PennyMac adds to 101; planned Supernus eyed; Microsoft adds; Theravance to split company

By Rebecca Melvin

New York, April 25 - PennyMac Mortgage Investment Trust's newly priced 5.375% convertibles traded up to a little more than 101 on their debut in the secondary market Thursday after the $200 million of seven-year exchangeable notes priced at the rich end and toward the rich end of talk late Thursday, market players said.

The bonds were better on an outright basis and despite the underlying shares of the Calabasas, Calif.-based real estate investment trust being lower at the open and at the close. They traded up in between, however. The convertible's move was similar to how the deal traded in the gray market ahead of final terms being fixed.

The planned Supernus Pharmaceuticals Inc. deal was getting a look from investors despite its small size. One buysider got involved in the deal for a small amount not on the basis of valuation but on the basis of the fundamental story: it's a company with a new epilepsy drug in the market.

"If prescriptions start to ramp up and this company has a pipeline, what's that worth?" the buysider said, adding that it would be difficult to make meaningful assumptions for valuation.

"You can make the model say anything. You're basically putting a finger to the air," the buysider said.

Microsoft Corp.'s 0% convertibles due in June were trading actively and better by about 0.375 point on a dollar-neutral, or hedged, basis, a New York-based trader said, as the Redmond, Wash.-based software company was preparing to sell five-, 10- and 30-year senior straight notes.

Microsoft last tapped the market Nov. 2 for $2.25 billion. Before that it hadn't been in the market since the first quarter of 2011.

Microsoft's convertible ended the session at 102.25 versus an underlying share price of $31.94, which was up 0.6% on the day.

Elsewhere, earnings reports continued to pour in. Cadence Design Systems Inc.'s 2.625% convertibles due 2015 traded up about 13 points outright to 185 after the San Jose, Calif.-based electronic design technology company reported first-quarter earnings that beat earnings and revenue estimates. Shares surged 8%.

But investors were not celebrating earnings reports that beat earnings estimates but not revenue estimates. Cash America International Inc.'s earnings beat estimates but missed on revenue. The in-the-money Cash America 5.25% convertibles were not heard in trade, while shares of the Fort Worth-based owner and operator of pawn shops were seen fractionally higher at $43.98 at the close.

Theravance Inc. was not a particular focus in the market, although the 2.125% convertibles due 2023 printed at 136.361 during the session, according to Trace data, which was up 2 points on the day. But after the market close, market players were weighing news that the San Francisco-based biotechnology company is planning to split itself up into two publicly traded companies.

Equities rose on stronger-than-expected earnings and economic data. Initial claims for unemployment benefits dropped 16,000 to a seasonally adjusted 339,000 compared to estimates for 351,000 claims for the last week.

The Dow Jones industrial average ended up 24.5 points, or 0.2%, to 14,700.80; the S&P 500 stock index gained 6.37 points, or 0.4%, to 1,585.16, and the Nasdaq stock average closed higher by 20.34 points, or 0.6%, to 3,289.99.

New PennyMac adds outright

PennyMac's 5.375% convertibles due 2020 traded early in the session at 100.75 bid, 101.25 offered versus an underlying share price of $23.87. Later in the day, the new issue was quoted at 100.625 bid, 101.125 offered with the shares closer to $23.78.

"It traded actively in the morning," a syndicate source said. "It has been outright dominated in trading as swap players weren't so involved given the bond has a theoretical delta of 30%."

PennyMac priced $200 million of the seven-year exchangeable senior notes after the market close Wednesday at par to yield 5.375% with an initial conversion premium of 25%.

Pricing came toward the rich end of 5.25% to 5.75% coupon talk and at the rich end of 20% to 25% premium talk.

The Rule 144A offering has a $50 million greenshoe, which was upsized from $30 million.

Credit Suisse Securities (USA) LLC, BofA Merrill Lynch and Citigroup Global Markets Inc. were the joint bookrunners of the deal.

The exchangeables are non-callable. There is standard takeover protection, and dividend protection, in the form of a conversion rate adjustment for dividends paid above $0.57 quarterly.

Proceeds are expected to be used to acquire distressed mortgage loans, to develop correspondent lending business, to repay debt and for general corporate purposes.

Planned Supernus considered

Supernus' planned $75 million of seven-year convertibles was not heard in the gray market ahead of pricing expected after the market close.

Several sellsiders said that they didn't see the bond and didn't expect to see it given the deal's small size and market sector. But a buysider said the specialty pharmaceutical company based in Rockville, Md., was interesting for a small allocation.

Supernus planned to price $75 million of convertibles due 2019 that were talked to yield 7% to 7.5% with an initial conversion premium of 15% to 20%.

"Obviously it is more of a fundamental idea. We think it's OK to own a little; but it's not something we have a strong conviction on," a buysider said.

The Rule 144A deal was being sold via joint bookrunners Jefferies & Co. and Piper Jaffray & Co.

The company focuses on treatments of central nervous system diseases, including epilepsy.

Cadence jumps on earnings

Cadence Design's 2.625% convertibles due 2015 traded at 185, up 13 points, while Cadance shares jumped $1.00 to $13.72.

The San Jose, Calif.-based electronic design technology company reported first-quarter earnings that beat estimates by a penny and beat on revenue. But it guided below the consensus estimate for second-quarter earnings, while full-year earnings per share were seen in line with estimates with revenue above consensus.

First-quarter net income was $61 million, or $0.21 per share, compared to net income of $47 million, or $0.17 per share for the year-earlier period.

Revenue for the first period was $354 million, compared to revenue of $316 million in the same period last year.

Analysts were expecting $0.19 per share earnings on $347.34 million in revenue.

Looking ahead, the company expects earnings for the second quarter to be in the range of $0.19 to $0.21 per share on revenue of $355 million to $365 million. For full year, total profit is expected to be in the range of $0.81 to $0.91 per share on revenue of $1.44 billion to $1.47 billion.

The company said its accelerating IP strategy has been and will continue to be based on key acquisitions to expand the scope of its IP business.

Theravance to split

Theravance's 2.125% convertibles due 2023 traded at 136.361 during the session, which was up 2 points, according to Trace data.

Theravance shares rose 38 cents, or 1.2%, to $30.92. In after-hours, the bonds traded up $1.88, or 6%, to $32.08.

After the market close, Theravance said it intends to create two new independent publicly traded companies with differing business objectives and opportunities. One company, referred to as the Royalty Management Co., will continue to manage the late-stage partnered respiratory assets and associated potential royalty revenues as well as retain the convertible bond debt, with the intention of returning capital to stockholders.

The other company will be a separate biopharmaceutical company, referred to as Theravance Biopharma, and it will focus on discovery, development and commercialization of small-molecule medicines in areas of unmet medical need, the company said in its release.

The plan has been approved by the board. Of the split company divisions, the convertible bonds will be obligations of the company referred to as the Royalty Management Co, which will also hold and continue to manage the rights of potential near-term respiratory product royalty revenue from GlaxoSmithKline. This company will continue to hold directly and manage Relvar or Breo Ellipta and VI monotherapy programs and an associated limited liability company subsidiary will manage the rights of Anoro Ellipta. All three of the programs are partnered with Glaxo. This company is expected to retain Theravance's net operating loss carry forwards and to operate under a new name, which has not yet been determined.

A market source was looking at the development but said it wasn't immediately clear what affect the news would have on the convertibles.

Mentioned in this article:

Cadence Design Systems Inc. Nasdaq: CNDS

Cash America International Inc. NYSE: CSH

Microsoft Corp. Nasdaq: MSFT

PennyMac Mortgage Investment Trust NYSE: PMT

Supernus Pharmaceuticals Inc. Nasdaq: SUPN

Theravance Inc. Nasdaq: THRX

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