New Molina upsizes; planned Molina, Starwood bid higher in gray; Regeneron 'comes in'

By Rebecca Melvin

New York, Feb. 11 - Two new deals launched in the convertible bond market early Monday helped market players gain some traction in an otherwise lackluster session. The lingering effects of a heavy snowstorm that locked down pockets of the U.S. northeast through the weekend and into Monday were cited for muted action.

Molina Healthcare Inc., which launched an offering of $325 million of seven-year convertibles early in the day, priced the significantly upsized $450 million deal after the market close.

During marketing the deal was bid higher in the gray market despite what was seen as slightly rich pricing. Price talk was also tightened during marketing.

Molina's existing 3.75% convertibles due 2014, of which there is about $187 million outstanding, were looking somewhat weaker on Friday, a New York-based trader said, but he wasn't able to say whether the paper was weaker on Monday. The existing notes were seen around 119 on Monday with the underlying shares lower at around $31.00, compared to 122.625 versus an underlying share price of $32.00 on Friday.

Starwood Property Trust Inc.'s planned $450 million of five-year convertible senior notes, which were seen pricing after the market close, were said to be less of a market focus, but the deal was also bid higher by about 1.75 points in the gray market ahead of final terms , a New York-based trader said.

Elsewhere, Regeneron Pharmaceuticals Inc.'s convertibles were higher outright, but slightly lower on a dollar-neutral, or hedged, basis, after shares of the Tarrytown, N.Y.-based biotechnology company popped on news that drug-development partner Sanofi plans to lift its stake in the company to about $500 million by buying shares in the open market and by direct purchases from shareholders.

PHH Corp.'s convertibles were a little stronger once again on the strength of a large buyer that has been in the market.

"They've gone up in the past two-and-half weeks by about 0.25 point to 0.5 point outright to around 112," a New York-based trader said of PHH, the Mount Laurel, N.J.-based business process management services company.

Also after the market close, MannKind Corp. reported earnings that were mildly positive, sending shares higher by a little more than 1% in after-hours trade. The convertibles, which are pretty tightly held, weren't seen.

Overall, the session was described as quiet and lacking market-moving news. The major stock averages were mostly lower, but pared losses to end the session nearly unchanged. The S&P 500 stock index ended down 0.92 point, or 0.06% to 1,517.01, the Dow Jones industrial average ended down 21.73 points, or 0.16%, at 13,971.24; and the Nasdaq stock market settled 1.87 point lower, or 0.06%, to 3,192.00.

Molina seen slightly rich

Molina's planned offering of seven-year convertibles was upsized to $450 million, and price talk was tightened to a 1.125% to 1.375% coupon and a 30% to 32.5% initial conversion premium, according to sources.

The Rule 144A deal was initially talked at $325 million in size, with pricing talked at a 1.125% to 1.625% yield and with an initial conversion premium of 27.5% to 32.5%.

The deal was seen slightly rich using a credit spread of 500 basis points over Libor and a 34% vol., a West Coast-based trader said.

Nevertheless, the deal was bid higher in the gray market by 1.25 points to 2 points.

"People are starved for paper," one trader said.

The offering has a $100 million greenshoe, which was upsized from $50 million.

Joint bookrunners were J.P. Morgan Securities LLC and BofA Merrill Lynch. The deal priced late Monday.

The notes have continent conversion if shares rise to 130% of the conversion price. They are non-callable for life with no puts. They also have takeover and dividend protection and will be cash settled.

In connection with the offering, the company planned to enter into a call spread, or privately negotiated convertible note hedge and warrant transactions with one or more of the initial purchasers of the notes.

Proceeds of the note offering will be used to pay the cost of the call spread and to repurchase up to $50 million of its common stock in privately negotiated transactions concurrently with the offering, and to pay off a $40 million credit facility. Remaining proceeds will be used for working capital and general corporate purposes, including possible repurchases of the company's 3.75% convertible notes due 2014.

Long Beach, Calif.-based Molina Healthcare is a health management organization that works with Medicaid patients and other government assistance programs.

Existing Molina

Molina's existing 3.75% convertibles due 2014, some of which may be repurchased with proceeds of the offering, were a little lower outright, but it's hedged moved was not ascertained.

"The call option is probably worth 16 points to 17 points, and you've got that and the 6.5 points of interest, so that's 23 points. If they paid 120, they would be getting them a little bit cheap," a New York-based trader said about the possibility that Molina may purchase some of the old notes with proceeds of the new issue.

He noted that InterMune Inc. recently bought back bonds at around 108.5. "But they had 11 points of interest left, and the option wasn't really worth anything. The Molina option is worth something."

Starwood bid higher in gray

Starwood Property's planned $450 million of five-year convertible senior notes was seen bid higher in the gray market by 1.75 points, a trader said.

The deal was talked to yield 4.15% to 4.65% with a fixed initial conversion premium of 10%.

The registered, off-the-shelf deal has a greenshoe of $67.5 million and was being sold via bookrunners Deutsche Bank Securities Inc., BofA Merrill Lynch, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Goldman Sachs & Co.

Co-managers are Evercore Partners Inc. and FBR & Co.

The notes are contingently convertible if shares rise to 130% of the conversion price. They are non-callable for life, with no puts. They also have takeover protection.

Proceeds are earmarked for originating and purchasing additional commercial mortgage loans, and other target assets and investments. Proceeds may also be used to fund a portion of the purchase price of its previously announced acquisition of LNR Property LLC, depending on the timing of that closing.

Greenwich, Conn.-based Starwood is a real estate investment company.

Regeneron 'comes in' on hedge

Regeneron's 1.875% convertibles due 2016 traded at 210.85 versus an underlying share price of $171.96 during the session, a New York-based trader said.

That's a contraction on a hedged basis of 0.25 point, he said.

"The option is worth less because there's a large buyer in the stock that puts a floor in the bond," the trader said.

Regeneron shares traded up strongly in the early going but pared gains later, ending up only $4.47, or 2.7%, to $170.35.

Shares moved up on news that Sanofi, the Paris-based pharmaceutical giant, planned to boost its stake in Regeneron.

Mentioned in this article:

MannKind Corp. Nasdaq: MNKD

Molina Healthcare Inc. NYSE: MOH

PHH Corp. NYSE: PHH

Regeneron Pharmaceuticals Inc. Nasdaq: REGN

Starwood Property Trust Inc. Nasdaq: STWD

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