NorthStar prices at discount; Navistar comes in on slashed guidance; Molina improves

By Rebecca Melvin

New York, June 7 -NorthStar Realty Finance Corp.'s newly priced $75 million of 20-year senior exchangeable notes traded languidly after coming at a discount to par of 98.625 before the market open Thursday, according to market sources. A nearly 5% drop in the underlying shares took more steam away from the deal.

NorthStar's existing convertibles, a 7.5% exchangeable due 2031 that priced in March 2011 and a 7.25% exchangeable due 2027 that priced in 2007 weren't really trading, sources said.

Navistar International Corp. was the name of the day, with those convertibles coming in 1 point to more than 4 points on a dollar-neutral, or hedged, basis, depending on the delta, after the Lisle, Ill.-based truck maker posted a much weaker than expected quarter and slashed full-year guidance significantly for the second time this year.

If Navistar was the name of the day, Molina Healthcare Inc. was in second place, with its convertibles expanding a point to 1.5 points while the underlying shares of the Long Beach, Calif.-based health management organization plunged after it pulled its full-year earnings guidance due to cost problems in its newly expanded Texas Medicaid market.

Molina shares plunged 31%.

"Both stocks are getting tattooed," a New York-based convertibles strategist said of Navistar and Molina.

On a brighter note, the new Medicines Co.'s 1.375% convertibles improved some more after trading well on their debut Wednesday.

The new Medicines closed Thursday at 102 bid, 102.5 offered, versus an underlying share price of $22.81, which compared to a close of 101.75 bid, 102.125 offered on Wednesday.

"It was a good deal; you couldn't poke too many holes in it," a West Coast-based trader said Thursday.

Otherwise the session was fairly quiet, market sources said, as markets waited to see if Federal Reserve chairman Ben Bernanke would tip his hat about whether more central bank intervention is going to be forthcoming in the face of recent weak economic data.

Bernanke testified before the Joint Economic Committee of Congress early Thursday. He said the Fed "remains prepared to take action as needed."

"People were hoping for stimulus from Bernanke, and the markets opened higher but fell after that," a New York-based convertibles analyst said.

The analyst pointed to the upcoming Greek elections as being a key catalyst for what happens next, and he noted that if the elections go poorly, then Fed action isn't going to mean too much anyway.

At that point "you would need drastic action to tip the scales the other direction," he said.

The Greek elections are set for June 17.

NorthStar prices at a discount

NorthStar's new 8.875% convertibles due 2032 was not very active and languished some with the lower stock in the 96 bid, 98 offered range during the session, a syndicate source said. But he said they closed higher at 98 bid, 99 offered, after coming at a discount to par of 98.625.

NorthStar shares fell 26 cents, or nearly 5%, to $5.03 in heavy volume.

The new convertible didn't trade actively.

Joint bookrunners were Citigroup Global Markets Inc., UBS Securities LLC, Wells Fargo Securities LLC and Deutsche Bank Securities Inc.

One syndicate source put the existing 7.5% NorthStar convert at 102 bid, 103 offered at the close Thursday, and the 7.25% convertible at 100 bid, 100.5 offered at the close.

The new Rule 144A deal came at the cheap end of talk, which was for an 8.375% to 8.875% coupon and a 13.5% to 18.5% premium.

New York-based NorthStar is a real estate investment trust that originates and invests in commercial real estate debt, real estate securities and net lease properties.

Navistar falls

Navistar's 3% convertibles due 2014 were seen last 92 bid, 92.5 offered. The underlying shares closed down $4.04, or 14%, to $21.11 in heavy volume, and they had been down as much as 25% earlier in the session.

Thursday's trading of the convertible, which was called lower by 1 point to more than 4 points dollar neutral depending on delta, compared to 97.45 versus an underlying share price of $28.60 on Wednesday.

On a heavier delta, the hedged loss was less.

On a 15% delta, the bonds were down more than 4 points, according to one source. But on a 30% delta, "you were down 2.5 to 3 points," he said.

A second source said the loss around midday was 1.5 points, and he called the close down about a point dollar neutral on a 20% to 25% delta.

Behind the carnage was the company's second quarter earnings report. The company lost $172 million, or $2.50 a share, compared with a gain of $74 million, or 93 cents a share, in the year earlier period.

Excluding items such as pre-existing warranty charges, asset impairment and engineering integration costs, the per-share loss was $1.99 in the most-recent quarter.

Revenue fell 1.7% to $3.3 million. Analysts had been expecting earnings of 67 cents on revenue of $3.63 billion.

Meanwhile, the company cut its earnings outlook for the year to break even to $2 a share, compared to its reduced March forecast of between $4.25 per share and $5.25 per share. Analysts had been expecting the company to earn $3.73 a share.

The reasons behind slashing guidance to as low as breakeven include weakened demand for commercial trucks and pressure from rising warranty expenses for its new 13-liter engines, as well as for expenses related to moving its engineering operations to Illinois and fines paid to the U.S. Environmental Protection Agency for engines that don't meet the agency's pollution-reduction standard for engine exhaust.

Navistar has been relying on pollution credits that have run out as it awaits EPA certification for this engine.

The company also announced some management changes. Jack Allen, who is currently president of Navistar's North American truck business will become president of North America truck and parts, and expansion of his current duties. Engine group president Eric Tech will become president of global truck and engine, responsible for all operations outside of North America. Troy Clarke, who is currently president of the company's Asia Pacific operations will be promoted to the newly created position for president over the company's truck, engine and parts operations.

Navistar's convertible matures in 2.3 years.

Molina expands 1.5 points

Molina Healthcare's 3.75% convertibles due 2014 slid outright to 101.25 bid, 101.75 offered by the close, versus an underlying share price that plunged $7.99, or 31%, to $17.77.

A second source said the bonds traded at 101.356 versus $17.80 at the end of the day.

At least $30 million of Molina bonds changed hands, according to Trace data.

The bonds were up dollar neutral by about 1.5 points if holders came into the day on a 55% delta. The delta now is lower in the 40% range.

Sparking the meltdown was the company's decision to withdraw 2012 guidance due to uncertainty related to costs in Texas.

The company said in a filing late Wednesday that patient use of long-term-care services in its Texas Hidalgo and El Paso regions is far exceeding usage in other areas and surpassing premium-rate setting assumptions.

The company said it is not taking in enough premium revenue to cover the costs in those regions.

Molina has asked Texas to re-examine its rate setting assumption and new premium rates are expected Sept. 1.

This problem comes on top of earlier contract losses in Missouri and Ohio that took the shares and convertibles of Molina down in early April.

Mentioned in this article:

Medicines Co. Nasdaq: MDCO

Molina Healthcare Inc. NYSE: MOH

Navistar International Corp. NYSE: NAV

NorthStar Realty Finance Corp. NYSE: NRF

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