Dendreon, Goodrich pull back; Forestar sells $110 million bonds; Post looks slightly cheap

By Rebecca Melvin

New York, Feb. 20 - Convertibles were generally a little weaker on Wednesday as a number of issues that have run up strongly in the past two months pulled back along with equities, which dropped into the market close.

The convertibles market was still described as subdued like Tuesday, as the holiday-shortened week has become a popular one for vacations that thins out many trading desks, sources said.

Goodrich Petroleum Corp.'s convertibles slipped as the underlying shares of the Houston-based oil and gas exploration and production company traded down 4.4% in the session ahead of their quarterly earnings report expected out after the market close.

Dendreon Corp.'s convertibles were also a little weaker with shares of the Seattle-based biotechnology company down 2.8% on the day. Dendreon is expected to report earnings Monday, and analysts predict that the company, which develops therapeutics to treat cancer, will show that it swung to a loss for its fourth quarter amid a large revenue drop.

Chiquita Brands International Inc. was also lower on a 3% equity decline for the banana and fresh produce distributor.

"All the names with big run ups have given some up. These things stalled out a couple of days ago," a New York-based trader said.

A second New York-based trader said, "It felt a little heavy, but it's not all that surprising when you're down 100 in the Dow."

Equity markets pulled lower after the release of the minutes from the Federal Reserve's Jan. 29-30 policy meeting, which revealed Fed policymakers are divided about how long to continue quantitative easing.

The Fed's standing policy is that it plans to continue to buy $40 billion per month of mortgage-backed securities and $45 billion per month of longer-term Treasury securities until the employment picture improves. But minutes show some officials said the costs and risks of quantitative easing might lead the Fed to taper or end its purchases before a substantial improvement in the labor outlook.

In the primary convertibles market on Wednesday, two deals that were expected to price after the market close were in focus. After the close, Forestar Group Inc. priced $110 million of seven-year convertible bonds as planned for a 3.75% coupon, which was the midpoint of talk, and with a 37.5% premium, which was the rich end of talk.

The deal had been seen significantly cheap at the midpoint of talk, and its good stock borrow availability meant interest among hedged players was strong, but the deal was only par bid with a plus 1 offer side in the gray market ahead of pricing, a New York-based trader said.

The second deal was Post Holdings Inc.'s planned $175 million of perpetual convertible preferred stock, which was seen about 1% cheap and was plus 0.5 point in the gray market ahead of final terms being fixed.

Goodrich, Dendreon weaker

Goodrich's 5% convertibles due 2029 traded at 97.625 bid, 98 offered on Wednesday, which was down compared to 98.25 on Tuesday.

Goodrich shares traded down 55 cents, or 4.4%, to $11.93 in average to strong volume.

"It was down yesterday, and a little lower again today" a trader said of the convertible bonds.

Goodrich was expected to report fourth-quarter earnings after the market close. Average analyst estimates predict Goodrich's revenue will have grown 27%, but the bottom line will have remained in the red.

The average estimate for earnings per share is for a loss of 8 cents a share.

Dendreon's 2.875% convertibles due 2016 traded at 83.25 during the session, which was down from its recent peak, approaching 84.5, a trader said.

Dendreon shares slipped during the session by17 cents, or 2.8%, to $5.93 in light volume.

"It has not seen that much activity," a trader said of Dendreon's convertibles. "And if someone decides they want to make a sale and no one wants to buy them, they go down."

Nevertheless, the paper had a very strong run, he pointed out. The paper was trading at 70 bid, 72 offered as recently as December.

"That's 15.5 points in two months and a week; that's a lot for a bond," the trader said.

Chiquita's convertibles were down to about 89.5 from 90 bid, 90.25 offered.

"They are giving up a little bit," a trader said.

Forestar prices $110 million

Forestar priced $110 million of seven-year convertible senior notes after the market close Wednesday at par to yield 3.75% with an initial conversion premium of 37.5%, according to a syndicate source.

Pricing of the registered, off-the-shelf deal came following a session in which the underlying shares swooned $2.05, or 10%, to $17.81 in active trade.

During the session, one trader said the deal looked like it would be successful given its strong stock borrow.

"That one looks good," he said.

A second trader said that the deal looked about 6 points cheap at the midpoint of talk, using a credit spread of 650 basis points over Libor and 29% vol.

A Connecticut-based analyst said that he got the paper about 4% cheap, using a slightly wider spread and a higher vol.

In the gray market ahead of pricing, the deal was said to be par bid and 101 offered.

Forestar is an Austin, Texas-based real estate, mineral and fiber resources company. It plans to use proceeds to repay outstanding borrowings under the company's revolving line of credit and for general corporate purposes, including investments in oil and gas exploration, drilling, real estate acquisition and development.

Post looks slightly cheap

Post's planned $175 million of perpetual convertible preferred stock was seen less cheap compared to the Forestar deal, or about 1% cheap, according to a Connecticut-based analyst.

The deal was seen at 100.5 offered in the gray market, with no bid.

"A perpetual preferred is not the most attractive security. It's about the hardest thing to sell in the universe," a New York-based trader said.

The St. Louis-based cereal maker Post planned to price the deal after the market close Wednesday. The deal was talked to yield 3.75% to 4.25% with an initial conversion premium of 20% to 25%.

Proceeds will be used to repay amounts outstanding under the company's term loan facility and for general corporate purposes, which could include financing acquisitions.

Mentioned in this article:

Chiquita Brands International Inc. NYSE: CQB

Dendreon Corp. Nasdaq: DNDN

Goodrich Petroleum Corp. NYSE: GDP

Forestar Group Inc. NYSE: FOR

Post Holdings Inc. Nasdaq: POST

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