Cubist climbs in gray market; L-3 improves on stock downgrade; Novell seen to firm on poor guidance

By Kenneth Lim

Boston, May 31 - The convertible bond market saw scattered interest across sectors on Wednesday, with the new offering by Cubist Pharmaceuticals Inc. generating the most buzz.

Cubist's proposed $275 million offering was bid up at least a point in the gray market with analysts and traders sounding positive notes on the company's fundamental prospects and the volatility in the stock.

"What's not to like?" a sell-side convertible bond trader said.

Meanwhile, L-3 Communications Holdings Inc. improved slightly on a dollar-neutral basis after the stock slid on an analyst's downgrade.

Novell Inc. gained slightly on an outright basis on Wednesday ahead of the company's results announcement, but traders said the convertibles could improve on a dollar-neutral basis after Novell's guidance missed estimates after the market closed.

From the primary market, Trinity Industries Inc. announced $450 million of 30-year convertibles that are expected to price Thursday after the market closes.

Cubist deal seen as attractive

Cubist Pharmaceuticals' planned $275 million deal of seven-year convertible subordinated notes climbed in the gray market trading ahead of its expected pricing after the market close Wednesday as observers said a bright fundamental outlook and high stock volatility made the offering look attractive.

The convertible, which was talked at a coupon of 2.25% to 2.75% and an initial conversion premium of 25% to 30%, was quoted at 101 bid, 103 offered as Cubist stock (Nasdaq: CBST) tumbled 9.07% or $2.36 to close at $23.67.

The convertibles were offered at par.

There is an over-allotment option for a further $41.25 million.

Goldman Sachs is the bookrunner of the registered off-the-shelf deal.

Cubist, a Lexington, Mass.-based biopharmaceutical company, said it will use the proceeds of the deal to redeem its outstanding $165 million of 5.5% convertibles due 2008. Any remaining proceeds will be used to market Cubist's intravenous antibiotic drug Cubicin, to build the company's product pipeline and for working capital.

"I really like the company, I really like the product, and it models cheap," a sell-side convertible analyst said, adding that the deal was likely to land at the rich end of price talk.

But "if they change it to the rich end, it'll still be fair to slightly cheap," the analyst said.

Cubist's credit quality and prospects have improved after the company announced on May 25 that it had gotten approval from the U.S. Food and Drug Administration to market its intravenous antibiotic Cubicin as a treatment for a certain blood infection, said the analyst, who noted that Cubicin forms about 98% of Cubist's sales.

"That was the significant move," the analyst said. "Most equity analysts seem to have $30 and above price targets. It looks like their competition has disadvantages, and these guys have first to market advantage over anyone coming up the tubes. And they haven't opened up the Europe and Asian markets yet."

Cubist's bonds should be fine even without considering the company's pipeline, although Cubist's pipeline should not be a significant concern, the analyst said. Cubist's current development efforts are focusing on a treatment for pneumonia infections, "which isn't something Cubicin is great at addressing," the analyst said.

"It looks like they've got a complementary rather than a cannibalistic drug going into Phase 3," the analyst said. "I don't think the market's giving it any credit either."

A potential risk lies in Cubist's heavy reliance on Cubicin, which will leave investors stranded if Cubicin does not perform as expected, the analyst said. But the chance of that happening is slim.

"It's really a one-drug company, but it's been on the market for [treating] skin [infections] for three years...so it's kind of a small chance that something like that will happen," the analyst said.

A California-based convertible bond trader said the deal was going to "do OK - everyone seems to be saying that."

The trader said the company has indicated that it expects to be free cash flow positive by the end of 2006 or the start of 2007, and there is a "real product" that supports those expectations, so "I like it," the trader said.

The trader noted that views are split on where Cubist stock is headed. Lazard equity analyst Joel Sendek downgraded the stock to sell from hold on Wednesday, saying the FDA approval may not drive as much growth as expected and cases of resistance to the antibiotic may discourage adoption. But differing views on the stock should be fine for convertible bond investors, the trader said.

"It's creating volatility in the stock," the trader explained.

The trader also felt the deal should still be fine if it comes at the rich end of talk. "It'll probably still do OK, in part because guys are starved for volatility and they're bidding up names like this with a chance for volatility with decent credit," the trader said.

L-3 firms on stock downgrade

L-3 Communications' convertible slid about two points on an outright basis but improved dollar-neutral after an analyst downgraded the stock over concerns about its stock option grant policies and succession planning.

L-3's 3% convertible due 2035 was marked at 97.5 bid, 97.75 offered against a stock price of $72.90 late Wednesday. L-3 stock (NYSE: LLL) fell 6.31% or $4.91 to close at $72.96.

"The LLLs got slightly better on a delta basis," a sell-side convertible trader said. "The stock was off...after CIBC downgraded them earlier."

CIBC equity analyst Myles Walton on Wednesday downgraded L-3 stock to sector performer from sector outperformer, citing concerns that arose out of an analysis of the company's stock option grants. Walton said uncertainty over how the timing of the grants was determined and the market's potential reaction to such uncertainty led to the downgrade.

Walton also raised concerns about L-3's recent pricier acquisitions and the lack of clarity in the company's succession planning following the recent retirement of the company's chief financial officer and co-founder.

New York-based L-3 makes communications and electronics systems for the defense industry.

Novell may firm as guidance falls short

Novell's 0.5% convertible due 2024 could improve on a hedged basis on Thursday after the stock fell in after-market trading on Wednesday on the back of the company's disappointing guidance, traders said.

The convertible traded flat outright at about 91.875 bid, 92.375 offered on Wednesday against a stock price of $7.65. Novell stock (Nasdaq: NOVL) rose 0.78% or 6 cents to close at $7.73 before dropping 9.19% or 71 cents to $7.02 in after-market trading.

"They reported after the close lower guidance going forward," a California-based trader said. "The stock's getting hit somewhat. This is Convertibles 101 - solid credit, stock gets smacked, bonds hold."

Novell said Wednesday after the market closed that it earned $3 million, or 1 cent per share, in the second quarter, against a net loss of $16 million, or 4 cents per share, in the year-ago period. But the company expects net income of 3 cents per share in the third quarter, less than the 4 cents per share expected by analysts.

Waltham, Mass.-based Novell is a developer of open-source software.

Trinity plans $450 million deal

Trinity Industries expects to price after the market closes on Thursday $450 million of 30-year convertible subordinated notes talked at a coupon of 3.5% to 4.25% and an initial conversion premium of 35%.

The convertibles will be offered at par, and the initial conversion rate and price will be adjusted on June 12, the ex-dividend date for Trinity's 3-for-2 stock split that was declared on May 15.

There is a greenshoe option for a further $50 million.

JP Morgan, Banc of America and Wachovia Securities are the bookrunners of the registered off-the-shelf deal.

Trinity, a Dallas-based maker of railcars, inland barges and energy equipment, will use the proceeds of the deal to expand its railcar leasing business, possibly repay or repurchase part of its outstanding debts and for other general corporate purposes.

Trinity stock (NYSE: TRN) closed at $62.34 on Wednesday, up by 1.42% or 87 cents before the deal was announced.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.