Central European drops on restatement news; Illumina comes in slightly; Medicines Co. on tap

By Rebecca Melvin

New York, June 5 - Central European Distribution Corp. dropped about 6 to 7 points on Tuesday along with a slump in the underlying shares after the Polish vodka producer said it may need to restate its financial results for 2010 and 2011.

Illumina Inc. traded in size and looked to have come in about a half-point on a dollar-neutral, or hedged, basis amid no particular news for the San Diego-based gene-sequencing company.

Dendreon Corp. convertibles were said to have firmed up a bit from their drop on Monday, but they were still trading down from the Monday news on rival Johnson & Johnson's Zytiga prostrate drug.

Elsewhere, convertibles traded mildly, market players said, as they eyed developments in the Spanish debt crisis and continued to play it safe in generally skittish markets.

Gilead Sciences Inc.'s three convertible bonds were trading actively, but were called unchanged on a hedged basis, according to a New York-based sellside trader.

SanDisk Corp. was also trading actively, but essentially unchanged dollar neutral.

In the primary arena, Medicines Co. launched a $200 million offering of five-year convertibles ahead of the market open that were said to have been upsized during marketing to $225 million, according to a market source. Syndicates sources did not confirm the upsizing.

The Medicines deal was viewed as 1% to 3% cheap, according to market players, and it traded in the gray market ahead of final terms being fixed at par plus 1 to plus 2. Pricing was expected after the market close on Tuesday.

The convertibles market was characterized as quiet on Tuesday with no resolution in sight in the European debt crisis.

"The only thing that will cure it is more time," an East Coast-based buysider said of the troubled euro zone. "I think we just have to live with this kind of uncertainty for a while."

But despite the drop in equities and weaker high-yield debt, the convertible bond market has held up relatively well over the last few weeks, he said.

"You don't have a lot of people aggressively reducing holding. There is not a wholesale selloff. At the same time, it's hard to move around when you can't buy much in size," he said.

To date, there have been no widespread redemptions. That's the risk that one runs in the high-yield market, and if there were redemptions in that market, the convertible bond market would feel the effects too, the buysider said.

Central Distribution drops

Central European Distribution's 3% convertibles due 2013 traded down 6 to 7 points to 88 bid, 88.5 offered, down from 95 bid, 96 offered previously.

One source said the bonds were offered lower than the 88.5 level, but added that he hadn't seen the paper bid there.

CEDC shares fell 38 cents per share, or 10.7%, to $3.17 in heavy volume.

The vodka maker and beverage distributor said late Monday that it expects to have to restate all its financial results from Jan. 1, 2010 as it incorrectly estimated some rebates during the period.

CEDC failed to reflect the timely reporting of the full amount of retroactive trade rebates provided to subsidiary Russian Alcohol Group's customers, the company said in a statement.

The company estimates the adjustments will result in a reduction of its consolidated net sales, operating profit and related accounts receivable from Jan. 1, 2010 through Dec. 31, 2011 of about $30 million to $40 million.

The majority of adjustments reflect that certain retroactive trade rebates were estimated incorrectly and, therefore, both net revenues and accounts receivable were over stated, the company said. CEDC is also reviewing whether any adjustments are needed to its financial statements for the year ended Dec. 31, 2009.

Medicines looks cheap

Using a credit spread of 500 basis points over Libor and a 30% volatility, the proposed Medicines looked about 2% to 2.5% cheap, market sources said.

One market source had the credit spread wider at 550 bps, and another had a lower volatility of 25%, but all players said the paper was looking cheap.

"These are fine," a West Coast-based trader said, adding that the deal has a straightforward structure and story.

The story of the $1.23 billion market cap company is that it has one product on the market that comes off patent in 2015, but no other debt other than the convertibles.

A buysider pointed out that the Parsippany, N.J.-based pharmaceuticals company is a good sector to be involved in and that the company's pipeline "looks okay."

"[The company has] a few things in the early stages [of clinical trials], and there's also things to come, so there will be product expansion and they are doing okay in Europe."

The deal was said to be upsized to $225 million during marketing, up from the $200 million initially talked. And pricing was expected to come at the middle of talk, which was for a yield of 1.125% to 1.625% and an initial conversion premium of 20% to 25%.

The Rule 144A deal was being sold via joint bookrunners J.P. Morgan Securities LLC, Bank of America Merrill Lynch and Citigroup Global Markets Inc., with Leerink Swann as a co-manager.

The notes are non-callable and will be settled upon conversion in cash at par. There is standard dividend and takeover protection.

Proceeds will be used to repurchase up to $50 million of common shares in privately negotiated transactions concurrently with the pricing of the convertibles and from time to time following the offering.

The company also plans to pay for the net cost of bond hedge and warrant transactions and for general corporate purposes.

Illlumina slips

Illumina's newer 0.25% convertibles due 2016 were said to have traded at 88.125 bid, 88.875 offered last, versus a share price of about $41. That was down about 0.5 on the day, a buysider said.

Illumina's shares closed higher by 48 cents, or 1.2%, to $40.98 each on Tuesday.

"Illumina traded in some size today, and it was 'in' a little bit marginally," the buysider said of the low delta name.

"Anything of any size comes 'in' a little these days. But then it recovers as soon as the piece is done," the buysider said.

Mentioned in this article:

Central European Distribution Corp. Nasdaq: CEDC

Dendreon Corp. Nasdaq: DNDN

Gilead Sciences Inc. Nasdaq: GILD

Illumina Inc. Nasdaq: ILMN

Medicines Co. Nasdaq: MDCO

SanDisk Corp. Nasdaq: SNDK

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