Tesla down outright, better dollar neutral; Dendreon weakens; Web.com adds; Rambus on tap

By Rebecca Melvin

New York, Aug. 12 - Action in the convertibles secondary market got off to a slow start for the week on Monday as vacation schedules swing into high gear heading into mid-August, market players said.

"There's not a ton going on in August. You always expect the summer slowdown, even though you rarely get it; but today, we've gotten it," an East Coast-based buyside analyst said.

The convertibles of Tesla Motors Inc. dropped on an outright basis, but were better by about 0.5 point on a dollar-neutral, or hedged, basis as the underlying shares of the electric car maker fell on a bearish Barron's article pointing to a potential bubble for the shares and a Lazard share downgrade.

Dendreon Corp.'s convertibles extended losses, trading down another couple of points to the 64 to 64.5 level after sliding Friday on the back of meager second-quarter results and a warning that sales of its Provenge cancer drug won't meet 2013 sales targets. The convertibles fell 7.125 points on Friday.

Web.com Group Inc.'s 1% convertibles due 2018, which debuted in the market on Friday, edged up a bit. They were seen at 102 and change. The notes were initially sold at a discounted price of 98.5.

In primary market action, Rambus Inc. launched an offering of $100 million of five-year convertible notes that was seen pricing after the market close.

The new Rambus paper was talked at a 1% to 1.5% coupon, which is considerably lower than its existing convertible notes with a 5% coupon. Nevertheless, the lower coupon was seen as mostly justified - if "a little light" - given the company's much improved credit profile.

Rambus' existing 5% convertibles, which also have a short duration, weren't drawn into trade on news of the new deal and were seen last at about 103.

On the radar was Universal Corp., which has seen its underlying shares get hammered in the last week. One trader said the Universal's 6.75% convertible perpetual preferred was worth taking a look at.

Tesla expands by 0.5 point

Tesla's 1.5% convertibles due 2018 traded down about 5 points outright to 137 and change. But that was better on a dollar-neutral basis by about 0.5 point, a New York-based trader said.

Tesla shares fell $5.62, or 3.7%, to $147.38 in volume that was a little better than average.

On the heels of a bearish Barron's article, a Lazard Capital Markets' analyst downgraded the shares to "neutral" from "buy," citing the current share price as fully capturing Tesla's evolution into a profitable luxury auto maker, with sustained annual volumes and margins similar to Porsche.

Meaningful upside from current levels will require domestic manufacturing in China and record sales of Gen 3 on launch, the Lazard analyst said.

A convertibles analyst said, "You have to take downgrades with a grain of salt. If you want to believe in the story, it's worth anywhere. You just have to make a bet."

Tesla shares have run up about 50% since June.

Rambus looks pretty fair

Rambus planned to price $100 million of five-year convertibles that were talked at a 1% to 1.5% coupon and a 32.5% to 37.5% initial conversion premium.

Using a credit spread of about 500 basis points over Libor and a 40% vol., the paper valued at about fair value at the midpoint of talk, one analyst said.

A second analyst used inputs of 400 bps over Libor and a 35% vol. and got the paper at 101 at the midpoint of talk.

"Personally, I think it's a little light on the coupon. But it's a much better company than it was in 2009, and rates were higher even then," an East Coast-based buysider said, referring to the year that the company's previous convertible deal was priced.

"The company has executed very well, but [the new deal] is a little to be desired," he said. Although many are optimistic about the deal, he added.

The Los Altos, Calif.-based designer of chip interface technologies and architectures planned to price the offering after the close Monday via joint bookrunners Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Jefferies & Co.

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

Proceeds will be used for working capital and other general corporate purposes, which may include financing potential acquisitions and strategic transactions, and repayment of debt, including Rambus' existing 5% convertible senior notes due 2014.

The Rule 144A offering has a $15 million greenshoe.

Existing Rambus quiet

Rambus' existing 5% convertibles due 2014 were said to be quiet and at around 103.

"The old paper is viewed as money good, and this deal solidifies that fact. It's relatively short dated, and the conversion price represents a significant premium, so it's a real yield to maturity of a short-dated bond," the analyst said.

Dendreon extends losses

Dendreon's 2.875% convertibles due 2016 traded down to 64 and 64.5 on Monday from 65.5 to 66 on Friday, when the bonds dropped 7 points.

Shares of the Seattle-based biotechnology company pared initial losses Monday to end down 2 cents, or 0.6%, to $3.37.

Last week, the company posted second-quarter revenue of $73.3 million, which was down 8.4% from the year-earlier period, and missed analysts' estimates of $74.8 million.

The company's net loss was $68.8 million, or $0.45 per share, compared to a net loss of $96.1 million, or $0.65 per share, for the same period of 2012.

Dendreon also said that based on enrollments in July and early August, its Provenge drug won't be able to generate enough sales in the second half of 2013 to overcome the first six months, so it won't meet full-year targets.

Separately, the company's chief financial officer, Gregory T. Schiffman, is leaving his post effective Dec. 31, with finance vice president Gregory R. Cox assuming the CFO role effective immediately.

Mentioned in this article:

Dendreon Corp. Nasdaq: DNDN

Rambus Inc. Nasdaq: RMBS

Tesla Motors Inc. Nasdaq: TSLA

Universal Corp. NYSE: UVV

Web.com Group Inc. Nasdaq: WWWW

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