Molycorp drops; called Ford preferreds 'come in' a couple of points; Wright Medical jumps

By Rebecca Melvin

New York, Feb. 11 - It was an up and down week for convertible players who saw surprise tenders, takeout news and credit stories develop through the week, starting with Beckman Coulter Inc. on Monday, which lost a few points on hedge on takeout news.

On Friday, Molycorp Inc.'s newly priced 5.5% convertible mandatory preferred shares put in a poor performance on their debut, dropping out of the chute along with the issue's underlying shares, which fell like a stone, market sources said.

A late market on the Molycorp mandatories was 98 bid, 98.375 offered, according to sources. But that wasn't matched to the underlying stock's close at its lows.

Some blamed a concurrent secondary stock offering as being too big and not coming cheaply enough.

"If the stock had traded up, they would have been fine," a New York-based sellside trader said of the Molycorp mandatory preferreds.

Convertible hedge players also lost a couple of points Friday on news of Ford Motor Co.'s huge $2.98 billion redemption of its 6.5% cumulative convertible trust preferred securities.

In terms of activity, "the big thing of the day was Ford," a New York-based sellsider trader said. It affected a lot of players, and there were sellers as well as buyers because there is still some optionality in the paper before the redemption in 30 days, the trader said.

On the upside, Wright Medical Group Inc.'s 2.625% convertibles jumped nearly 5 points outright on a cash tender offer for the $200 million of those bonds outstanding. The Wright Medical bonds were held either outright or on a very light hedge due to their large premium, a New York-based sellside trader said.

Also on Friday, private mortgage insurers MGIC Investment Corp. and Radian Group Inc. were boosted and believed to be better on a hedged basis after statements from Treasury secretary Timothy Geithner about the administration's intentions to wind down government-sponsored mortgage insurers Fannie Mae and Freddie Mac.

But PMI Group Inc., a third big mortgage insurer, wasn't seen benefiting from the pronouncements.

Molycorp trades down

Molycorp's newly priced 5.5% convertible mandatory preferreds were offered at 98.5 on Friday and later seen at 98 bid, 98.375 offered, but that wasn't the bottom in terms of where the underlying shares went out for the day, a New York-based sellside trader said.

That market was when the stock was about $48.50; but shares of the Greenwood Village, Colo.-based producer of rare earth oxides dropped to $47.77, which was off $3.38, or 6.6%, on the day.

Prior to the deal pricing late Thursday, market sources were saying that based on certain valuations, the deal looked cheap. But one New York-based sellside trader said: "I wouldn't call it cheap. It's a pure play on rare earth. If China decides to open the spigots [on rare earth production] and increase exports, then this thing will be worth nothing."

"There's no way for it to look cheap; you're at the mercy of the execution," he said. "It doesn't make sense."

Nevertheless, some valued it cheap at the midpoint of talk using a credit spread of 700 bps over Libor and a 45% vol.

In fact, Molycorp priced an upsized $180 million of mandatories through the rich end of talk for the dividend and at the midpoint of talk for the premium, which was 20%. It also priced 13.5 million shares of common stock at $50.00 per share.

Although that was a 2% discount to the stock's $51.15 close on the New York Stock Exchange Thursday, investors were probably looking for a 5% to 6% discount given the amount of shares priced, a New York-based sellsider said.

The convertibles were a disappointment for investors. One source said he wasn't sure if most participants "puked them out or hedged them up."

Nevertheless, an outright buysider noted that it wasn't the first deal of late to falter on its debut. General Motors Co.'s huge $5 billion of mandatories were initially weak, as were recent issues from Ares Capital Corp. and Clearwire Corp., he said.

"Each cheapened after issuance but then subsequently richened," he said.

Borrow problems cited

Prior to the deal pricing, sources cited stock borrow problems as a strike against the deal.

"Borrow is really tight, but that will become better once the new shares settle. But right now borrow on $25,000 is like minus 10, and deal size is so small [that] allocations are going to be very tight," a sellsider said.

The Molycorp paper was upsized to $180 million from an initially talked $150 million.

Proceeds will be used for working capital and general corporate purposes. Previously Molycorp said it expected to use proceeds to double the production capacity of its Mountain Pass facility in California.

Molycorp has applied to list the mandatory convertible preferred stock on the NYSE under the symbol "MCP PrA."

Ford preferreds come in

Ford Motor's 6.5% preferreds traded "pretty range bound" between 51.05 and 51.20, which was slightly above the redemption plus accrued interest price of 50.85. And that compared to trades with a 53 handle before the redemption announcement.

"The premium is based on the fact that there's a little bit of optionality; if the stock runs to a certain level, you have a little bit over parity," a New York-based sellside trader said.

"If the stock runs to $17.50 to $18.00, then you have parity that goes over the 50.85," the sellsider said. "You do a little bit better than the redemption price, and people are buying above the redemption price," he said.

The securities will be redeemed on March 15 at a redemption price of $50.33 per trust preferred security plus an accrued distribution of $0.5416667 per security, according to the company's news release.

Prior to the redemption date, holders may convert their trust preferred securities into 2.8769 shares of Ford common stock per trust preferred, equivalent to a conversion price of $17.38 per share of Ford common stock.

Redemption or conversion of these securities will reduce Ford's automotive debt by about $3 billion and lower interest costs by about $190 million per year, the filing said. It will also result in a 2011 first-quarter charge of up to about $60 million.

Wright Medical jumps

Wright Medical's 2.625% convertibles due 2014 traded up to 99.5 bid, 100 offered from about 95 after the Arlington, Tenn.-based orthopedic and medical products producer said it would tender those bonds for cash at par.

The tender offer runs until March 11.

Arbitrage players on the news were buying back their stock, which was up 10% intraday and settled higher by $1.43, or nearly 10%, at $16.54.

"That is up 4 or 5 points," a sellsider said, adding that the bonds were held outright as they had too large of a premium to be a hedge play.

Mentioned in this article:

Beckman Coulter Inc. NYSE: BEC

Ford Motor Co. NYSE: F

MGIC Investment Corp. Nasdaq: MGIC

Molycorp Inc. NYSE: MCP

PMI Group Inc. NYSE: PMI

Radian Group Inc. NYSE: RDN

Wright Medical Group Inc. Nasdaq: WMGI

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