Planned Invacare deal looks cheap; Priceline 0.9% convertibles contract with higher shares

By Rebecca Melvin

New York, Feb. 17 – Invacare Corp.’s planned $130 million issue of convertible senior notes looks cheap in terms of valuation, two market sources said Wednesday, but the underlying shares were crushed in the equity market and the paper was offered in the gray market ahead of final terms being set with no bid.

Using a credit spread of 900 basis points over Libor and a 40% vol., the Invacare deal looked to have a fair value of 106 at the midpoint of price talk, a New York-based trader said.

A second trader said, “It’s going to be contentious pricing,” for the bonds, in light of a 24% plunge in the underlying shares.

Back in established issues, but also in the health care space, the Medicines Co.’s 2.5% convertibles moved up in line with the underlying shares, which saw a 10% jump, but were flat on a swap basis.

Meanwhile, Priceline Group Inc.’s convertibles were trading actively, with the Priceline 0.9% changing hands up almost 3 points on an outright basis at 100.25, but contracting on a dollar-neutral, or hedged, basis by about 0.75 point, a New York-based trader said.

Priceline shares were up about 11% at $1,229.84 at late morning after the Norwalk, Conn.-based travel site reported better-than-expected fourth-quarter earnings and guided current earnings in a range that was below and just touching the consensus estimate.

Overall the convertibles market remained “pretty apprehensive” despite a rally in U.S. equities, which left the Dow Jones industrial average and the S&P 500 stock index up 5% since Friday.

“Volumes were better; I saw volume almost double in health care, but in terms of conviction, I didn’t catch a lot of it. I had sellers checking to sell at higher prices on the rally, but I couldn’t get anything done because the real buyers are not in there yet,” a trader said.

On the other hand, the equity markets got through some important levels on Wednesday, he added.

The Dow gained another 257.42 points, or 1.6%, to 16,453.83; the S&P closed up 31.24 points, or 1.7%, to 1,926.82; and the Nasdaq stock market jumped 98.11 points, or 2.2%, to 4,534.06.

Invacare shares slump

Shares of Elyria, Ohio-based Invacare, a maker of non-acute health care products, hit a 52-week low on Wednesday, closing down $4.03, or 24%, to $12.81.

The planned convertible deal for $130 million of 4.5% to 5% convertible senior notes was looking 6 points cheap at the midpoint of talk based on a 900 bps credit spread and 40% vol.

There were no trades in the gray market ahead of pricing, but there was a 102 offer with no bid, a trader said.

Still the deal was expected to see strong interest. It represents the fourth new deal this year in the lagging convertibles primary space and the third in health care. The other health care sector deals were KemPharm Inc.’s $86.25 million of 5.5% convertibles due 2021 and Novavax Inc.’s $325 million of 3.75% convertibles due 2023.

The new Novavax paper bounced back on Wednesday to a 96.25 bid, 97.25 offered close against shares at $5.07. That was up from a low of between 91 and 92 since the paper priced at the end of January.

The convertible primary market’s fourth new deal was from issuer Hess Corp., which priced a $500 million offering of 8% series A mandatory convertible preferred stock at par of $50.00 on Feb. 4 with a 17.5% initial conversion premium.

Cheapness has been a theme so far this year given that the market overall has been down and the capital markets have been limited.

“It’s cheap; but it had to price cheap in this Tape,” a trader said. He also noted that the Invacare deal “has a limited audience. But it will get the hedge guys that play the model game.”

“It’s hard to get things done in this market; it’s hard to drum up interest, and it doesn’t help health care fund its business when the capital markets are closed,” a trader said.

Invacare launched an offering of $130 million of convertible senior notes that were talked to yield 4.5% to 5% with an initial conversion premium of 25% to 30%.

In 2007, Invacare priced $125 million of 4.125% convertible bonds with a 22.5% initial conversion premium.

Proceeds of the new deal will be used to repurchase Invacare common shares and to fund the net cost of a call spread.

Priceline 0.9% lags

Priceline’s 0.9% convertible traded up almost 3 points to 100.25, but that was off about 0.75 point on a swap basis. Priceline shares were at approximately $1,240.00 when the trades occurred.

The close for Priceline shares was slightly below that but still up 11%, or $124.88, at $1,235.56.

The Priceline 1% convertible traded at 129.375, which was up about 9.5 points outright.

Priceline beat expectations when it reported net income of $504 million, or $10.00 per share, which was up from $452 million, or $8.52 a share, in the fourth quarter a year ago. Adjusted earnings per share of $12.63 were above the consensus estimate of $11.81.

Priceline also reported revenue of $2 billion, which was up from $1.84 billion in the year-earlier period and above the consensus estimate of $1.96 billion. Looking ahead, for the first quarter, Priceline said it expects adjusted earnings per share of between $9.00 and $9.60. That range was beneath and just touching the estimate of $9.60.

Mentioned in this article:

Hess Corp. NYSE: HES

Invacare Inc. NYSE: IVC

KemPharm Inc. Nasdaq: KMPG

The Medicines Co. Nasdaq: MDCO

Novavax Inc. Nasdaq: NVAX

Priceline Group Inc. Nasdaq: PCLN

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