Cytokinetics executes hedge-neutral US$650m CB
Cytokinetics achieved a balanced outcome on convertible bond refinancing, landing an upsized US$650m on the pricing of a new CB and using that money to partially repurchase an existing CB.
Such rollover financings are commonplace, though rarely executed on an overnight basis.
The front end of the financing saw Morgan Stanley, Cantor and Mizuho Securities price a new six-year US$650m CB overnight Tuesday at a 1.75% coupon and 37.5% conversion premium, the aggressive ends of 1.75%–2.25% and 32.5%–37.5% talk and an increase from the US$550m base deal size targeted at launch.
The back end saw the banks negotiate the price to repurchase US$399.5m of Cytokinetics’ 3.5% CB maturing at the end of 2027 and convertible at US$51.07.
The late-stage biotech’s shares fell 4.4% post-pricing Wednesday to US$47.56, a muted response given the complexities of delta hedging across two converts.
“(The new CB) has a higher conversion price than the existing, and that results in really efficient dynamics from a hedging perspective,” said one banker on the deal. “(Convert arb funds) do not have to short stock on the open market.”
Cytokinetics’ existing CB has a higher delta than the new CB, allowing arbs to roll over shorts already in place to hedge the new CB.
In addition to US$402.5m of cash, Cytokinetics issued 2.17m shares to the 3.75% CB holders on the repurchased bonds, a total consideration package worth US$510.4m or 127 cents on the dollar, about the 125 price the bonds were trading prior to the repurchase.
For Cytokinetics, settling in stock limited the amount of new debt needed to repurchase the existing CB.
“From a messaging standpoint, it was important that the company wasn’t taking on incremental debt to refinance,” said the banker. “Healthcare has not been a big part of the CB new issue market, so a lot of investors are underinvested (in the sector).”
Cytokinetics is just the seventh biotech/pharmaceutical company to tap the CB market this year, including a similar refinancing by Alnylam Pharmaceuticals earlier this month.
Cytokinetics chipped the 2027 CB maturity to US$140.5m and is paying a lot lower cost because of the refinancing.
In addition to CB arbs, there are compelling reasons for long-only CB funds to participate.
Equity investors have high hopes for Cytokinetics’ heart disease drug, aficamten. The FDA is expected to approve the drug later this year, transitioning Cytokinetics to a pharmaceutical company.
Cytokinetics has three other drugs in Phase III trials focused on muscle diseases.
Analysts at RBC Capital Markets project peak US sales for aficamten of US$2.6bn in 2034.