Planned Toll Brothers deal gets tepid reaction; Medicis mixed; Knight Capital edges up

By Rebecca Melvin

New York, Sept. 4 - A new deal and some M&A activity enlivened the convertible bond market on Tuesday, which was the first day back after the long Labor Day weekend - not to mention the long summer period.

The activity was mixed for market players, however.

Toll Brothers Inc. launched a $250 million offering of 20-year exchangeable notes that were seen not all that interesting at talked terms of a 0.25% to 0.75% yield with a 47.5% to 52.5% initial conversion premium.

Final terms were seen being fixed after the market close on Tuesday.

"The reception for this one is not so hot so far," a West Coast-based trader said of the Toll Brothers deal.

Medicis Pharmaceutical Corp.'s convertibles gained outright but fell on a dollar-neutral, or hedged, basis on news that Valeant Pharmaceuticals International Inc., a former convertible issuer, has agreed to acquire the Scottsdale, Calif.-based specialty pharmaceuticals maker for $2.6 billion in cash, or $44 per share, representing a 39% premium from the stock's Aug. 31 close. The acquisition will include payout of the convertible bonds.

The bonds were seen coming in 3 to 5 points on a hedged basis but added about 9 points outright.

Knight Capital Group Inc. saw its convertible bond gain small in trade, up about 0.125 point to 89.375 bid, 89.5 offered amid no real news, a Connecticut-based trader said.

Elsewhere on the primary market front Tuesday, Provectus Pharmaceuticals Inc. said it plans to price an offering of series A 8% convertible preferreds at $4 per share in tandem with an offering of series D warrants, according to a company source.

New York-based Maxim Group LLC is underwriting the offerings.

Proceeds will be used for general corporate purposes.

The convertible preferred stock will be convertible into common stock.

Further details were not yet available for the offerings, which are part of a shelf prospectus filed about two months ago by the Knoxville, Tenn.-based dermatology and oncology pharmaceutical company.

And internationally, British Land (Jersey) Ltd., a subsidiary of the British Land Co. plc, plans to price £300 million of five-year convertible bonds that were talked to yield between 1.375% and 1.875% with an initial conversion premium of between 27.5% and 32.5%, according to a release.

The Regulation S offering has an increase option of up to an additional £100 million of bonds and is being sold via joint bookrunners UBS Ltd., Morgan Stanley & Co. International plc and the Royal Bank of Scotland plc.

British Land in a London-based real estate company.

Planned Toll Brothers panned

The market's response to the planned $250 million of 20-year exchangeable notes of Toll Brothers left something to be desired, and players "were looking at the Tolls, just on the terms, and trying to figure out how to make money," a trader said.

The deal was seen pricing after the market close and talked to yield 0.25% to 0.75% with a 47.5% to 52.5% initial conversion premium.

The Rule 144A deal has a $37.5 million over-allotment option and was being priced by Toll Brothers Finance Corp., a wholly owned subsidiary of Toll Brothers, a Horsham, Pa.-based residential home builder.

Underwriters involved included Deutsche Bank Securities Inc., Citigroup Global Markets Inc., RBS Securities Inc., BMO Capital Markets Corp. and Goldman Sachs & Co.

A Connecticut-based analyst said, "There's not much juice in them."

Although Toll Brothers is a BB+ rated company, there were some using BBB- spread equivalents to make the new deal about 2% cheap, according to one source.

One trader said using a credit spread of 225 basis points to 250 bps over Libor and a 36% vol. was about right given that credit default swaps in the name were 150 bps over.

In addition, there is straight debt that matures only two months before the first put of the new deal that has about a 275 bps spread, based on Tuesday trades.

"Almost any way you modeled it, the bond was not that interesting, and no one I know admitted to going in on it," a West Coast-based trader said.

The notes are non-callable until Sept. 15, 2017. There are puts Dec. 15, 2017, Sept. 15, 2022 and Sept. 15, 2027. There is contingent interest of 0.5% at a price trigger of 120%.

Medicis mixed on buyout

Medicis' 1.375% convertibles due 2017 started out trading Tuesday in the 99 context and lifted to 108, going out at 108 bid, 108.50 offered versus an underlying share price of $43.65, according to one market source.

A second source had them going out at 108 bid, 108.25 offered versus a share price of $43.60.

That compared to 98.312 bid, 98.812 versus an underlying share price of $31.73 before the news.

The paper gained on an outright basis but lost 3 to 5 points on a hedged basis depending on the hedge.

Shares of the Scottsdale, Calif.-based specialty pharmaceutical company surged $12.09, or 38%, to $43.65in ultra-heavy volume.

The bonds lost on hedge due to the fact that the relatively new paper, issued in May, had richened so much in that time and the prospectus take out matrix only gives so much in the event of a takeout.

The make-whole table is set when the bonds are issued, so it doesn't take into account richening in the secondary market.

A 43% hedge was the breakeven hedge, and some had them on a 46% to 48% delta, one trader said.

However the 1.375% convertibles are owned by many outright accounts, and "they made out very well on this one," a New York-based trader said.

Medicis, which is focused on dermatology and aesthetic treatments, priced the upsized $500 million of convertible bonds in May.

Under terms of the M&A deal, Medicis plans to repurchase or pay the conversion consideration for its $168.9 million of 2.5% contingent convertible senior notes due 2032, $200,000 of 1.5% contingent convertible senior notes due 2033 and $422.2 million of 1.375% convertible senior notes due 2017 using proceeds from a debt issuance by Valeant Pharmaceuticals International Inc., a Mississauga, Ont.-based specialty pharmaceutical company.

According to an 8-K filing with the Securities and Exchange Commission, Valeant Pharmaceuticals intends to issue up to $2.75 billion of high-yield securities to fund its acquisition of Medicis. The transaction, expected to close in the first half of 2013, is valued at about $2.6 billion.

Mentioned in this article:

Knight Capital Group Inc. NYSE: KCG

Medicis Pharmaceutical Corp. NYSE: MRX

Toll Brothers Inc. NYSE: TOL

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