Prospect Capital trades up after pricing another $150 million convertible; Cephalon steady

By Rebecca Melvin

New York, Feb. 15 - Prospect Capital Corp.'s newly priced 5.5% convertibles due 2016 traded up in small volume on Tuesday, quoted early at 100 bid, 101.75 offered and seen later at 101.375 bid, 102.125 offered, versus a share price of $11.66, shortly after mid-session.

The new Prospect convertible launched and priced late Monday, and there was no initial price talk. The underwriter just went out with a 5.5% coupon and a 10% initial conversion premium, a syndicate source said.

Market sources believed it to be pretty tightly held by mostly equity accounts, but syndicate wouldn't comment on allocations.

Prospect Capital's 6.25% convertibles, also five-year paper, which priced in December, were privately placed and weren't seen in trade.

Cephalon Inc.'s 2% convertibles due 2015 dropped 5.287 points outright in early trade Tuesday, according to Trace data, but later recovered to just a 0.5-point dip outright, and they were steady on a hedged basis after a Jefferies & Co. analyst downgraded Cephalon shares two notches to "underperform" from "buy," citing expectations of greater generic competition.

The "Cephalon 2% did not come in today," a New York-based sellsider said.

Eastman Kodak Co.'s convertibles were active and lower amid no particular news, a New York-based sellside desk analyst said.

United States Steel Corp.'s convertibles were up about 5 points outright and the underlying shares were higher after an upgrade by Goldman Sachs to "buy" from "neutral," with a share price target raised to $75 from $61. Goldman said U.S. Steel's leverage to higher steel demand and pricing as an integrated steelmaker was behind the upgrade.

Volume overall Tuesday was boosted by a 2% convertible preferred of CenterPoint Energy Inc., which was trading in very heavy volume, with about $49 million, or 1.43 million of the preferreds, changing hands between 34 bid, 35.625 offered, a New York-based sellside trader said.

Prospect Capital quoted higher

Prospect Capital's newly priced 5.5% convertibles due 2016, which came at par late Monday via bookrunner Goldman Sachs and co-managers RBC Capital Markets and Credit Suisse, was seen moving up in trade to 102 offered in tandem with a gradual rise in the underlying shares on Tuesday.

Shares of the New York-based venture capital and private equity firm added 19 cents, or 1.6%, to $11.79 by the market close.

The deal came as an "overnighter" after the market close Monday but priced late Monday as well.

The new Prospect Capital paper was not trading actively and was characterized as a private-like deal like its sister convertible, another $150 million issue, which priced right before Christmas.

The older Prospect Capital 6.25% convertibles due 2015 have not been seen in trade, according to sources queried.

Prospect's new $150 million of 5.5-year convertible senior notes were done under Rule 144A and they will be convertible into shares of Prospect's common stock at an initial conversion price of $12.76 per share.

The older, two-month-old Prospect convertibles paper is convertible at $11.35. The older paper was underwritten by Barclays Capital Inc. with RBC Capital as joint lead managers and KBW and Rabo Securities as co-managers.

The new bonds, for which there is a $22.5 million greenshoe, are non-callable with no puts. There is dividend protection in the form of a no-cap conversion rate adjustment, and also takeover protection.

Market players weren't looking very favorably on the paper.

The "new issue has a lower coupon, a higher strike, and the stock still grossly out-yields the bonds. What's to like?" a New York-based sellside trader said.

A Connecticut-based sellside analyst was using a credit spread of 325 basis points over Treasuries and a 15% vol. to value the new Prospect Capital bonds.

Proceeds will be used to maintain balance sheet liquidity, including repayment of debt under its credit facility, investments in high quality short-term debt instruments, and thereafter long-term investments in accordance with Prospect's investment objectives.

Cephalon steady 'in line'

Cephalon's 2% convertibles due 2015 were seen late in the day at 135.125 bid, 135.375 offered versus a share price of $58.50, which was little changed from Monday, when the convertibles were pretty active and moving up on an 88% delta, according to a New York-based sellside trader.

On Tuesday, the bonds "did not come in today," said a New York-based sellside trader, who referred to the delta as 85%.

Shares of the Frazer, Pa.-based biopharmaceutical company pared early losses and then settled a penny into positive territory, closing at $58.99.

Both the shares and the bonds were flat, a New York-based sellside trader said, recovering from an initial dip after Jefferies analyst Corey Davis cut his share price target on Cephalon to $48 from $77.

The analyst cited greater competition from generic pharmaceuticals like Watson Pharmaceuticals, which is planning to launch soon its own version of Cephalon's Fentora, a drug used to treat pain in cancer patients.

Davis also said that Cephalon's next batch of drug candidates isn't going to be immediately available to take up the slack.

Data from Cephalon's late-stage drug candidates, which could help bolster revenue, is still a year away or more, he said.

Furthermore, sales of the company's sleep disorder drug Nuvigil have been disappointing, he added.

Cephalon reported about $182 million in Fentora sales in 2010, and Davis said he expected that total to drop to around $50 million in 2012 because of generic competition.

Cephalon's drug candidates in late-stage testing include Cinquil, a treatment for adult asthma. It is also testing its drug Nuvigil as an add-on treatment for bipolar depression and its cancer drug Treanda as a treatment for non-Hodgkin's lymphoma.

Mentioned in this article:

CenterPoint Energy Inc. NYSE: CNP

Cephalon Inc. Nasdaq: CEPH

Eastman Kodak Co. NYSE: EK

Prospect Capital Corp. Nasdaq: PSEC

United States Steel Corp. NYSE: X

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