Integra leads new deals with debut gain; Ciena gains dollar-neutral; Dendreon, Cogent set cheaper than talk

By Kenneth Lim

Boston, June 6 - The convertible market was swamped with new deals on Wednesday, with Integra LifeSciences Holdings Corp. leading the pack with a slight gain after the company upsized the deal and priced it within talk.

Ciena Corp. was slightly better on a dollar-neutral basis. Its new convertible was seen as modestly cheap after it priced within talk.

Dendreon Corp., however, was quiet on its debut with hedge funds mostly staying out of the deal and outright investors expected to hold onto its new notes.

Cogent Communications Group Inc. was seen unchanged from its reoffered price, although the convertible was sold cheaper than talk amid criticism that the coupon was too low.

Integra improves on debut

Integra's two new convertibles were up right off the blocks on Wednesday after the deal arrived near the midpoint of talk.

The 2.75% convertible senior note due 2010 traded at 100.625 against a stock price of $51.50 while the 2.375% convertible senior note due 2012 changed hands at 100 versus the same stock price. Both convertibles were offered at par. Integra stock (Nasdaq: IART) closed at $50.34, lower by 3.14% or $1.63.

"We saw a lot of trades in the new IARTs," a sellsider said. "Most trades are between par and 100.875."

Integra on Tuesday priced the upsized $150 million three-year series with an initial conversion premium of 27.5% while the equally sized five-year series was set with an initial conversion premium of 25%.

The three-year tranche was talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 27.5% to 32.5%. The five-year notes were talked at a coupon of 2.125% to 2.625% and an initial conversion premium of 22.5% to 27.5%.

The size of each tranche was originally $125 million with an over-allotment option for a further $25 million. The greenshoe is now $15 million for each series.

JPMorgan, Banc of America, Morgan Stanley, Deutsche Bank and Citigroup were the bookrunners of the Rule 144A offering.

Integra, a Plainsboro, N.J.-based maker of surgical implants and medical instruments, said it will use the proceeds of the deal to fund convertible note hedge and warrant transactions, buy back $75 million of its common stock, repay outstanding bank loans and fund general purposes.

"It looked fair," a sellside convertible analyst said. "It set up only fairly well. The short one had a good upside-downside tradeoff. The long ones have very good but different upside-downside tradeoff."

Ciena gains dollar-neutral

Ciena's new 0.875% convertible due 2017 rose early Wednesday despite an initial decline in the stock with the deal seen as reasonably priced.

The convertible traded at 101 against a stock price of $33.17 on Wednesday. The convertible was offered at par. Ciena stock (Nasdaq: CIEN) gained 0.93% or 31 cents to finish at $33.48.

Ciena priced the $450 million deal with an initial conversion premium of 15%. The 10-year bullet was talked at a coupon of 0.625% to 1.125% with an initial conversion premium of 13% to 17%.

There is an over-allotment option for a further $50 million.

Deutsche Bank was the bookrunner of the registered offering.

Ciena, a Linthicum, Md.-based supplier communications networking equipment and software, said about $38.25 million of the proceeds will fund a call spread option on its common stock, while the rest of the proceeds will be used for general purposes, which could include buying back its outstanding 3.75% convertible senior notes due 2008.

"We did see Ciena trade about plus-half before the open," a sellside convertible strategist said. "It's better dollar-neutral. People bought into the volatility-credit pairing. There appears to be some discrepancy between the listed volatility and the historic volatility. It makes sense, compared to where the old Ciena 0.5s were trading."

A convertible trader said that although the convertible had a low coupon, the initial conversion premium was small.

"There's potential for better volatility in the stock, so 15% is not ridiculous," the trader said. "The one thing I didn't like was the 10-year structure. I don't like being locked in for so long."

Dendreon quiet on debut

Dendreon's new 4.75% convertible senior subordinated note due 2014 stayed quiet on its debut as outright accounts stayed away with no stock to borrow.

"We didn't see it," a sellsider said. "I don't think we will ever see it. Well, I shouldn't say that, but...the borrow on the stock is non-existent, so it obviously went to guys who liked the story, and the inclination of these guys I would expect would be to hold it."

Dendreon priced its $75 million deal on Tuesday after the market closed with an initial conversion premium of 17.5%. The convertibles were offered at par. The deal was originally talked at a coupon of 3.5% to 4% and an initial conversion premium of 20% to 25%. Dendreon stock (Nasdaq: DNDN) fell 5.6% or 49 cents on Wednesday to settle at $8.26.

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

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

Dendreon, a Seattle-based biotechnology company, said the proceeds of the deal will be used to develop the commercialization and manufacturing of its prostate cancer drug Provenge, research other products and fund general purposes.

A convertible analyst said the cheaper-than-talk pricing was partly expected.

"It's not surprising," the analyst said. "With no borrow, what were they expecting? I can't even model it."

The analyst said the convertible was a "very binary" investment, which could make or break depending on whether the U.S. Food and Drug Administration is willing to approve Provenge based on interim data. If the FDA rejects the interim data, Dendreon will have to submit more data and pay for more trials and delay marketing of the drug, the analyst said. Approval based on interim data could arrive in the second half of 2008, while approval based on final data is not expected until 2010, the analyst noted.

"This [deal] gets them only past that interim data," the analyst said. "The question is will it get approved, and will it get approved on interim data? The problem is if the FDA doesn't approve the interim data...the stock's going to dip on the bad news and they're going to need financing and the company will need to raise money again. And the last time you want to find money is when you come out with bad news. It just would be a bad sequence of events if the interim data doesn't get approved."

Another analyst said the deal was essentially an outright bet on the company.

"With no borrow on a late-stage biotech with no approved drugs, you're basically making a bet on an approval, which is fine if you have a borrow and you can set it up however you want," the second analyst said. "I guess it could be a good alternative to owning the equity, but absent that you really need to be sold on the company and the space."

Cogent flat in start

Cogent Communications' new 1% convertible senior unsecured note due 2027 was seen flat around its reoffered price early Wednesday after the deal was sold cheaper than talk as critics thought the low coupon and high premium were too aggressive.

"I find it amazing that CCOI whose 7.75% traded not long ago in mid 80's can get away with selling 1%, up 75%," a sellsider said. "God bless them!"

The convertible was offered at its reoffered price of 97.75 versus a stock price of $28.10 early Wednesday and was seen trading at similar levels near the open. Cogent stock (Nasdaq: CCOI) closed at $26.50, lower by 5.69% or $1.60.

Cogent priced the $200 million overnight deal with an initial conversion premium of 75%. The deal was talked at a reoffer price of 98.75 to 99.25 with the coupon and conversion premium already fixed.

There is an over-allotment option for a further $20 million.

Bear Stearns, UBS Investment Bank, RBC Capital Markets and Cowen & Co. were the bookrunners of the Rule 144A offering.

The conversion rate will be increased if the volume weighted average price of Cogent's common stock exceeds the initial conversion price of $49.18.

Cogent, a Washington-based provider of high-speed internet access, said about $10.6 million of the net proceeds will be used to redeem its outstanding 7.5% convertible subordinated notes due June 15, 2007, while $50 million will be used to buy back its common stock. The remaining proceeds will be used for general purposes.

A convertible analyst said it was difficult to model the deal without more details about the incremental share factor, but the deal could have been interesting at first glance.

"It looks like an interesting company," the analyst said. "It could be an acquisition target with growth, but there's definitely and execution risk there. If they execute it well, there could be stock upside and the credit could tighten. I like the space they're in and they're right on the cusp of some potentially explosive growth, but it could go either way."

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