Brookdale slips on debut; Forestar scraps deal; Molycorp looks cheap after revised talk

By Rebecca Melvin

New York, June 9 - Brookdale Senior Living Inc.'s newly priced 2.75% convertibles slipped in active trade on their debut in the secondary market Thursday after the Brentwood, Tenn.-based senior living facilities' operator priced the offering of seven-year paper at the cheap end talk.

Brookdale stock took a dive early and the convertibles slipped with it to trade mostly in the 99 to 99.25 context.

Forestar Group Inc. and its subsidiary Forestar (USA) Real Estate Group Inc. canceled a planned $100 million offering of seven-year convertible bonds and a concurrent $150 million of straight notes due to "recent deterioration in the capital markets."

Forestar shares had sunk about 19% in the days prior to the anticipated pricing. "It's shelved. It wasn't a good time," a syndicate source said.

It was the first convertible deal pulled since April when Apollo Investment Corp. canceled a planned $200 million of six-year senior notes. But that deal followed swiftly on the heels of Apollo's $175 million of 5.75% five-year convertibles that the convertibles market absorbed at a discount to par of 98.5 from the business development company in January.

Integra LifeSciences Holdings Corp. launched a $200 million offering of five-year convertible senior notes early Thursday that was seen pricing after the market close.

Molycorp Inc.'s $200 million offering of five-year convertible senior notes was also seen pricing after the market close, and it still looked cheap even after several points of cheapness were taken out of the deal with revised price talk of a 3% to 5% coupon and a 37.5% to 40% initial conversion premium.

Original talk was for a 3.25% to 3.75% coupon and a 27.5% to 32.5% premium.

There was no gray market ahead of final terms seen in either Molycorp or Integra by late afternoon.

Vertex Pharmaceuticals Inc.'s convertibles dropped outright but gained on a hedged basis after the Cambridge, Mass.-based biotechnology company released phase 2 data on a combination of drugs to treat cystic fibrosis that disappointed Wall Street.

Brookdale slips below par

Brookdale's 2.75% convertibles due 2018 traded at below par during their debut session and closed out at 99.25 bid, 99.5 offered versus an underlying share price $23.00, according to a syndicate source.

Brookdale shares traded down sharply in early trading to $22.45 but recovered quickly to steadily toggle the flat line for the remainder of the session.

The outcome for convert players was disappointing, and despite decent demand for the bonds, there was no follow through, sources said.

One source complained that the underwriter didn't support the deal after allocation.

"Look, they priced in a very challenging environment, but for the most part, new issues don't trade down as quickly as this one did," a New York-based sellsider said.

A syndicate source said there was plenty of demand for the bonds and there was a good mix of outright and hedged investors.

"There were some chunky orders from outrights," the syndicate sources said, adding that the paper dipped down to 99 when the shares were lower.

Brookdale priced $275 million of seven-year convertible senior notes after the market close Wednesday at par to yield 2.75% with an initial conversion premium of 27.5%.

The registered offering came at the cheap end of talk, which was for a coupon of 2.25% to 2.75% and a 27.5% to 32.5% the initial conversion premium.

There is a $41.25 million over-allotment option for the deal, which was sold via joint bookrunners Bank of America Merrill Lynch, J.P. Morgan Securities LLC and RBC Capital Markets LLC. Co-managers were CSCA Capital Advisors LLC and Stifel, Nicolaus & Co. Inc.

The notes are non-callable. There is takeover protection and contingent conversion.

Brookdale entered into convertible note hedge and warrant transactions with counterparties of the underwriters concurrently with the convertible deal.

A portion of the proceeds will be used to pay the cost of hedge transactions, which have the effect of raising the conversion premium from the issuer's perspective to 75%, or $40.25 per share.

Together with proceeds from a proposed mortgage loan, proceeds from the convertibles will be used to repay a portion of the company's outstanding mortgage debt and for general corporate purposes.

Molycorp still looks cheap

Molycorp has a large market cap in relation to the debt, a Connecticut-based sellside analyst said, to underscore that from a credit perspective the Molycorp deal looks favorable.

Using a credit spread of 600 basis points over Libor and a 45% vol., the deal looked 3% to 4% cheap, depending on borrow, even on revised talk.

"The cheapness was a little bit impaired, but it's still cheap," the sellsider said.

The revision lowered the previously talked 3.25% to 3.75% coupon and raised the previously talked 27.5% to 32.5% premium talk.

As previously reported, the convertibles have a $30 million greenshoe, and Molycorp also plans to price a concurrent registered offering of common stock.

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

The convertibles will be non-callable with no puts, and there is takeover and dividend protection.

Proceeds are earmarked to fund production capacity and expansion at the company's Mountain Pass, Calif., processing facility and for general corporate purposes.

Molycorp shares were down another 3.6% on Thursday to $51.29, after getting slammed Wednesday after the rare earths company launched the offering.

The Greenwood Village, Colo.-based company is a producer of rare earth oxides.

Vertex gains on hedge

Vertex's 3.35% convertibles due 2015 traded at 120.55 early in the session, which was down 5.575 points on the day, according to Trace data.

Vertex shares dropped on the phase 2 data news and closed down about $5, or 10%, to $48.07.

The Cambridge, Mass.-based biotechnology company released phase 2 data on a combination treatment in patients with F508del mutation that occurs in nearly 90% of cystic fibrosis patients.

But a trader said the convertibles did what they were supposed to do on the stock sell-off, and they gained 1.5 points on a hedged basis to close at 120 bid, 120.5 offered versus the $48.07 share price.

Still, "they're not all that exciting here," the trader said of the Vertex convertibles. "They're not that attractive. And I don't know how they do in a takeover situation."

Mentioned in this article:

Brookdale Senior Living Inc. NYSE: BKD

Forestar Group Inc. NYSE: FOR

Integra LifeSciences Holdings Corp. Nasdaq: IART

Molycorp Inc. NYSE: MCP

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

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