Kendle, SonoSite talked cheap; Live Nation questioned; Medtronic, Mylan seen safe in choppy market

By Evan Weinberger

New York, July 10 - The convertible secondary market jumped back into action Tuesday as investors continued to run for safer places, especially in the health care and medical sectors. Convertibles linked to Medtronic Inc. and Mylan Laboratories Inc. traded actively as the markets returned to normal after the July 4 holiday week.

With the stock market ravaged Tuesday on bleak retail earnings news and surging oil prices, convertibles investors will continue searching for a safe harbor in larger companies with strong credit, analysts say.

"People are kind of moving to better credit type names and out of high yield. If anything is a wider type credit, people are looking to sell," one sellside trader said.

New issues also had traders and analysts buzzing.

Deals that were set to price after market close Tuesday from Kendle International Inc., SonoSite, Inc. and Live Nation, Inc. all appeared to be priced to move as analysts said that although the three companies were on the small end of market capitalization, their convertibles were on the cheap side.

"I understand people are going to play in all three. They're not eew, yuck, puke kind of deals," one sellside analyst said. "People might be thinking, they can pick this up, put it in their portfolio and sell something they don't like."

Along with Kendle, SonoSite and Live Nation in the United States, one small new deal slung in from Singapore. Soilbuild Group Holdings Ltd., a property developer, priced S$50 million in convertible bonds due July 27, 2011 to yield 4.25% with an initial conversion premium of 28%.

One new issue that won't be coming to market is Panda Ethanol Inc.'s $140 million in convertible senior notes that was talked at a coupon of 6%. The convertibles, which were originally supposed to price June 19, were officially pulled Tuesday.

Overall, trading activity made a comeback Tuesday as the people that make the market run got back to work, and probably not a moment too soon for one sellside trader.

"When I went through my notes this morning things were back to normal," he said. "The last couple of days were brutal."

Kendle, SonoSite seen cheap

After a week traders spent lamenting the lack of new deals, or old deals for that matter, three companies charged to the forefront Monday evening and Tuesday morning.

Kendle International, a Cincinnati-based clinical research organization that provides clinical development services to the biopharmaceuticals industry, announced that it would price $150 million in convertible senior notes Tuesday after market close. The convertibles were being talked at a coupon of 3.125% to 3.625% with an initial conversion premium talked at 30% to 35%. There's also a $22.5 million greenshoe.

Soon after Kendle announced, SonoSite, a Bothell, Wash.-based maker of ultrasound systems, announced a $150 offering of convertible senior notes. Those were talked at a coupon of 3.625% to 4.125% with an initial conversion premium talked at 19% to 24%. The SonoSite convertibles were also scheduled to price Tuesday after market close. And, like Kendle, the SonoSite convertibles also had a $22.5 million greenshoe.

Both of those deals, according to analysts and traders, modeled cheap.

"Kendle doesn't look bad at 375 [bps] over Libor and 32 vol," one sellside analyst said. "Sono is very cheap, 500 over Libor at the mids using 30 vol."

Because the two are in the health sector, they seem to be lumped together in many analysts' minds. But there may be more reservations when it comes to SonoSite.

"The Kendles are attractive," another sellside analyst said. "They model cheap. The only downside is the small market cap. The stock looks pretty fairly valued though, so not the most attractive deal in the world. [SonoSite] stock is overvalued to me. They still model cheap."

Kendle International stocks (Nasdaq: KNDL) fell prey to the general downturn Monday, finishing at $36.01, a drop of $1.10, or 2.96%. SonoSite (Nasdaq: SONO) plummeted, closing down $3.28, or 9.48%, at $31.31.

Live Nation draws mixed reviews

As mentioned, there were three convertibles deals set to price. The third came from Live Nation, a Los Angeles-based concert promoter and music venue manager.

The $200 million in convertible senior notes due 2027 are being talked at a coupon of 2.625% to 3.125% with an initial conversion premium talked at 25% to 30%.

The convertibles look to be just as solid as the other two new issues to a lot of analysts.

"It can be a nice margin business," one sellside analyst said . "They did almost $150 million last year. It doesn't look bad at sort of 350 over Libor, 32 vol. It looks pretty good."

But not everyone is sold on Live Nation. Concerns range from the term to maturity for the bonds - 20 years while the company has only been in existence as Live Nation for two - to the downward trend in revenues.

The value of the convertibles boils down to one thing, according to a sellside trader. "The concern is really around the credit. It's not about the terms," he said.

But even with the concerns cited by the above trader, S&P gave the Live Nation convertibles a B rating.

Live Nation stock (NYSE: LYV) dropped $1.72 points, or 7.47%, to $21.29 Tuesday.

Newmont plans $1 billion

Meanwhile, well after the close, Newmont Mining Corp. announced plans to sell $1 billion of convertible senior notes in two tranches of $500 million each, one due 2014 and one due 2017.

Talk, timing and underwriters were not immediately at press time on the Rule 144A deal.

Medical issues provide safe space

When a patient is feeling ill, the doctor is a good place to go. When the convertibles market is feeling a little unsteady, then it seems to make sense to move towards convertibles that have good credit. And for those with a more literary bent, it works out nicely when those companies with good credit happen to be in the medical and health care universe.

"That may not just be yesterday's news, but news from the last few weeks," one sellside analyst said. "It looks like people have been avoiding the bad credits ever since the whole Bear Stearns thing blew up," he added, referring to the investment bank's trouble with hedge funds that had heavy exposure to subprime mortgages.

Medtronic's 1.625% convertible senior notes due April 15, 2013 were particularly active, finishing at 106.75 versus a stock price of $52.62. They were last seen Monday at 107.75 versus Monday's closing stock price of $53.16. Medtronic stock (NYSE: MDT) was down $0.54, or 1.02% Tuesday.

One of the Minneapolis-based medical device producer's other two convertibles was also active. The company's 1.5% convertible senior notes due April 15, 2011 was last seen Tuesday at 104.75 versus $52.62. It was last seen Monday at 105.625 versus $53.16.

"It's just one of these very strong credits and low vol kind of stocks," one buyside analyst said of Medtronic.

Mylan Laboratories' 1.250% convertible senior notes due March 15, 2012 were also active Tuesday, last seen at 94.96474 versus a closing stock price of $17.75. They were last seen Monday at 95.13 versus a closing stock price of $17.88. Mylan stock (NYSE: MYL) was down $0.13, or 0.73%.

Another sellside analyst said he expects to see people maintaining an interest in Medtronic, Mylan and other health-related convertibles. "People are gravitating towards better credit health care, medical products," he said.

Medtronic and Mylan, despite their good reputations with convertibles investors, couldn't withstand the equity market onslaught Tuesday. The losses in both of those stocks went along with the general trend on Wall Street. Both the Dow Jones Industrial Average and the Nasdaq took a beating. The Dow was down 148.27 points, or 1.09%, at 13,501.70. The Nasdaq finished 30.86 points, or 1.16%, lower at 2,639.16.

Panda sighting fleeting

The giant panda is one of the most difficult animals to track in the wild. Sightings are rare and noteworthy. The $140 million seven-year convertible senior notes from Panda Ethanol have proven to be just as elusive as their namesake.

Panda Ethanol pulled its convertibles, which had been talked at a coupon of 6%, was pulled Tuesday.

The move was hardly surprising. The pricing, originally set for June 19, was delayed then. Analysts and traders said at the time that the convertibles' complicated structure and the fact that the $140 million issue was equal to the Dallas-based ethanol refining company's market capitalization were turning investors off.

A statement from the company Tuesday said that market conditions weren't optimal to issue the convertibles, which were initially intended to fund the construction of the company's Yuma, Colo. ethanol refining facility and general purposes.

On the plus side for Panda, the company announced Tuesday that it had purchased the 292-acre site where the facility will be built.

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