Clovis Oncology deal looks ‘cheap,’ existing convertible trades down; Lumentum drops

By Abigail W. Adams

Portland, Me., April 16 – After a week with no convertible deals pricing, a new offering was in the pipeline.

Clovis Oncology, Inc. planned to price $200 million of seven-year convertible notes after the market close on Monday with price talk for a coupon of 1% to 1.5% and an initial conversion premium of 35% to 40%, according to a market source.

The deal, which is being made concurrently with a $100 million common stock offering, looks cheap, although there are drawbacks, market sources said.

As Clovis prepares a new convertible note and common stock offering, the Boulder, Colo.-based specialty pharmaceutical company’s 2.5% convertible notes due 2021 and stock dropped.

Meanwhile, the broader convertibles secondary market continued to see low trading volume on Monday. There was only $134 million on the tape by late afternoon, a market source said.

“The lines are very, very light,” a market source said.

Lumentum Holdings Inc.’s 0.25% convertible notes due 2024 dropped about 7 points outright as stock was down more than 9% during Monday’s session.

Lumentum was one of several tech companies that took a hit from the U.S. Department of Commerce’s ban on domestic companies selling component parts to Shenzhen, China-based telecom equipment manufacturer ZTE.

Ensco plc’s 3% convertible notes due 2024 were active during Monday’s session and maintained their strength alongside company stock after rising about 4 points on an outright basis last week.

Clovis’ deal

Clovis’ $200 million offering of seven-year convertible notes looks cheap, market sources said.

The convertible notes are being offered concurrently with an offering of $100 million of common stock.

The deal is being marketed with a credit spread of 350 basis points and a 42% vol., a market source said. The deal modeled about 4 points cheap with those inputs, a market source said.

However, the inputs were questioned.

“It seems aggressive,” a market source said. Using a credit spread of 400 bps and a 40% vol., the deal modeled about 1.5 points cheap, the source said.

“Normally, you don’t do 40% vol. for seven-year paper,” a market source said. The company does have good vol., “but I don’t know about 40%,” the source said.

With a market cap of $2.77 billion, the credit spread seemed appropriate, the source said.

Other sources pegged the deal 1.5 points to 2 points cheap.

The seven-year structure is always a drawback, but the deal should do OK, a source said.

Clovis has long been rumored as a source of a potential buyout, “which puts a damper on things,” the source said.

Clovis’ existing convertible notes have always traded rich. “That’s why they can price it where they’re pricing it,” a market source said.

As new paper from Clovis was in the works, the company’s 2.5% convertible notes due 2021 were trading down as the company’s stock dropped off more than 10%.

The 2.5% convertible notes dropped about 7 points outright in scattered trades on Monday to just north of 119. “The old ones have been coming in,” a market source said.

Clovis stock closed Monday at $54.41, a decrease of 10.27%. The drop in stock was seen as a reaction to the convertible note and preferred stock offering.

Proceeds from the offerings will be used for the commercialization of the ovarian cancer medication RubracaR in the United States and Europe.

The medication has already been approved by the U.S. Food and Drug Administration and approval is pending in the European Union.

Tesaro Inc. also has a competing medication on the market. “The trouble with the space is that it’s hard to differentiate who has the best product,” a market source said. “There’s a question of market share.”

Lumentum drops

Lumentum’s 0.25% convertible notes due 2024 were active and losing ground on an outright basis as company stock dropped more than 9% after the U.S. Department of Commerce put a ban on domestic companies selling to ZTE.

The 0.25% convertible notes were trading in a range of 121 to 124, according to Trace data. Lumentum stock wavered between $57.10 and $60.50 before closing Monday at $58.475, a decrease of 9.06%.

Lumentum was one of several optical component makers whose stock took a hit after a seven-year ban was placed on selling to ZTE.

The ban was placed on the company for violating an agreement reached as part of ZTE’s guilty plea in 2017 to conspiring to violate U.S. sanctions by shipping U.S. goods and technology to Iran, Reuters reported.

Lumentum sales to ZTE were estimated to be 2% to 3% by Raymond James and 5% to 10% by William Blair, Investor’s Business Daily reported.

Ensco active

Ensco’s 3% convertible notes due 2024 were active on Monday with the notes continuing to trade in the 85 to 86 range after rising last week alongside the price of crude oil.

Ensco stock closed Monday at $5.52, an increase of 1.66%. The London-based offshore drilling contractor’s convertible notes were trading in a range of 79 to 80 before the dramatic rise in the price of crude oil last week.

The barrel price of West Texas intermediate crude oil for May delivery rose more than $4 over the course of last week, reaching its highest point since December 2014.

Crude oil was down on Monday to $66.34, a decrease of $1.05 or 1.56%.

Mentioned in this article:

Clovis Oncology, Inc. Nasdaq: CLVS

Lumentum Holdings Inc. Nasdaq: LITE

Ensco plc NYSE: ESV

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