CVRD gains early; Encysive firmer; Panda delays deal; Stewart, Dollar Financial, NovaMed plan deals

By Kenneth Lim

Boston, June 20 - Companhia Vale do Rio Doce dominated the convertible market with its massive two-tranche $1.9 billion offering that priced within talk late Tuesday.

That new convertible rose quickly on its debut but eased later in the day to finish flat as its stock weakened over the session.

Encysive Pharmaceuticals Inc. held firm on a hedged basis as its stock continued to fall a day after a key drug was rejected by regulators.

Panda Ethanol Inc. was a no-show after the company's planned $140 million offering was delayed amid observations that there appeared to be very limited demand for the deal.

New deals continue to march onto the market with another three offerings announced Wednesday. Stewart Enterprises Inc., Dollar Financial Corp. and NovaMed Inc. are expected to add about $450 million of new convertibles when their deals price this week.

CVRD gains on debut

Companhia Vale do Rio Doce's new 5.5% mandatory exchangeables due 2010 rode to a strong start on the back of outright investors on its first day of trading, but a declining stock reined in the gains later in the day.

The RIO series, which is exchangeable into American Depository Shares that represent the company's common stock, traded at 49.875 to 50 against a stock price of $45.30. The RIO-P series, which is exchangeable into ADSs that represent the company's class A preferred stock, traded at a similar level. Companhia Vale do Rio Doce common ADS (NYSE: RIO) closed at $45, down by 1.75% or 80 cents.

The exchangeables were offered at par of $50.

"A lot of the RIOs traded today, both of them," a sellside convertible trader said. "Nothing else was trading. All I did was the RIOs."

Companhia Vale do Rio Doce priced the $1.88 billion two-tranche offering with an initial threshold appreciation premium of 26% on Tuesday after the market closed.

The RIO tranche comprised $1.296 billion of notes while the RIO-P tranche comprised $584.538 million of notes. Both deals were talked at a coupon of 5.25% to 5.75% and an initial threshold appreciation premium of 22% to 28%.

The exchangeables are issued by Companhia Vale do Rio Doce finance subsidiary Vale Capital Ltd. but are guaranteed by the listed parent.

There is no over-allotment option.

JPMorgan and Citigroup were the bookrunners of the registered offering.

Companhia Vale do Rio Doce, a Rio de Janeiro, Brazil-based diversified metals and minerals mining company, said the proceeds of the deal will be used for general corporate purposes.

"We started out really strong, but when the common came in the coupons because these are mandatories the coupons don't really give you the protection and so they came back in," the trader said. "They ended up flat but they were up good in the morning."

The trader said there was strong outright interest in the deal mainly because there are not many convertibles in the space.

"The problem is the structure," the trader said. "The problem isn't the sector. The sector is needed in the converts market. But the structure sucks. You can't take out mandatories on a deal like this."

A convertible analyst agreed that outright fund managers may have liked the deal.

"They're the biggest metals and mining company in the world, so it's actually a really good sector to be in," the analyst said. "They're a huge company and a high grade credit, so they're investment grade. It looks like something really good to add for a portfolio manager."

The analyst said the deal actually modeled only fair to slightly cheap.

"I thought the deal was fairly valued in the model," the analyst said. "There's a dividend pass-through feature on these, which passes through any dividend on the common stock to the interest, and one thing we saw was that the dividend on the common stock is highly inconsistent, so it's very hard to model that. So the pass through would give a little more value to the bonds based on our model."

Encysive holds as stock falls further

Encysive's 2.5% convertible due 2012 remained firm on Wednesday despite a second day of declines for the stock as the common continued to suffer from a regulatory setback for a key drug.

The Encysive 2.5% convertible traded at 65 against a stock price of $2 on Wednesday, unchanged from the day before. Encysive stock (Nasdaq: ENCY) fell 9.63% or 21 cents to close at $1.97.

"I think they're pretty close to their bond floor now, so it doesn't look like the converts are going to go anywhere for now," a sellsider said.

The U.S. Food and Drug Administration this week rejected Encysive's Thelin pulmonary arterial hypertension drug, saying the developmental treatment was approval but required further trials. Encysive, a Houston-based biopharmaceutical company, has said it plans to dispute the FDA's decision and it is also exploring strategic alternatives.

"Guys who were short the stock before this week probably made a killing because of this, but at this stage the converts are becoming more expensive," the sellsider said. "For outrights, there really isn't much upside to look forward to in the near term. Encysive doesn't really have a strong pipeline to fall back on and whether they fight this decision or do further trials it's going to cost a lot in time and money. Somebody may step in to offer a buyout, but there's no way of knowing now whether anyone's really interested in a company like this."

Panda remains elusive

Panda Ethanol's planned $140 million of seven-year convertible senior notes was delayed with no new schedule available, market sources said.

Panda's deal was expected to price Tuesday after the close, and it was initially talked at a coupon of 6% with an initial conversion price of about $5 per share.

The convertibles were being offered at par, but the company planned to pay $1,500 per note at maturity. The initial conversion price range was about 13% below Panda common stock's closing price of $5.75 on Tuesday.

Morgan Stanley is the bookrunner of the Rule 144A offering.

Panda Ethanol, a Dallas-based ethanol refining company that specializes in using cattle manure as a thermal energy source, said the proceeds of the deal will be used to fund its Yuma ethanol facility and general purposes.

A number of analysts and traders said they did not take a close look at the deal, explaining that there was a lack of interest.

"One issue is the really unusual structure," a convertible analyst said. "It's really complicated to model if you want to try, because you don't really know the conversion premium and there are all these moving parts. So I think some people may say, it's too complicated, I'm not going to get it if I can't understand it."

"There's also a big problem with the stock liquidity," the analyst said. "The common doesn't trade and the market cap, needless to say, is tiny. They have a market cap of about $140 million, which is what they're trying to raise in debt. So it's very risky, you can't hedge it and it's tough to model. I don't think a lot of people are spending too much time on this."

More new deals arriving

Another three new convertible offerings were announced late Wednesday.

Stewart Enterprises' planned $250 million two-tranche offering of convertible senior notes is expected to price Thursday after the market closes. The $125 million series of seven-year notes is talked at a coupon of 2.875% to 3.375% and an initial conversion premium of 30% to 35% while the equally sized nine-year tranche is talked at a coupon of 3.125% to 3.625% and an initial conversion premium of 30% to 35%.

The convertibles will be offered at par.

There is no over-allotment option.

Banc of America and Merrill Lynch are the bookrunners of the Rule 144A offering.

Stewart, a Jefferson, La.-based provider of funeral and cemetery products, said it will use the proceeds to fund convertible note hedge and warrant transactions. It will use $165 million of the proceeds to prepay the remaining balance of a term loan and use $64.2 million to buy back its own stock.

Dollar Financial's $150 million offering of 20-year convertible senior notes is talked at a coupon of 2.75% with an initial conversion premium of 32.5% at the midpoint of guidance, market sources said.

The convertibles will be offered at par.

There is an over-allotment option for an additional $22.5 million.

The company did not disclose the timing of the deal and the bookrunners, but market sources said Jefferies & Co. is running the books.

Dollar Financial, a Berwyn, Pa.-based provider of financial services to "under-banked" customers, said it will use the proceeds of the deal to repay an outstanding revolving loan, fund general purposes and possible repay other outstanding debts.

NovaMed expects to price its $52.5 million of five-year convertible senior subordinated notes on Thursday after the market closes, talked at a coupon of 0.5% to 1% and an initial conversion premium of 15% to 20%.

The convertibles will be offered at par.

There is an over-allotment option for a further $7.5 million.

Deutsche Bank is the bookrunner of the registered offering.

NovaMed, a Chicago-based healthcare services company that operates surgical facilities, said the proceeds of the deal will be used to fund convertible note hedge and warrant transactions, and to repay an outstanding $125 million of debt.

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