New Medicines Co. 'does well' as shares slip; Navistar in line before earnings; NetApp busy

By Rebecca Melvin

New York, June 6 - Medicines Co.'s newly priced 1.375% convertibles "traded well" on their debut in the secondary market on Wednesday, adding even while the underlying stock was lower for much of the session, giving a performance that was about even on a dollar-neutral, or hedged basis during, market players said, and finishing up at 101.75 bid, 102.125 offered.

Navistar International Corp.'s convertibles were seen higher in price terms and in line dollar-netural in trading Wednesday as shares of the Lisle, Ill.-based truck maker managed a nice little bounce ahead of earnings expected to be released by the company on Thursday.

NetApp Inc. was very active and traded in line as the underlying shares of the Sunnyvale, Calif.-based data storage company rose amid takeout speculation, continuing a comeback following disappointing earnings. These bonds have added about a point on a hedged basis since the stock hit its lows a couple of weeks ago.

SanDisk Corp.'s 1.5% and 1% convertibles were mostly quiet as the underlying shares continued to jump, lifting 5% on Wednesday on top of 5% climb on Tuesday on the heels of an "outperform" rating by Pacific Crest brokerage when it initiated coverage of the Milpitas, Calif.-based memory chip maker this week.

After the market close, NorthStar Realty Finance Corp. said it plans to price $75 million of 20-year senior exchangeable notes through an operating partnership. The notes were expected to price before the market open Thursday and were talked to yield 8.375% to 8.875% with an initial conversion premium of 13.5% to 18.5%, according to a syndicate source.

Convertibles overall were pulled higher by a rally in equity markets on Wednesday.

Equities rallied about 2% as investors moved money out of defensive sectors and back into stocks amid a lack of negative news.

The European Central Bank left its benchmark rate unchanged on Wednesday despite calls for it to cut rates to alleviate pressure on Europe's weakened banks. ECB president Mario Draghi said the bank cannot make up for inaction by governments.

The market focus continues to be the "macro front," a New York-based analyst said. From a valuation standpoint, convertibles are still not exceptionally cheap.

"The downside [of the past six weeks] wasn't as brutal for convertibles as it was in the second half of last year, so they are unlikely to outperform on the upside going forward," the analyst said.

New Medicines holds firm

Medicine Co.'s good showing was chalked up to the paper being priced cheaply and due to ongoing high demand for the slim supplies of new convertibles.

The upsized $225 million of Medicine bonds were seen at 101.25 bid versus a stock price of $22.52 in late afternoon trading, according to a Connecticut-based analyst.

Shares of the Parsippany, N.J.-based pharmaceutical company touched a low of $22.35 in trade Wednesday, which was off 45 cents, or 1%, on the day. But they ended higher by a penny at $22.81.

Before the market opened, the new paper was trading at 102 bid 103.375 offered, so it was not trading lower on a dollar-neutral basis when shares were lower, market sources said.

"They did well, and the market is having a good day," a West Coast-based trader said.

They were also 101.75 bid versus $22.80, where the stock was when the deal was priced, a New York-based trader said.

Medicines priced an upsized $225 million of five-year convertible senior notes after the market close on Tuesday to yield 1.375% with an initial conversion price of 22.5%.

The greenshoe was upsized to $50 million. Initially, the deal was going to be $200 million in size with a $30 million greenshoe.

The Rule 144A deal was initially talked at $200 million in size. The deal also has a $50 million greenshoe, which was upsized from an initially talked $30 million.

Pricing came at the midpoint of talk, which was for a coupon of 1.125% to 1.625% and a 20% to 25% initial conversion premium.

Joint bookrunners were J.P. Morgan Securities LLC, Bank of America Merrill Lynch and Citigroup Global Markets Inc.

The notes are non-callable and will be settled upon conversion in cash up to par and in stock for any additional value. 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 use proceeds to pay for the net cost of bond hedge and warrant transactions and for general corporate purposes.

Navistar in line

Navistar's 3% convertibles due 2014 were seen at 97.45 versus an underlying share price of $28.60 on Wednesday, which was seen in line on a dollar neutral basis using a 25% delta.

Shares of the Lisle, Ill.-based truck maker had a nice little bounce on were up 61 cents, or 2.2% on the day at $28.13.

On Tuesday, the Navistar convertibles traded mostly in a 96.25 bid, 96.5offered context versus an underlying share price of $26.61, with a delta in the 25% to 30% range.

The convertible matures in 2.3 years and has a credit spread of about 450 basis points over Libor and a 33% vol.

"Some people like these a lot. It has a good price point below par as the stock has gotten killed; however others [are] uncomfortable with the credit," a New York-based convertibles strategist said.

The commercial and military vehicle producer is slated to report earnings on Thursday ahead of the market open. For the quarter ended Jan. 31, the company reported a disappointing loss of $153 million, or $2.19 per share. Excluding one-time items, the company lost $2.08 per share.

Navistar blamed health-care costs, a new foundry operation and an issue at a brake supplier for the poor results that are typically softest in the first quarter due to seasonal weakness.

NetApp better of late

NetApp's 1.75% convertibles due 2013 were seen going out Wednesday at 114 .875 versus an underlying share price of $31.98. That was unchanged on the day, an analyst said.

Shares of the Sunnyvale, Calif.-based data storage company gained 93 cents, or 3%, to $32.07 on the day.

On Tuesday, the bonds were about 112.875 at the end of the session.

Lifting the securities was some speculation about NetApp being a potential takeover target following a published report about the idea, the analyst said.

NetApp is a $10 billion market cap company and a very solid credit. It is not too big though for one of the bigger players in the technology sector to acquire. And typically takeovers in the technology sector involve a significant premium, the analyst said.

A strategist noted that there was "a lot of activity in NetApp, which is still doing pretty well. The stock has had a terrific comeback from the earnings debacle. I would think these would come in but apparently not."

On another front, SanDisk, a more cyclical and less robust credit, was little changed to slightly lower for both the short dated 1% convertibles due in a year and the five-year, 1.5% convertibles.

The 1% convertibles are slightly cheap with a high yield given its duration. "There is some room for it to appreciate from these levels," an analyst said.

There was not much volume in either of the SanDisk bonds on Wednesday.

NorthStar to price

The New York-based real estate investment trust plans to use the $75 million of proceeds from its convertibles offering to make investments relating to its business, to repurchase or pay its liabilities and for general corporate purposes.

The Rule 144A offering has a greenshoe of $11.25 million, and was being sold via Citigroup Capital Markets Inc., UBS Securities LLC, Wells Fargo Securities LLC and Deutsche Bank Securities Inc. as joint bookrunners.

The notes will be non-callable for seven years with a put in year seven.

The notes will be senior unsecured obligations of the operating partnership, exchangeable for cash, shares of NorthStar's common stock, or a combination of cash and shares of NorthStar's common stock, at the operating partnership's option.

Mentioned in this article:

Medicines Co. Nasdaq: MDCO

Navistar International Corp. NYSE: NAV

NetApp In. Nasdaq: NTAP

NorthStar Realty Finance Corp. NYSE: NRF

SanDisk Corp. Nasdaq: SNDK

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