Medicis seen clearing way for more CoCo converts; TXU could usher in more energy mandatories

By Ronda Fears

Nashville, Tenn., May 30 - Convertible players are expecting issuance to pick up in the next few weeks in a bit of a rush before the summer lull begins. Medicis Pharmaceuticals' new deal is seen clearing the way for a new wave of contingent convertibles by smaller issuers, and the upcoming TXU deal a precursor to more energy names.

"The [Medicis] deal went outstanding. The CFO, Mark Prygocki, did the road show in L.A. and New York and a luncheon. In all, he spoke with 26 major convertible accounts and 85% of those participated in the deal, whereas we would normally expect 50% to 60%," said a salesman working on the Medicis deal.

"This deal, which was nine times over-booked and accelerated by a day, is seen opening up the market to being able to do a whole new round of CoCos for the lower-rated credits, the smaller-cap companies."

Medicis Pharmaceutical Corp. sold $350 million of 30-year 2.5% convertible senior notes with a 25% initial conversion premium, at the aggressive end of price talk, with a contingent conversion threshold of 110%.

The Scottsdale, Ariz.-based specialty pharmaceutical company sold the deal on swap, using $125 million of proceeds to buy stock sold short by convertible buyers. Remaining proceeds of around $161 million are earmarked for future acquisitions and general corporate purposes.

"For a non-rated issuer, we expected to get pushed back [on the terms], but clearly, that was not the case," the salesman said.

The market has become more comfortable with CoCo features and was very receptive to a healthcare story, he said. The credits are tighter in healthcare at a spread of between 350 to 400 basis points, versus 700 to 800 basis points for biotech names, he said. Volatility is lower in healthcare stocks, in the 30s, whereas biotechs are in the 70s or 80s.

The salesman said healthcare names are expected to pop up on the convertible calendar in the next few weeks.

Also, sources expect several energy names to come to market with mandatory convertibles.

TXU will lead off, pricing a $250 million mandatory alongside a stock offering after the close Thursday.

"We expect things to pick up to a pretty good clip for a few weeks before the summer doldrums set in," said the head of convertible origination at one of the leading underwriters.

"We may not see much of a drastic slowdown this summer, either. It didn't really die out last summer, either."

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