Hedged holders lose on Teva call; Nielsen mandatory to price Jan. 24 week; GM mandatory up

By Rebecca Melvin

New York, Jan. 12 - Holders of the Teva Pharmaceutical Industries Ltd. 1.75% convertibles, or Teva D convertibles, lost several points on a hedged basis after the Israeli-based pharmaceutical company unexpectedly called those bonds.

"It was a surprise," a New York-based sellside trader said Wednesday regarding the company's tendency not to redeem paper that is callable. "In the past they have left paper outstanding."

Teva's 0.25% convertibles due 2026, or the Teva Cs, which have been callable since February 2008, were steady in trade. Teva called the Ds Tuesday.

Trading action in the convertible bond market Wednesday was somewhat muted after a snowstorm hit the U.S. northeast overnight and kept some people away from their offices.

"It wasn't as bad as expected, but it scared some people off from traveling," a New York-based sellside analyst said.

"It's quiet. People are more relaxed today," a second sellside analyst said.

What's really going to make market activity pick up is new issuance, market players agreed, and that isn't expected to begin in earnest until interest rates move up in a significant way.

There's one deal on the forward calendar, an initial public offering and concurrent convertible mandatory from Nielsen Holdings BV, for which pricing has been pushed back to the week of Jan. 24 from initial talk that the deal would price next week.

There is a lot of positive sentiment surrounding the deal, however, especially given that the previous IPO and mandatory deal from General Motors Corp. in November generated a lot of interest.

It has "left a good taste," a New York-based sellside trader said of the GM mandatory.

GM's mandatory's were a little weak at first, related primarily to an over supply situation, but they moved up handily through December.

Also seen in trade were the convertibles of Regis Corp., which were about 0.5 point better on a dollar-neutral basis as the underlying shares gained a little more than 2%; PHH Corp.'s convertibles also traded amid heavy volume in the underlying equity. But the equity volume wasn't attributed to action in the convertibles or hedged players.

There was also decent convertibles market volume in the convertible preferreds of Stillwater Mining Co., which were actually issued by UBS, and were about 0.5 point better on Wednesday.

Overall sentiment was pretty good, with pricing tight, but not any volume leaders and "not a ton of news," sources said about Wednesday's session.

"Stuff was better on the back of the Portugal news. Things were feeling better in terms of sentiment," the source said, referring to successful debt auction from Portugal Wednesday that assured investors of continued demand for the region's debt.

The EuroStoxx 50 had its strongest single-session move in three months with a 3% gain.

Teva paper comes in

Teva's 1.75% series D convertibles due 2026 traded down another point outright on Wednesday to 106.75 after slipping on Tuesday and coming in several points on a hedged basis. The paper had been 111 and now is about 108, a sellsider said.

They "came in," a sellsider said, referring to the fact that they had had 3 or 4 points of premium, which disappeared on Tuesday.

Premium, referring to the advantage of holding the convert over holding the equity, was said to be at a discount on Tuesday and said to be zero on Wednesday.

"It was a surprise because they were in the habit in the past of not calling their paper right away," a New York-based sellside trader said.

But the coupon on the paper that was called Tuesday was higher, at 1.75%, compared to the 0.25% coupon that is attached to the paper still outstanding after being callable for two years.

Going forward, the only Teva convertible issue remaining outstanding of any significant size is the Teva 0.25% convertibles due 2026, or the Teva Cs, of which there is $531 million outstanding.

Pricing on the Teva Cs hung in there, trading flattish at 120 bid, 121 offered, before and after the call on the Teva Ds.

Both the Teva 0.25% convertibles due 2024, or the Teva B paper, and the Teva 0.5% convertibles due 2024, or the Teva A paper, have only small amounts left outstanding.

Subsidiary Teva Pharmaceutical Finance Co. BV announced that it will redeem its outstanding $813 million of 1.75% convertible senior debentures due 2026 on Feb. 1 at par.

Holders of the debentures may elect to convert their securities any time before 5 p.m. ET on Jan. 28 at a price of $50.0385, or 19.9846 American Depositary Shares per $1,000 principal amount of debentures.

Teva makes generic and human pharmaceuticals as well as active pharmaceutical ingredients. The company is based in Petach Tikva, Israel.

GM trading well

After a disappointing start when they were issued in November, GM's 4.75% mandatory preferred convertible has been trading well, changing hands at $56.15 versus a share price of $38.55 on Wednesday, which was slightly lower compared to Monday, when they traded at $56.55 versus a share price of $39.00, but still doing well.

The performance is being viewed as having a positive influence on the planned Nielsen Holdings deal, which includes a $1.7 billion IPO and a relatively small $250 million mandatory convertible.

"They usually upsize the convert deal," a New York-based sellside trader said.

The trader also noted that while the GM mandatory was really "a one-of-a-kind issuance," given the company's story, its retail investor history, and the large $5 billion size, it still serves as a good comparison for the upcoming Nielsen IPO and mandatory, and likely to attract the same kind of investor.

The GM deal was "a really huge issue" in terms of supply and demand dynamics and therefore traded a bit cheap.

Right now the GM mandatory price is in the so-called dead zone, or in between the lower and upper strike prices, but it is approaching the upper strike and will gain more delta, or equity sensitivity, in that context, a New York-based sellside analyst said.

It's close to the upper strike, which is $39.60, with a lower strike of $33.00. "You're still in the dead zone, but you're moving up, and delta is going to pick up when you get to the upper strike," the analyst said.

The issue's trading a little less than fair value, he said.

"GM still profitable: at $56 they are up on this thing. It's been profitable for people, and since this is the last name that people have on their pads, maybe it leaves a good taste" for mandatories, a second sellsider said.

Mentioned in this article:

General Motors Corp. NYSE: GM

PHH Corp. NYSE: PHH

Regis Corp. NYSE: RGS

Teva Pharmaceutical Industries Ltd. ADRs: TEVA

Stillwater Mining Co. NYSE: SWC

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