Convertibles muted; MannKind to price $100 million deal; King Pharma quiet as shares add

By Rebecca Melvin

New York, Aug. 16 - The convertible bond market began the week and the second half of August in a somnolent mood, with investors seemingly holding on to existing positions and only trading stock to manage their hedges, sources said.

It was a mixed bag in terms of pricing, with underlying equities trading lightly in a tight range.

A new deal emerged after the market close, surprising some market participants who are braced for new issuance to remain dormant until at least September when the summer vacation season is over.

MannKind Corp. launched a $100 million offering of five-year convertible notes after the close of markets Monday that was seen pricing after the close on Wednesday.

The Valencia, Calif.-based biopharmaceutical company has an existing issue of 3.75% convertibles due December 2013 that is trading in the low 60s.

The convertibles of Medtronic Inc. barely budged as the underlying shares slipped to near their 52-week low.

And the mostly outright King Pharmaceuticals Inc. convertibles were quiet amid a 3% improvement in the underlying common stock after Credit Agricole upgraded the shares to "buy" from "underperform," a Connecticut-based sellside analyst said.

The secondary market was quiet, with less than $300 million of bonds having changed hands by mid-afternoon, according to Trace data.

"People seem inclined to trade their gamma, or stock, in their hedges," a New York-based sellside trader said.

The tendency for investors to hold their positions and trade only stocks seemed to have become more prominent as volatility has picked up and with corporate credit stable and rates hanging unchanged at low levels.

"The market is only good for arbs, and outright investors for that matter, when there is value in the market... However, this market is fairly priced to rich, with little prospects for a new issue calendar. Consequently, hedge guys are generally leaving their positions in place and try to make money trading stocks or options," a New York-based sellside analyst said.

MannKind to price

Mannkind's planned $100 million of five-year convertible notes were talked to yield 5.25% to 5.75% with an initial conversion premium of 20% to 25%, according to market sources.

The Rule 144A deal - seen at 5.5%, up 22.5% at the midpoint of price talk - has an over-allotment option for an additional $15 million of notes.

"It's pretty small deal, on a small-cap company, where the stock borrow is not particularly good," a sellsider said.

However, the deal is being priced concurrently with an offering by MannKind of 8 million common shares, which will be loaned to bookrunner Bank of America Merrill Lynch for a nominal fee to facilitate investor hedging.

Whether MannKind's existing 3.75% convertibles due 2013, which trade in the low 60s, will be helped by the new deal was uncertain. Proceeds of the new issue weren't earmarked for paying down the older convertibles but instead for research and development and clinical trials.

One sellsider suggested that the new five-year would have a wider credit spread than the older three-year paper, with an implied credit spread of 2,000 basis points over and a 45% vol.

The new notes will be provisionally callable at 150% of the conversion price, with coupon make whole. There are no puts. There is stock settlement and dividend and change-of-control protection.

MannKind develops and commercializes therapeutics for diseases such as diabetes and cancer.

King Pharma quiet as shares gain

King Pharmaceuticals' 1.25% convertibles due 2026 were last seen at 91 and weren't seen having traded since Friday.

The convertibles of the maker of drugs for cardiovascular and thyroid disorders are mostly an outright play with some players trading them on a very light delta.

Shares of the Bristol, Tenn.-based company gained 26 cents, or 3%, to $8.84.

The convertibles are 2.6 years to the put, with a less than 5% return.

The paper wasn't considered very cheap, according to one sellsider, who described them as "a little cheap," or about 1% cheap for BB paper, based on Friday's share price.

Mentioned in this article:

King Pharmaceuticals Inc. NYSE: KG

MannKind Corp. Nasdaq: MNKD

Medtronic Inc. NYSE: MDT

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