Planned Medicis convertible adds in gray despite revised terms; planned Ryland seen cheap

By Rebecca Melvin

New York, May 10 - Convertibles players eyed two new deals that launched ahead of the market open on Thursday for pricing after the close.

Demand for new paper is high, and issuers are able to come to the market opportunistically for financing, a New York-based sellside analyst said.

Price talk on Medicis Pharmaceutical Corp.'s planned $400 million of five-year convertible senior notes was tightened up during marketing to beyond the rich end of the coupon range, but the paper was still trading up in the gray market by 0.5 point to a point despite being viewed as somewhat rich at the new midpoint of talk.

Ryland Group Inc.'s $150 million offering of six-year convertible bullets was even higher in the gray market by 1 point to 1.75 points; and that paper was viewed as several points cheap at talked terms of 1.625% to 2.125% for the coupon and 37.5% to 42.5% for the initial conversion premium.

Elsewhere, James River Coal Co.'s 3.125% convertibles gained a point to 35.25 after the Richmond, Va.-based coal producer posted a narrower-than-expected quarterly loss given a rise in metallurgical coal shipments and cost cutting.

Microchip Technology Inc. saw its convertibles in trade and higher after a Barclays Capital research note Thursday recommended them as a promising trade idea.

Equities traded mostly higher on Thursday, breaking a losing streak that had them languishing for about a week. A slight drop in the number of unemployment claims last week was said to have encouraged investors.

The U.S. Labor Department reported that applications for unemployment benefits dropped 1,000 to 367,000 in the week ending May 5, and the four-week average fell 5,250 to 379,000.

The Dow Jones industrial average gained 20 points, or 0.2%, to 12,855.04, and the Standard & Poor's 500 stock index edged up 3.41 points, or 0.3%, to 1,357.99, but the Nasdaq Composite index shed 1 point to 2,933.64.

Planned Medicis looks rich

Despite some seeing several points of richness at the new midpoint of talk, the planned Medici convertibles looked "fine," according to an East Coast-based buysider.

Price talk was revised on the $400 million of five-year convertible senior notes to a coupon of 1% to 1.5% and an initial conversion premium of 25%, which was tightened from original talk of 1.5% to 2% for the coupon and toward the tight, or rich, end of 20% to 25% premium talk.

Using a credit spread of 375 basis points over Libor and a 24% vol. the deal looked like fair value of 97 at the new midpoint, a New York-based analyst said.

"It looks a bit rich at the mids on the new price talk," an analyst said.

Shares of the Scottsdale, Ariz.-based specialty pharmaceutical company fell 86 cents, or 2.2%, to $37.66 Thursday.

The registered, off-the-shelf deal was being priced by Deutsche Bank Securities Inc. and J.P. Morgan Securities LLC as joint bookrunners.

In determining the valuation, a tighter credit of 350 bps could be argued, and then the deal would be a little less rich at around 97.56, the analyst said.

The bonds are non-callable and have net share settlement and dividend protection via conversion rate adjustment.

Proceeds are intended for general corporate purposes, which may include working capital, capital expenditures, repurchasing shares of common stock, repaying outstanding debt and corporate acquisitions.

In addition the company intends to enter into convertible note hedge and warrant transactions, and a portion of proceeds from the note and warrant sales will be used to fund the hedge transactions.

Planned Ryland looks cheap

The planned Ryland deal looked about 1.8% cheap at the midpoint of talk using a 425 bps credit spread over Libor and a rather high vol. of 40% at the midpoint of talk, according to a sellsider.

The registered, off-the-shelf deal, which has a $22.5 million over-allotment option, was talked to yield 1.625% to 2.125% with an initial conversion premium of 37.5% to 42.5%.

Shares of the Calabasas, Calif.-based home builder and mortgage finance company fell 77 cents, or 3.3%, to $22.48.

The Ryland deal was said to be attractive to convertible arbitrage players and was seen in the gray market at 101 bid, 101.75 offered.

"The Ryland looks OK too," an East Coast-based buysider said. He said it's a smaller deal but a hot industry right now.

Citigroup Global Markets Inc. and JPMorgan were the joint bookrunners, with UBS Securities LLC acting as co-manager.

The notes are a six-year bullet, with no calls or puts.

Proceeds will be used for general corporate purposes, including repayment or repurchase of debt.

James River adds on earnings

James River's 3.125% convertibles due 2018 traded at 35.25 on Thursday, which was up about a point on the day, a Connecticut-based trader said.

The James River 4.5% convertibles due 2015 saw only one small trade at 45.25.

James River shares spent part of the day in positive territory but ended lower by 13 cents, or 3%, to $4.06.

James River reported a first-quarter net loss of $15.7 million, or 45 cents a share, which compared to a loss of $7.6 million, or 28 cents a share, in the year-earlier quarter. But that loss was still much smaller than the 65 cent loss per share that analysts were expecting.

Coal sales rose in the quarter to $279.8 million, and analysts had been expecting the company to post sales of $277.5 million.

James River said it is withdrawing its 2012 capital expenditure forecast of $125 million due to the volatile coal market. Demand for metallurgical coal had shot up in early 2011 on strong demand from steelmakers and supply shortages due to floods in Australia, the top coal producer.

Microchip trades higher

Microchip's 2.125% convertibles due 2037 traded last at 123, according to Trace data.

The bonds were quoted at 120.5 bid, 121 offered versus an underlying share price of $32.00 ahead of the open, according to Barclays convertibles research analyst Manoj Shivdasani, Venu Krishna and Piyush Anchliya.

Using the mids of 120.75 versus a $32.00 stock price and a 450 bps credit spread with 20% vol., the bonds carry a high effective current yield of 5.6%, including the dividend adjustment, a premium of just 6.22 points, 91% delta and a 2.8-year breakeven, which contrasts with 5.6 years of hard call protection and a provisional call threshold of $41.91, the analysts said.

With the recent stock decline, short interest could come in and ease up borrow, which is running about 75 bps and impacting valuation by about 3 points, the analysts said.

Microchip's stock price at $31.93 as of the Thursday close is starting to look reasonable, they said.

Given the recent pullback in the stock price and the attractive convertible valuation, the analysts said they think investors should begin to consider a long position in the name.

Mentioned in this article:

James River Coal Co. Nasdaq: JRCC

Medicis Pharmaceutical Corp. NYSE: MRX

Microchip Technology Inc. Nasdaq: MCHP

Ryland Group Inc. NYSE: RYL

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