Illumina lags after being reoffered at 98.25; RAIT postponed a day; USEC extends losses

By Rebecca Melvin

New York, March 15 - Illumina Inc.'s new $800 million of 0.25% convertibles lagged initially in the secondary market Tuesday after being reoffered in an overnight deal at a less-than-expected 98.25.

The new Illumina reoffer price had been talked higher at 98.5 to 100.

Also in the primary market, RAIT Financial Trust's $100 million of 20-year convertible senior notes were anticipated, but not forthcoming, after the deal was postponed by one day until after the market close Tuesday, according to a syndicate source.

Overall, the convertible market was described as weak amid a pick up of activity from Monday's depressed levels.

Volatility spiked, with the CBOE Volatility Index, or VIX, up to 25.50 at the open and closing at 24.32, which was higher by 3 points on the day.

One market source called the market mixed, but a third source said, "It feels like everything is lower," with some buyers stepping in at the lower levels in small trading.

USEC Inc. extended losses. The convertibles and stock of the supplier of enriched uranium fuel for commercial nuclear plants tumbled on Monday amid concern over greater scrutiny of nuclear power programs both here and abroad in the aftermath of Japan's nuclear crisis.

Cheniere Energy Inc., which stands to see higher demand given Japan's curtailed nuclear generating capacity, was quiet, however.

The markets reacted negatively Tuesday to word that Japan's nuclear crisis worsened with radiation leaking from four reactors at the Fukushima Dai-ichi plant, where there have been at least three explosions and a fire in the pool where spent nuclear fuel is stored since the earthquake and tsunami hit last Friday.

The radiation leaks were significant enough to affect human health, government officials said, and every effort was being made to stabilize the plant to prevent further emissions.

In other news, the Federal Open Market Committee said it was going to keep its key interest rate unchanged in the range 0.00% to 0.25%, as expected.

The Fed also announced that it will keep in place its plan to purchase $600 billion of longer-term Treasury securities by the end of the second quarter and will continue to reinvest principal payments from its securities holdings.

The market's reaction to the FOMC announcement was muted.

Elsewhere, the convertibles of Best Buy Co. Inc. dropped about half a point in active trade with its shares sliding 2%, but EMC Corp.'s twin convertibles fell by a greater magnitude, down more than 3 points in active trade, with the shares down intra-day by as much as 4.6%. The EMC shares gradually retraced most of their loss to settle lower by less than 1%.

Hologic Inc.'s shares acted similarly, and its older 2% convertibles traded at 97 and slightly lower at 96.80. The 97 trade was versus a share price of $21.16. Shares of the Bedford, Mass.-based imaging and diagnostics company ended better than that at $21.27, which was down just 4 cents.

Illumina lags

Illumina's new 0.25% convertibles due 2016, which were reoffered at 98.25, traded below 98 on their debut in secondary market trading on Tuesday even though its shares were up for the most part.

The fact that those shares were able to hang in positive territory during a session that was marked by a broad-based selloff led one sellsider to speculate that market players were shorting the stock.

"People shorted the stock before they knew it was a Happy Meal. It's tough to be up in this market," a New York-based sellside trader said.

A Happy Meal refers to a deal in which stock becomes available along with an offering of convertibles, making it easier for convertible arbitrage players to hedge.

The new Illumina convertibles traded at 97.875 at 10:30 a.m. ET and lower at 97.50, a New York-based sellside desk analyst said.

The new convertibles also traded higher at 98.125 and at 98.375 later in the session. He said the paper traded at 98.25 versus a share price of $64.25.

"They came back a little," the sellsider said.

Shares of the San Diego-based developer of genetic research tools traded up much of the session, but ended lower by 8 cents at $64.19.

Market players weren't thrilled with the new paper because of its aggressive terms. Not only is the coupon negligible, but the premium at 22.5% is slightly above average, a sellsider noted.

The new paper came 0.25 point lower than talked and traded actively below that level in early trade before coming back to that level or just over as underlying shares added.

The $800 million deal has a $120 million greenshoe, and the Rule 144A paper was sold via Morgan Stanley & Co. Inc. and Goldman Sachs & Co. with Bank of America Merrill Lynch as a co-manager.

The notes are non-callable and may not be put.

The company is buying back $425 million of common stock and another chunk of convertible paper with the proceeds.

Cheniere steady, quiet

Cheniere's 2.25% convertibles due 2012 were quoted at 80 bid, 81 offered versus a stock price of $8.30 on Tuesday, which was little changed from Monday, when shares popped 13%. The convertibles were previously indicated at 79.

Shares of the Houston-based liquefied natural gas company settled at $8.26 on Tuesday, which was down by 2 cents from Monday's close.

Energy names like this one, a liquefied natural gas company, are among those that could get a boost from the grim news coming out of Japan.

Cheniere plans to raise funding to construct a liquification (export) facility beside its present re-gas (import) facility on the Gulf Coast. It already has an export license from the Department of Energy and significant interest from companies wanting to secure potential bi-directional capacity, according to Citigroup in a note on Cheniere's 2.25% convertibles Tuesday.

The Citi note said that that paper, which matures in 16 months, has a yield to maturity of 19.5% and a current yield of 2.8%.

There is $204 million outstanding of these notes, which trade on just a 1% delta. But holders can mitigate downside risk by selling stock short, the Citi note said.

The convertibles stand at 57 points over parity.

"We see this is as a binary outcome situation," the Citi note stated. "If the company is successful in securing capital for the liquifaction facility, we think there would adequate funding available to pay off the debt next year. If they are unsuccessful, the company may have to resort to some type of exchange transaction which could result in a loss of value relative to these levels."

Mentioned in this article:

Best Buy Co. Inc. NYSE: BBY

Cheniere Energy Inc. NYSE: LNG

EMC Corp. NYSE: EMC

Hologic Inc. Nasdaq: HOLX

Illumina Inc. ILMN

RAIT Financial Trust Nasdaq: RAIT

USEC Inc. NYSE: USU

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