Contagion hits China Medical; Forestar looks a little cheap; Molycorp, Brookdale launch

By Rebecca Melvin

New York, June 7 - The convertible bond market felt a little heavier again on Tuesday as action picked up from Monday's sluggish pace, and players were skittish about buying or holding paper in the international space, particularly issues attached to China.

China based but New York-listed China Medical Technologies Inc. was active, and the convertibles dropped together with the underlying shares amid no apparent news but rather a general uneasiness surrounding China-based companies following the allegations of fraud surrounding Sino-Forest Corp.

Sino-Forest's convertibles were in action for a third consecutive day since those allegations, which the company has denied.

The Sino-Forest 4.25% convertibles due 2016 were seen at 47 bid at the end of the day Tuesday, which was toward the high end of a wide range of trading since Friday.

"Everybody is scared to touch anything international; the market doesn't feel particularly healthy right now. But it looks like we're not far away from good support levels in stocks," a New York-based sellside trader said.

A second sellsider, this one based on the West Coast, said, "I looked at a couple of things this morning and everything looks a little weaker, like about 0.5 point on swap over the last week."

Some of the more established names did OK Tuesday, with Tyson Foods Inc., which has been heavy of late, doing a little better Tuesday, a trader said.

Primary gains momentum

The primary market picked up.

Brookdale Senior Living Inc. launched an offering of $275 million of seven-year convertibles that were seen pricing after the market close Wednesday and were talked at a coupon of 2.25% to 2.75% and an initial conversion premium of 27.5% to 32.5%.

And Molycorp Inc. launched an offering of $200 million of five-year convertible senior notes that was seen pricing after the market close Thursday and which was talked to yield 3.25% to 3.75% with an initial conversion premium of 27.5% to 32.5%.

Forestar (USA) Real Estate Group Inc., a subsidiary of Forestar Group Inc., was looking a little bit cheap to market players, who eyeballed talk for a 3.5% to 4% coupon and an initial conversion premium of 22.5% to 27.5%. Pricing was expected Wednesday after the market close.

"Typically with deals like, if it's coming Wednesday, then the hedge guys will look at it Wednesday," a New York trader said.

Equities slumped in the final hour of trading - having earlier sported gains - as Federal Reserve chairman Ben Bernanke gave a late afternoon speech in which he stood by previously enunciated expectations about the U.S. economy and Fed policy.

He said he believes the U.S. economy will pick up in the second half of the year and that he believes the economy still needs the benefit of low interest rates.

Contagion hits China Medical

China Medical's 4% convertibles due 2013 traded at around 75 to 75.5, which was down from a small trade Monday at 85 and general trades in the 83.5 area over the last few days, a Connecticut-based sellside analyst said.

China Medical's 6.25% convertibles due 2016 were said to have traded in the low 70s versus a share price of $7.40.

The Beijing-based and New York-listed medical device maker priced $125 million of the 6.25% convertibles last December and used nearly all of it to buy back its 3.5% convertibles due in November of this year.

On Tuesday, China Medical shares slid $1.54, or 17%, to $7.65 in extremely heavy volume.

There was no particular news on the company, although the company was presenting at a Jefferies conference Wednesday afternoon, and it reported earnings last week, sources noted.

China Medical is engaged in the commercialization, manufacture and sale of medical devices and supplies to customers primarily in the People's Republic of China. The company develops, manufactures and markets advanced immunodiagnostic and molecular diagnostic products. It is based in Beijing, has nearly 1,000 employees and has a market cap of $296.54 million.

Market sources said that the problem with China Medical was that any China-based issues are in disfavor in the convertibles market right now following allegations of fraud surrounding the China-based and Toronto-listed commercial tree plantation operator Sino-Forest.

Sino-Forest's 4.25% convertibles due 2016 were 47 bid, 51 offered near Tuesday's close; and the Toronto Stock Exchange-listed shares moved down again by 14 cents, or 2%, to $6.85 on Tuesday.

Muddy Waters Research, based in Hong Kong and operated by known short-seller Carson Block, put out a research report last week that said Sino-Forest overstated its holdings in China and that its financial reporting was tantamount to fraud. Sino-Forest has denied the claims but also indicated that it was going to investigate the matter.

One trader talked about dealers that were not paying close attention to the tone of the session "getting stuffed" on some bonds having at the high end of the day's trading range but below the previous day's price.

"They got stuffed because someone wasn't paying attention," the trader said.

Forestar looks slightly cheap

Forestar's $100 million of seven-year non-call convertibles looked slightly cheap based on talked terms of 3.5% to 4% on the coupon and 22.5% to 27.5% on the premium.

In addition, it could be seen a little cheap given that it breaks even within call protection.

"That's one way of looking at cheapness. It looks cheap from that perspective," a New York-based sellside analyst said regarding the call.

As previously reported, Forestar plans to price the convertible bonds, which have a $15 million greenshoe, concurrently with $150 million of eight-year straight notes, after the market close Wednesday.

Goldman Sachs & Co. is the bookrunner of the Rule 144A offering.

Forestar intends to enter into privately negotiated capped call transactions with one or more financial institutions, which may include the initial purchasers.

Proceeds from the convertible offering are earmarked for general corporate purposes, including investments in strategic growth opportunities, and to pay the cost of the capped call transactions.

Proceeds of the secured straight notes are earmarked to repay borrowings under Forestar's senior secured term loan, with any remaining amount being used for general corporate purposes, which may also include repayment of borrowings under its revolving loans.

Forestar is an Austin, Texas-based company engaged in real estate and natural resources businesses.

Molycorp seeks $200 million

Molycorp plans to price $200 million of five-year convertible senior notes that were seen pricing after the market close Thursday.

The deal was talked at a coupon of 3.25% to 3.75% with an initial conversion premium of 27.5% to 32.5%, according to market sources.

Molycorp also announced a concurrent registered offering of 10 million shares of common stock.

J.P. Morgan Securities LLC and Morgan Stanley & Co. Inc. are joint bookrunners of both the Rule 144A convertibles offering and the secondary offering.

Molycorp priced an upsized $180 million of three-year mandatory convertible preferred stock in February. That paper priced with a 5.5% coupon and a 20% initial conversion premium.

The Greenwood Village, Colo.-based company is a producer of rare earth oxides and is expanding production capacity at its Mountain Pass facility in California.

Mentioned in this article:

Brookdale Senior Living Inc. NYSE: BKD

China Medical Technologies Inc. Nasdaq: CMED

Forestar Group Inc. NYSE: FOR

Molycorp Inc. NYSE: MCP

Sino-Forest Corp. Toronto: TRE

Tyson Foods Inc. NYSE: TSN

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