HGSI's Anti-Anthrax Convertible
A little company called Human Genome Sciences (HGSI) -- whose main business once seemed to be the steady production of new convertible bonds -- is trying to protect us from any further anthrax damage. The company announced this morning that it has begun delivery of its ABthrax drug for treating inhalation of anthrax. HGSI is expecting a $150-million infusion from the government from its first ABthrax deliveries.
While HGSI’s equity-market capitalization of less than $300 million makes the stock an interesting speculative play, investors also might want to take a look at the 2 convertible bonds HGSI has outstanding. Both of them carry modest 2.25% coupons, but since they're trading between $0.30 and $0.40 on the dollar, the current income they generate is significantly higher.
Still, you wouldn’t be buying these bonds for current income, rather, in the hopes that the company’s Anthrax drug and its other pipeline products will enable it to make good on these 2 bonds - 1 of which matures in 2 years, the other in 3 years. The debt adds up to face value of just over $500 million. The company’s cash has been running low (it's been burning about $40 million per quarter), so the coming infusion will be more than welcome. But refinancing is a major risk. That’s why, after all, the bonds are trading in the 30s - depressed levels even in today’s market.
One of the attractions to beaten-down convertibles in general -- and particularly those of micro-cap biotech companies -- is the “poison put” feature. I've written about this in the past, and it’s worth noting in the case of HGSI.
The stock is currently trading around $2. If a major pharmaceutical company buys HGSI for cash -- a distinct possibility -- it's required to pay off the convertibles at 100. So even if the company were to be taken out at no premium (or even a discount) to the current market price, the convertibles would roughly triple in value.
The HGSI convertibles maturing in 2011 are, naturally, the higher priced bonds and are identifiable by CUSIP #444903AK4. The 2012 bonds carry the CUSIP #444903AM0.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
Is this poison put feature standard in most converts?
Thanks
Thanks for your question.
BF
Have you looked at Amylin recently? As Icahn and Eastbourne both nominate directors, is a buyout inevitable? Does the Amylin convertible have a poison put feature?
Thanks
Amylin actually has two convertibles and both do have poison puts. The 2.5% mature in 2011 and are trading around 80. Cusip is 032346AD0. The 3% are in the mid-50's because they do not mature until 2014. Cusip for those is 032346AF5.
If you are playing for a cash takeout, since the stock is well below the conversion price for both bonds, you get more bang for your buck buying the lower-priced 3%, since you would get 100 with both of the bonds.
Whether or not a buyout is inevitable, I couldn't say, although it is a real possibility.
Best,
Bill
