PMI bid up in gray market; Lennar gray bid tepid; M&A drives trade in Charles River, Hertz

By Rebecca Melvin

New York, April 26 - The launch of two new issues to start out the week Monday didn't seem to jump start the convertibles market overall, but there was plenty of interest, particularly around the planned PMI Group Inc. offering of $200 million of 10-year convertible senior notes. That deal was bid higher to 108 ahead of repricing seen later in the session.

"I'm hearing that one is a blowout," a New York-based sellside desk analyst said.

Lennar Corp.'s planned $250 million of 10.5-year convertible senior notes wasn't getting as rousing a reception, with the pricing seen as pretty aggressive and the bid in the gray market only at par to 102.

Elsewhere, sources said the market was quiet with the exception of a couple of names driven by merger and acquisition news and also some earnings news.

Charles River Laboratories International Inc. was leading Monday's volume, trading at nearly par as its shares sank 15.6% after the clinical research company said that it had agreed to buy rival WuXi Pharmatech of China for $1.6 billion to expand its presence in China and deepen its expertise in drug-discovery services.

Hertz Global Holdings Inc. saw its convertibles jump to almost double par after the car rental company said it planned to buy rival Dollar Thrifty Automotive Group for $1.2 billion. On a dollar-neutral basis, the bonds kind of bumped around and ended slightly in.

Overall, the market was seeing very event-specific trading, a sellside analyst said, and he didn't anticipate the new issue launches would generate very much trade without some sort of prospects for more.

"The market is quiet....These new issues won't stir excessive activity unless one can conclude the recent new issue volume represents genuine sustainable new issue activity. That is not the sense I get," the New York-based sellside trader said.

PMI surges in the gray

PMI, which owns insurance companies in Arizona, New York and Wisconsin, seemed to be riding the coattails of MGIC Investment Corp., the mortgage insurer, which priced a convertibles deal last week that traded up to 114 on their debut after pricing on the rich end and beyond the rich end of talk.

"MTG was a homerun. If you bought that paper you made plus 10 points right off the bat," a New York-based sellside trader said.

Ahead of the market open Monday, PMI launched an offering of $200 million of 10-year convertibles that was initially talked at 5% to 5.5% for the coupon and 20% to 25% for the initial conversion premium. Price talk was later revised to 4.5% to 5% for the coupon, with a premium of 27.5%.

This paper was looking more in favor in the gray market simply as a function of the terms, a sellside analyst said. It's a five-year non-call piece of paper with a strong yield and premium on a volatile stock that results in a cheap security. "It's just math," the sellsider said.

The fact that the issue is a registered deal also helped, another sellsider said. The other paper launched Monday by Lennar was a private Rule 144A deal.

PMI, a Walnut Creek, Calif.-based provider of residential mortgage insurance and credit enhancement products, was also planning to price $400 million of common stock.

Joint bookrunners of both registered offerings were Credit Suisse Securities (USA) LLC and Bank of America Merrill Lynch, with Dowling & Partners Securities as a co-manager.

The convertibles have contingent conversion at a price trigger of 130%. They are non-callable for five years and then provisionally callable in years six through 10, at a 130% price trigger. There are no puts.

Conversion settlement can be made in cash, stock or a combination. They also have full dividend protection and change-of-control protection via a make-whole adjustment premium delivered upon conversion as incremental shares.

Closing of each of the offerings is contingent on the closing of the other.

Lennar gets tepid response

Lennar planned to price $250 million of 10.5-year convertible senior notes that were talked to yield 1.5% to 2% with an initial conversion premium of 37.5% to 42.5%.

Lennar also planned to price a concurrent $250 million of senior straight notes due 2018.

Given that the convertible terms were seen "a little aggressive," there was very little heard in the gray market and the paper was bid basically "at issue" to 101, source said.

Lennar is a Miami-based homebuilder and provider of financial services.

The convertibles, being sold via Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. as joint bookrunners, are non-callable until Dec. 1, 2013. There are puts on Dec. 1, 2013 and on Dec. 1, 2015.

There is contingent interest, or 50 basis points subject to a 120% threshold.

Conversion settlement can be made in stock.

"The housing market has a number of challenges facing it in 2010. A de minimis coupon and a big premium seems a bit much. Citi and JPM try to get around the stretched terms by putting in a short-dated put, but I'm not particularly impressed. Yet, given the new issue paper scarcity, I suspect it will price fine," a New York-based sellside trader said.

Charles River leads volume

Charles River's 2.25% convertibles due 2013 traded extremely actively after a period of practical dormancy given that investors were reluctant to "put a valuation" on the paper when there was speculation surrounding the company that it might be taken over, a New York-based sellside trader said.

More than $30 million of bonds traded, according to Trace data, the sellsider said, adding that the actual number was probably significantly higher and represented a backlog of demand.

Shares of the Wilmington, Mass.-based clinical research company slid $6.22, or 15.6%, to $33.55 in heavy volume after the company said it planned to take over a Chinese rival, and investors worried that it wouldn't be able to swallow the investment.

The Charles River 2.25% convertibles were at about 98.25 versus a share price of $35.00, which was indicated lower by about 4 or 5 points from previous levels.

"It kind of moved down on a 50% delta," the New York-based sellsider said. "It moved relative to the stock."

Nobody wanted to put a valuation on this before for fear that you'd lose 4 points on a takeover. So there was no clear valuation prior to this deal, the sellsider said.

Hertz zooms higher

Hertz's 5.25% convertibles due 2014 traded at 198 versus a share price of $15.25, according to a New York-based sellside desk analyst. Other sources said the paper was at double par.

The move up was dramatic.

Parity on the paper was 181 compared to parity in the previous session at 155. "That's a huge move," a New York-based sellside trader said.

Shares of the Park Ridge, N.J.-based rental car company, which rose 18% to a two-year high in early trading, settled higher by $1.81, or 14%, to $14.69 on Monday, and the move follows a steep climb in recent weeks. On March 20, the stock was at about $10.00, the sellsider pointed out.

Hertz said that it planned to buy Dollar Thrifty for $1.17 billion in cash and stock, and it also beat on earnings and guided higher for the rest of the year.

Hertz reported a narrower first-quarter loss of $150.4 million, or 37 cents a share, from $163.5 million, or 51 cents a share, in the year-earlier period.

Excluding one-time items, Hertz said it lost 12 cents a share, which was a penny below analysts' estimates of 13 cents a share. Hertz also had revenue of $1.66 billion, up 6%, from $1.56 billion in the year-earlier period.

Hertz also raised its adjusted earnings outlook for 2010 to a range of 43 cents a share to 45 cents a share, from 37 cents a share to 39 cents a share, and increased its annual revenue outlook to $7.5 billion to $7.7 billion, up from $7.4 billion to $7.6 billion.

Mentioned in this article:

Charles River Laboratories International Inc. NYSE: CRL

Hertz Global Holdings Inc. NYSE: HTZ

Lennar Corp. NYSE: LEN

MGIC Investment Corp. NYSE: MTG

PMI Group Inc. NYSE: PMI

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