Cubist gains outright, falls on swap on Merck takeout; T-Mobile, Envestnet deals on tap

By Rebecca Melvin

New York, Dec. 8 – Cubist Pharmaceuticals Inc.’s three convertible bonds jumped on an outright basis on Monday in active trade, but were mixed on a hedged basis, with the two balanced convertibles contracting and the in-the-money issue expanding after news that Merck & Co. agreed to buy the Lexington, Mass.-based biopharmaceutical company for $102.00 per share, or $9.5 billion, including debt.

The proposed purchase price represented a 35% premium to Friday’s Cubist stock close.

“This was really good for outrights, and not too damaging for arbs,” a trader who is focused on health care names said.

The in-the-money Cubist 2.5% convertibles jumped to about 347 on Monday from 262 ish, and arb players made about 3 points on the takeout, assuming a heavy 98% delta.

“I knew guys that were lighter,” in which case they would have made more, the trader said.

Cubist was essentially the name of the day, especially in the health care sector. But Illumina Inc.’s 0% convertibles due 2019 were also seen in trade at 111, which was down 0.3%, according to Trace.

Elsewhere, energy and oil prices were a major focus of the convertibles market as oil prices tumbled to new multi-year lows. Energy producer stocks plunged, and convertibles of many issuers were lower by a point or two on swap, a New York-based trader said.

West Texas Intermediate crude for January delivery fell $2.82, or 4.3%, to $63.02, while January Brent crude oil dropped $2.88, or 4.2% to $66.19 a barrel.

On Friday, WTI fell 97 cents to settle at $65.84 a barrel.

Weighing on energy and oil was Morgan Stanley’s cut for average Brent crude in 2015, citing supply issues related to OPEC production, which were expected to peak in the second quarter. Also unsettling investors was weak economic data out of Japan – which reported a greater-than-expected 1.9% drop in its gross domestic product, and China pressured expectations for the demand side of the equation.

Cobalt International Energy Inc.’s 2.625% convertibles extended losses, trading down to 59 with sharply lower shares, from 64.75 to 65 on Friday.

Equities dropped. The Nasdaq stock index slid 40.06 points, or 0.8%, to 4,740.69, the S&P 500 stock index fell 15.06 points, or 0.7%, to 2,060.31, and the Dow Jones industrial average fell 106 points, or 0.6%, to 17,852.48.

After the market close, the primary sprang into action. T-Mobile US Inc. launched an offering of $870 million of mandatory convertible preferred shares, and Envestnet Inc. plans to price $125 million of five-year convertible senior notes.

Cubist jumps on take out

Cubist’s 1.125% convertibles due 2018 were trading at 132.22 versus an underlying share price of $100.67 on Monday, a New York-based trader said.

That was up about 17.5 points on an outright basis from 115.125 versus a share price of $74.36 on Friday. On a swap basis, holders lost about 3.65 points, assuming a delta of 65%.

But value market players would not be long these issues on swap, the trader said. Therefore there wasn’t much pain among hedged players.

Cubist’s 1.875% convertibles due 2020, or the B tranche, traded at 136, according to Trace data. That was up from about 120.75 heading into Monday.

This issue would also be down 3 or 4 points on swap.

Cubist’s in the money 2.5% convertibles due 2017 “is a three-point winner with the make-whole table,” he said, assuming the $102 cash takeout price and that the deal closes in three months.

Cubist shares were up $26.24, or 35.3%, at $100.60.

“These assets have been in play for a long time,’ a trader said. “You just never know who or when. It was great today; it really helps the outright guys out.”

As for hedged players, heavy deltas would have resulted in steep losses, “but these have been screaming short for a long time,” the trader said.

He said the A tranche, or the Cubist 1.125% convertibles, shed 1.5 points on a 60% delta, and the B tranche, or the Cubist 1.875% convertibles, lost 3.5 points on a 65% delta.

Most arbs were in the 2.5% convertibles, and they made about 3 points on a 98% delta, the trader said.

Those on lighter deltas would have made more.

Cubist has a niche in antibiotics, and these have not been seen as desirable assets. But the company became more interesting to big pharma in light of the rise of super bugs, or drug-resistant viruses and bacterial infections.

Cobalt, energy names weaker

Cobalt’s 2.625% convertibles due 2019 fell to 59 on Monday from about 64.75 to 65 on Friday.

Cobalt’s 3.125% convertibles were seen dropping to about 62.

Cobalt shares fell 90 cents, or 10.5%, to $7.67 in average volume.

“They are lower, by about 2 points dollar neutral,” a trader said about Cobalt.

The trader said that the whole sector was lower, but there were more sellers than buyers, on not a ton of volume.

Other energy issues were also lower by a point or two, with abundant sellers, but not many buyers.

T-Mobile to price mandatories

Bellevue, Wash.-based T-Mobile, a wireless messaging and data services company, plans to price 870 million of mandatory convertible preferreds late Tuesday to yield 5% to 5.5% with an initial conversion premium of 20% to 25%, according to market sources.

Goldman Sachs & Co., Morgan Stanley & Co. LLC and Citigroup Global Markets Inc. are the joint bookrunning managers of the deal. Co-managers are Barclays, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. and J.P. Morgan Securities LLC.

The registered, off-the-shelf offering of 17,391,305 shares of mandatories has a liquidation preference of $50.00 per share.

There is a $130 million greenshoe for the three-year securities.

Proceeds will be used for general corporate purposes, including capital investment and acquisition of additional spectrum.

Envestnet to price

Chicago-based Envestnet, a provider of wealth management software and services to independent financial advisers, plans to price $125 million of five-year convertible senior notes after the market close on Tuesday to yield 1.5% to 2% with an initial conversion premium of 30% to 35%, according to market sources.

The registered deal has a greenshoe for $18.75 million and was being sold via joint bookrunners Stifel, Nicolaus & Co. Inc., Credit Suisse Securities and BMO Capital Markets Corp. Co-managers are Sandler O’Neill + Partners, LP, Sterne Agee & Leach Inc. and William Blair & Co. LLC.

The notes will be non-callable.

Proceeds are earmarked for general corporate purposes, including for selective strategic investments through acquisitions, alliances or other transactions.

Mentioned in this article:

Cobalt International Energy Inc. NYSE: CIE

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Illlumina Inc. Nasdaq: ILMN

Envestnet Inc. NYSE: ENV

T-Mobile US Inc. Nasdaq: TMUS

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