Earthlink, EMC, deCODE rise; Bunge climbs on new talk; Health Care, China Medical face tough borrow

By Kenneth Lim

Boston, Nov. 14 - New issues had a strong showing in the convertible bond market on Tuesday, with freshly priced paper by Earthlink Inc. and EMC Corp. gaining on their debuts.

deCODE Genetics Inc.'s add-on convertible, which was offered at similar terms and prices as an older series of notes, also did well despite concerns about the company's liquidity.

Meanwhile, Bunge Ltd.'s expected $500 million offering was bid up in the gray market, as revised price talk improved the attractiveness of the deal.

Deals by Health Care REIT Inc. and China Medical Technologies Inc. remained quiet in the gray market amid talk of poor stock borrow for both names.

Beyond the new deals, Dick's Sporting Goods Inc.'s 1.606% convertible due 2024 jumped about 6 points outright, but was weaker on a dollar-neutral basis after the company said it was buying Golf Galaxy Inc. for $225 million in cash.

The convertible was marked at 96.25 bid, 96.75 offered against a stock price of $53.20 on Tuesday. Dick's stock (NYSE: DKS) jumped 10.79% or $5.28 to close at $54.20.

"The DKS converts were slightly lower dollar-neutral," a sellside convertible bond trader said. "This is a cash acquisition, so the credit's going to be a little weaker. They may also have to raise some more cash."

Pittsburgh-based Dick's on Monday said it will buy Golf Galaxy for $18.82 in cash per Golf Galaxy common share. Dick's, a sporting goods retailer, said it expects the deal to be accretive in fiscal 2007, and does not foresee completion until Feb. 6, 2007, at the earliest.

Pier 1 Imports Inc.'s 6.375% convertible due 2036 shrugged off rumors of a buyout. The lightly traded convertible saw no action on Tuesday despite reports that Danish retailer Jakup Jacobsen is poised to bid for Pier 1, a Fort Worth, Texas-based home furnishing retailer.

"Nobody ever trades those," the sellside trader said. "I think guys who got them just held on to them."

Jacobsen is a minority shareholder of Pier 1, which said in May it was considering its strategic options. Pier 1 said it does not comment on market rumors.

Pier 1 stock (NYSE: PIR) closed at $7.62, up by 20.57% or $1.30.

EMC, Earthlink rise on debuts

EMC's $3.45 billion of 1.75% convertible senior notes due 2011 and 2013 opened higher on Tuesday after the deal priced within talk, but traders said most of the volume seemed to be linked to the underwriters.

The 1.75% series due 2011 was quoted at 101.25 bid, 101.5 offered against a stock price of $12.65, while the 1.75% convertible due 2013 was 101.25 bid, 101.5 offered versus $12.61. EMC stock (NYSE: EMC) rose 0.63% or 8 cents to close at $12.69.

A sellsider said the deal did not seem to be changing hands actively.

"EMC barely traded on the Street," the sellsider said. "It looked like they were mostly locked up up there with the underwriters."

EMC on Monday priced its dual-tranche offer at a coupon of 1.75% and an initial conversion premium of 27.5% for both series. The deal amount includes a $450 million over-allotment option that was immediately exercised.

The notes were offered at par, and the two equally sized series were talked at a coupon of 1.5% to 2% and an initial conversion premium of 25% to 30%.

Goldman Sachs, Lehman Brothers and Citigroup were the bookrunners of the Rule 144A offering.

EMC, a Hopkinton, Mass.-based information technology solutions provider, will use the proceeds to fund convertible note hedge and warrant transactions, repay $2.2 billion of a senior debt and concurrently buy back $945.8 million of its common stock.

"I think they priced them correctly," a buyside convertible bond trader said. "They were $1 to $1.25 better on a dollar-neutral basis, but I don't think people were particularly happy with the allocations."

Meanwhile, Earthlink's new 3.25% convertible senior note due 2026 also rose after it priced within talk.

The Earthlink convertible was quoted at 101.625 bid, 102 offered at its opening stock price of $6.37 on Tuesday. Earthlink shares (Nasdaq: ELNK) closed at $6.45, higher by 0.78% or 5 cents.

"That was definitely an interesting deal," a sellside convertible bond analyst said. "It came about a point cheap...It looks like you could play it whether you were outright or hedge."

Earthlink priced its $225 million deal at a coupon of 3.25% and an initial conversion premium of 42.5%. The notes were offered at par, and talked at a coupon of 3% to 3.5% and an initial conversion premium of 37.5% to 42.5%.

There is an over-allotment option for a further $33.75 million.

UBS Investment Bank and Banc of America Securities were the bookrunners of the registered off-the-shelf offering.

Earthlink, an Atlanta-based internet service provider, said the proceeds of the deal will be used for convertible note hedge and warrant transactions and for general purposes.

deCODE add-on rises

deCODE's new 3.5% convertible senior note due 2011 gained about 4 points outright on Tuesday, as the cheapness of the deal overcame concerns about the company's outlook.

The new convertible traded at 74 against a stock price of $5.02 at the close. deCODE stock (Nasdaq: DCGN) slipped 0.79% or 4 cents to close at $5.02.

deCODE Genetics Inc. on Tuesday sold the $65 million deal at an offer price of 70 apiece, with a coupon of 3.5% and an initial conversion premium of 176.7%.

The initial conversion price was $14, the same as deCODE's existing 3.5% convertible due 2011, which was issued in April 2004. All other terms between both notes are substantially the same, except that the new notes have stronger takeover protection.

There is an over-allotment option for a further $15 million.

Lehman Brothers was the bookrunner for the Rule 144A offering.

deCODE, a Reykjavik, Iceland-based drug maker, said the proceeds of the new offering will be used general purposes and to advance its drug and diagnostic discovery and development programs.

deCODE is "in a real cash crunch," a sellside convertible bond analyst said, and needs to push out its pipeline of new drugs enough to sell them or find partners in order to survive. The new offering brings some relief, but it remains to be seen whether it will be enough.

"It's a lot of money in terms of their market cap, but it only gives them another quarter or two at the current burn rate," the analyst said.

A buyside convertible bond trader, who said the deal was placed with a small number of investors, agreed that the name was risky. But the buysider noted that "a lot of the small biotechs are risky."

"At least it's a hedgeable bond," the buysider said. "It also depends on whether you think they have a product or not. They have a database of the human genome...it might or might not lead to a new drug, but it is an amazing way to lead to drug discovery."

Bunge revises talk, bid up

Bunge's planned $500 million of perpetual convertible preferred stock was bid 0.75 point higher in the gray market on Tuesday, after deal talk was revised ahead of expected post-market pricing.

Talk was changed to a dividend of 4.875% and an initial conversion premium of 40%, from the original talk at a dividend of 4.5% to 5% and an initial conversion premium of 35% to 40%.

Each preferred share is offered at par of $100.

There is an over-allotment option for a further $75 million.

Credit Suisse is the bookrunner of the registered off-the-shelf offering.

Bunge, a White Plains, N.Y.-based agribusiness and food retail company, said the proceeds of the offering will be used for working capital and general purposes, which may include acquisitions and repaying debt.

A sellside convertible bond analyst said the new talk appeared more attractive, rendering the deal almost 2% cheap at the midpoint of the new guidance.

Another convertible analyst agreed with that valuation, noting the Bunge's credit was around a BBB-.

"It's modeling slightly cheap at the mids," the analyst said.

Health Care, China Medical lack borrow

Health Care REIT's planned $300 million of 20-year convertible senior notes, which was expected to price after the market closed, was quiet in the gray market on Tuesday amid possible issues with the stock borrow.

"It looks like it might come at the mids, or at the mids to the cheaps," a buyside convertible bond analyst said. "On the hedge side, there's an issue with the borrow."

Health Care REIT's deal was talked at a coupon of 4.375% to 4.875% and an initial conversion premium of 20% to 25%.

The convertibles will be offered at par.

There is an over-allotment option for a further $45 million.

UBS Investment Bank and Deutsche Bank are the bookrunners of the registered off-the-shelf offering.

Health Care REIT, a Toledo, Ohio-based real estate investment trust that focuses on healthcare and senior housing facilities in the United States, said the proceeds of the deal will be used to invest in more health care and senior housing properties, and to repay its unsecured debt.

A sellside convertible analyst said the deal modeled about 1% cheap at the cheap end of talk, and just a little under par at the mids.

"I think it's going to have to come at the cheap end or be reoffered," the sellsider said.

China Medical's planned $100 million offering of five-year convertible senior subordinated notes also was seen as hampered by the lack of borrow.

"There's no borrow," a buyside convertible trader said. "You might be able to get a few shares, but most guys won't be able to get it."

China Medical's deal, which is expected to price Wednesday after the market closes, is talked at a coupon of 3.5% to 4% and an initial conversion premium of 20% to 25%.

The notes are offered at par.

There is an over-allotment option for a further $25 million.

Merrill Lynch is the bookrunner of the Rule 144A offering.

China Medical, a Beijing-based maker of cancer treatment devices, said it will concurrently repurchase $30 million of its common stock using the proceeds of the deal. It will also use the proceeds for general purposes and to acquire businesses, products and technologies.

"They're having a hard time figuring out the borrow," a sellsider said. "There's a very difficult borrow on this...but it's modeling about 1% cheap."

A convertible bond analyst noted that, besides the borrow issue, investors must also take into account the other risks associated with investing in a China-based company.

"You need to factor in currency and sovereign risk," the analyst said. "Otherwise it looks like a solid little company."

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