Omnicare's new exchanged notes dominate trade; Tesla contracts on hedge; Dendreon slips

By Rebecca Melvin

New York, Aug. 23 - Omnicare Inc.'s new 3.5% convertible senior notes due 2044, which were exchanged for about $180 million of the company's existing 3.75% convertible senior notes due 2025, were a big focus of trading action on Friday. Holders made about 5 to 6 points of profit on swap for every bond they exchanged.

"This new convert added 5 to 6 points of incremental value to those who did the exchange," a New York-based trader said.

The Cincinnati-based pharmaceutical services company did a similar exchange earlier this year in March for the same bond.

The bond issued in exchange at that time, a 3.5% convertible due 2042, was seen in trade up about 2 points at 141.4 on Friday, according to Trace data.

Elsewhere, Tesla Motors Inc. traded up on an outright basis to 145.75, which was up 3.23 points outright, according to Trace data. But the popular convertible was weak on a dollar-neutral, or hedged, basis and was seen down by about 1.5 points over the course of the last two or three days, a trader said.

Dendreon Inc.'s 2.875% convertibles due 2016 traded down about 0.75 point to 65.5 after a Deutsche Bank ratings downgrade took shares down 9%.

BPZ Resources Inc.'s 6.5% convertible due 2015 was also in trade on Friday at about 86.25. That was the first time those bonds had traded for some time, so an accurate previous level wasn't available.

Primary still active

The convertible bond market saw two new issues price this past week, adding $375 million of new paper, excluding over-allotments, to the market. The deals included B2Gold Corp.'s $225 million of 3.25% five-year convertibles, which traded up nicely in the secondary market on Tuesday, and Spansion Inc.'s upsized $150 million of 2% seven-year notes that dipped below par on their debut in the secondary market on Wednesday.

Issuance for July and August so far totals $3.51 billion in 17 deals, with more than $2 billion pricing in August so far, according to data compiled by Prospect News.

"Inflows in converts have been relatively healthy; large issuers can come to market. Big benchmarks are going into the index and everyone wants a piece, and the bonds are pretty reasonably priced," an East Coast-based convertibles analyst said.

A trader agreed that issuance is the best it's been in about four or five years, but organic growth is still negative, he said.

There have been about $35 billion in net redemptions year to date against new issuance of about $27.5 billion, the trader said.

At the moment, the market capitalization of the convertible market is about $220 billion, including U.S. bonds of more than $50 million face value, he said.

As for valuation, "A lot of the convert market is fully valued, and there are no obvious bargains. But at the same time, stuff hasn't really been for sale," the trader said.

Omnicare exchange eyed

Omnicare's new 3.5% convertibles due 2044 traded at 95.75 and were seen between 95 and 96.25 during the session, according to a New York-based trader.

The existing Omnicare 3.75% convertibles, which were originally priced in December 2010 at a $500 million base, were seen at about 214, which was up from a previous level of about 210.

Omnicare's 3.75% convertibles due 2042 changed hands up 2 points at 141.377, according to Trace data.

Omnicare exchanged $180.46 million of its existing 3.75% convertibles due 2025 for $424.25 million of new 3.5% convertibles due 2044 for an issue price of about $388.83 million, according to a news release.

The company also bought back about $5.15 million of the 3.75% notes due 2025 leaving about $132.42 million in principal amount of the 3.75% notes.

The new bonds were exchanged at a ratio of 2.36 to 1, meaning holders received 2.36 bonds for every one bond they exchanged. As long as the new bonds came at 89 or better they were made whole given this ratio, a trader said.

It's good for holders, the trader said. Not only do they make the incremental value, but now they will own an instrument that has a more balanced risk-reward profile, with lower delta, although not as much equity sensitivity.

"For holders that may have ridden up a huge stock run in the last five months, it gives them an opportunity to swap into more risk-reward and more gamma," the trader said.

Meanwhile, "holders of the 2025 bonds will have to buy back some delta, which I am sure they did," the trader said.

In addition to not being deep in the money like the old bond, the new bond also differs from the old one in that it has a make whole and is provisionally callable right away. The old bond was not callable until December 2018.

The exchange transaction's "kiss" cost the company 5 points, but perhaps "they didn't want to dilute themselves," the trader said.

Omnicare shares closed up $1.48, or 2.7%, at $55.99 in heavy volume.

Dendreon lower again

Dendreon's 2.875% convertibles traded at 65.5, which was down from about 65 bid, 65.375 offered previously, a New York-based trader said.

"Dendreon had more bad news," the trader said.

A Deutsche Bank analyst cut her rating on the stock of the Seattle-based biopharmaceutical company to "sell" and reduced her price target to $1.00, citing disappointing sales of its Provenge prostate cancer therapy.

Dendreon shares closed down 28 cents, or nearly 9%, at $2.91 in heavy volume.

Mentioned in this article:

BPZ Resources Inc. NYSE: BPZ

Dendreon Corp. Nasdaq: DNDN

Omnicare Inc. NYSE: OCR

Tesla Motors Inc. Nasdaq: TSLA

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