WellPoint adds in the gray, models attractively; Molina, Amerigroup quiet; Illumina eyed

By Rebecca Melvin

New York, Oct. 2 - WellPoint Inc.'s planned $1.35 billion of 30-year senior convertible debentures traded a little higher in the gray market on Tuesday ahead of final terms expected to be fixed after the close, market players said.

The WellPoint deal - which was up 1 point to 1.5 points in the gray market - was seen cheap by many sources, who said it has appeal for both outright and hedged players.

Its long duration, however, leaves open the specter of it morphing into something akin to an Intel Inc.-like long dated, dividend-paying convertible, which trades rich to the model due to high demand for investment-grade paper.

Back in established issues, investment-grade names like Gilead Sciences Inc., Medtronic Inc., Amgen Inc. and Prologis Inc. dominated trade, and pricing there was steady.

Despite an additional $1 billion plus of convertible paper anticipated in the managed health care space, there wasn't much, if any, activity in existing managed care names, like Molina Healthcare Inc.

Molina's 3.75% convertibles due 2014 were seen at 112 bid, 112.5 offered versus an underlying share price of $25.00, a West Coast-based trader said.

"I saw the usual markets in them, but, honestly, I don't think either one traded today," the trader said of Long Beach, Calif.-based Molina or Amerigroup Corp.

Illumina Inc. was also in focus after a report that Roche may consider another bid for the San Diego-based gene-sequencing company at $60 per share, pushing Illumina shares 5% higher in active trade. But there didn't appear to be concomitant activity in the Illumina 0.25% convertibles due 2016 or the Illumina 0.625% convertibles due 2014.

Lam Research Corp.'s convertibles remained unusually active, with the Lam 2.625% convertibles due 2041, or the former Novellus convertibles, little changed at 110ish.

"They are still breaking even inside of maturity, or even inside the provisional call; there's not a lot at risk," an analyst said of the Lam Research convertibles, which are yielding 2.4% with a 22% premium and with at least one player holding them on a delta in the 87% to 89% range.

Overall, the convertible market was pretty quiet, and "felt pretty picked over," the analyst said. "But there has been some vol. on an individual-name basis, so there has been some movement in recent sessions."

WellPoint adds in gray

WellPoint's planned 30-year convertible debentures gained in gray market trade to 101 to 101.5, according to a market source.

The Indianapolis-based health benefits concern launched the $1.35 billion offering after the market close Monday, and it was seen pricing after the market close Tuesday.

During marketing Tuesday, shares rose $2.48, or 4.3%, to $60.46.

The paper was modeling well, and the sector was appealing. The convertibles space has other paper in this sector but not an overabundance.

"It's nice to see," said an analyst, who commented that the paper "modeled out pretty attractively."

Using a credit spread of 150 basis points over Libor and a 26% vol., the paper was "pretty cheap."

"We got it 101 to 109," the analyst said, adding that WellPoint has 10-year straight paper that has a credit spread of about 100 bps.

Duration is detraction

But the duration of the bond was seen as a detraction, and others used a wider spread.

"I used a somewhat wider spread because of the duration, but I think it looks pretty good," a New York-based trader said, using 200 bps over Libor and a vol. of 22%.

Given the size of the deal and the long datedness of it, he thought that made the debentures valued at 1.5 points cheap.

Also given that there is a scarcity of investment-grade paper in the convertibles space, market players thought it would do well. "It will probably price on the rich end, and I wouldn't be surprised about a small upsize," a West Coast-based trader said.

The deal was talked to yield 2.5% to 3% with an initial conversion premium of 20% to 25%.

"I think it's trading well in the gray," an analyst said. "It's a nice, big investment-grade issue, and even though not rated, I think it eventually gets rated."

A trader based in New York suggested that the new paper looked similar to a perpetual piece of paper, and wondered how much of this type of structure the convert market could absorb.

"It's kinda like Intel. I know there's appetite," he said, "But I don't know what percent of the convert market cap can be filled by these perpetuals. I don't believe we're near it yet, but I personally feel there is a limit."

A second source agreed.

"It looks good but that duration is not without risks. What something looks like today is half the story. The other half is how will it look in seven years with rates at 7% and the stock down 50%," a convertibles strategist said.

Joint bookrunners for the Rule 144A offering are Credit Suisse Securities (USA) LLC, Bank of America Merrill Lynch and UBS Investment Bank. There is a $150 million greenshoe.

The debentures are non-callable for 10 years and then are provisionally callable if the underlying shares are 150% of the conversion price. There are no puts.

The securities have net share settlement, and they have dividend and change-of-control protection.

Up to $600 million of proceeds are earmarked for stock repurchases concurrently with the debenture offering. The balance of proceeds will be used for general corporate purposes, including but not limited to additional share repurchases and repayment of short- and long-term debt.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Amerigroup Corp. NYSE: AGP

Illumina Inc. Nasdaq: ILMN

Intel Inc. Nasdaq: INTC

Gilead Sciences Inc. Nasdaq: GILD

Lam Research Corp. Nasdaq: LRCX

Medtronic Inc. NYSE: MDT

Molina Healthcare Inc. NYSE: MOH

Pologis Inc. NYSE: PLD

WellPoint Inc. NYSE: WLP

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