Morning Commentary: Market eyes Medicines convertible offering; primary quiet otherwise

By Abigail W. Adams

Portland, Me., Dec. 13 – After a period of inactivity, the convertibles primary market returned with a new deal on the horizon, which will be the first and may be the last new paper in December.

Medicines Co. plans to price $150 million of five-year convertible notes after the market close on Thursday with price talk for a coupon of 3% to 3.5% and an initial conversion premium of 25% to 30%, according to a market source.

The deal was heard to be in the market with a credit spread of 900 bps over Libor and a 38% vol., a market source said.

Using underwriters’ assumptions, the deal modeled about 0.7 point cheap, a market source said.

While some felt the credit spread was conservative and could be tightened to 800 bps, others said the spread should be 1,000 bps.

The biotech company does not produce revenue and has an $800 million debt load, a market source said.

However, the 38% vol. was seen as conservative by the source, which may have helped to justify the tighter spread.

Using assumptions of 1,000 bps over Libor and a 45% vol., the deal modeled about 2 points cheap at the midpoint of talk.

While the borrow on the stock is decent, the deal will be a hard sell to outright accounts given the two outstanding convertible notes, a source said.

Some were surprised to see a new convertibles offering from the well-known biotech company, especially with its two outstanding issues trading below par.

Sources noted proceeds from the deal would not be used to repay the outstanding convertible notes but rather to support the development of a treatment in the pipeline, which some also found surprising.

Medicines’ 2.5% convertible notes due 2022 traded just shy of 91 with a 5.77% yield on Thursday.

The 2.75% convertible notes due 2023 traded down to 78.5 with the yield 8.5%, according to Trace data.

The notes were trading with credit spreads of 820 bps to 920 bps, a market source said.

The 2.5% convertible notes appeared to be the cheapest out of the three, a source said.

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