hold or expand on a pullback like this, but I have them contracting," a New York-based trader said.

The trader thought that the reason the bonds didn't hold up better is that they had been rich previously. He noted that the last time there was a poor result and the stock pulled back a couple of months ago, the bond didn't hold up well either.

"It's pretty disappointing particularly for hedged investors," the trader said.

Cobalt said that it has found more natural gas than expected in its latest Lontra well off of Angola. But having high volumes of gas could offset the value of oil because foreign investors cannot market gas under Angola's production-sharing agreements, according to reports.

"People didn't like the fact that the well was mostly gas, which has lower margins, obviously," the trader said.

Orexigen to price

Orexigen, the San-Diego based biopharmaceutical company, which is focused on developing treatments for obesity, was not viewed as the most steady of companies.

Looking at a valuation of the bond, one source said that a 45% volatility would imply a credit spread of 1,000 basis points over Libor at the midpoint of talk.

The $100 million offering of seven-year convertible senior notes was talked at a coupon of 2.75% to 3.25% with an initial conversion premium of 27.5% to 32.5%, according to a market source.

BofA Merrill Lynch, Credit Suisse Securities (USA) LLC and Leerink Swann are joint bookrunners of Orexigen deal, with Piper Jaffray & Co. acting as a co-manager.

The Rule 144A offering has a $15 million greenshoe and was expected to price after the market close on Monday.

The notes have contingent conversion if shares rise to 130% of the conversion price. They are non-callable for life. Conversion settlement will be in shares, cash or a combination of shares and cash at the company's option.

There is dividend protection via a conversion ratio adjustment and a make-whole adjustment premium in the event of a change of control.

Proceeds will be used for working capital and other general corporate purposes. A portion of the proceeds may also be used to acquire new businesses or products.

Mentioned in this article:

Cobalt International Energy Inc. NYSE: CIE

Frontline Ltd. NYSE: FRO

Orexigen Therapeutics Inc. Nasdaq: OREX

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.