Planned NuVasive looks slightly cheap; existing NuVasive contracts; Insulet paper on tap

By Rebecca Melvin

New York, June 22 - NuVasive Inc.'s planned $325 million of convertibles was seen slightly cheap but was not heard in the gray market on Wednesday ahead of final terms, which were expected to be fixed after the market close.

The medical device maker was expected to price the six-year convertibles at a 2.5% to 3% coupon and a 27.5% to 32.5% initial conversion premium.

NuVasive's existing 2.25% convertibles, which are expected to be repurchased with proceeds of the new deal, contracted about 0.25 point to 0.5 point on Wednesday, according to a New York-based desk analyst.

Also in primary action, Insulet Corp. launched a $110 million offering of five-year convertible notes after the market close that was talked to yield 3.5% to 4% with an initial conversion premium of 30% to 35%. That deal was coming together with a $25 million offering of secondary stock.

Elsewhere, Brookdale Senior Living Inc. Co. was a better Wednesday on a hedged basis after trading higher outright but unchanged on hedge Tuesday.

Micron Technology Inc.'s convertibles were also in trade and looked firm to slightly higher ahead of the semiconductor company's earnings report expected to be released Thursday

Equities took a dive at the end of the session, ending squarely in negative territory after earlier strength.

In an afternoon press conference, Federal Reserve chairman Ben Bernanke said slower growth over the second half is now expected due possibly to deleveraging and housing issues, among other issues.

Bernanke said that the Federal Open Market Committee now believes 2011 gross domestic product will range from 2.7% to 2.9%, which was down from the range of 3.1% to 3.3% that was announced in April.

In addition, 2011 unemployment is now expected to range from 8.6% to 8.9%, up from the range of 8.4% to 8.7%, and inflation is expected to tick higher.

The press conference was preceded by the formal FOMC decision, which was, as expected, to end the current program of buying $600 billion of Treasury securities on June 30. It also maintained its existing policy to reinvest principal payments from maturing securities to not let its balance sheet shrink and kept the target rate for the Federal Funds rate at between 0% and 0.25%.

"It seems a lot of folks thought growth would continue in the back half of the year, and to the extent that the central bank is now changing their view of growth, I think many will now have to revise their forecasts," a New York-based syndicate source commented.

While this doesn't have a direct impact on convertibles alone but rather on the overall credit and equity markets, "the pull back of the last two months is built around clear signs on an economic slowdown, and marks a continuation of new concerns for investors this year," the syndicate source said.

"It started with commodities, then the earthquake and tsunami, now Greece and Europe once again, and the U.S. economy," the source said.

As it impacts convertibles directly, he noted that solar and Chinese names have been particularly hard hit in recent weeks, and given that there are a large number of these types of issues in the convertibles market, it means that the convertibles market has been hit hard.

NuVasive slightly cheap

The stock borrow on NuVasive wasn't looking too good ahead of final terms for the planned $325 million NuVasive convertible deal, and that was putting a crimp in cheapness.

Using a credit spread of 425 basis points over Libor and a 35% vol. together with a 2% borrow, the deal looked 2.4% cheap, a New York-based sellside analyst said, citing inputs that were to have been given by the underwriters.

But some thought the 425 bps credit spread was a little tight and used instead a 500 bps credit spread and 30% vol. That comes in less cheap, if 2% borrow is also used in the calculation.

"Borrow is a key input," the syndicate source said, adding that the standard borrow input is 0%.

NuVasive planned to price $325 million of six-year convertible bonds via Bank of America Merrill Lynch and Goldman Sachs & Co. in a registered deal after the market close Wednesday.

A New York-based syndicate source, who saw the deal as attractively valued, thought that the deal should price at the midpoint of talk or better.

NuVasive's existing 2.25% convertibles traded in about 0.25 point to 0.5 point on the day, crossing at 106 versus an underlying share price of $34.25, compared to 105 versus a share price of $33.65 on Tuesday, according to a New York-based desk analyst.

"The old ones coming in is no surprise given it was/is trading around par and the two conversion prices are roughly the same," a New York-based trader said.

The NuVasive deal has a 15%, or $48.75 million, greenshoe.

The notes are non-callable with no puts.

NuVasive, a San Diego-based medical device maker, intends to use proceeds for general corporate purposes and to repurchase $230 million of its existing 2.25% convertible senior notes due 2013. The company may also consider possible strategic acquisitions or investments.

The company also plans to enter into convertible note hedge and warrant transactions intended to increase the effective conversion price of the notes and thereby reduce stock dilution upon potential future conversion of the notes.

There is contingent conversion at a price trigger of 130%.

The conversion settlement will be cash settled until stockholders approve an increase of authorized shares, then settlement will be in cash, stock or a combination.

There is full dividend protection and change-of-control protection.

The company also intends to enter into separate convertible note hedge and warrant transactions with counterparties of initial purchasers of the senior notes.

Insulet to price

Insulet, a Bedford, Mass.-based medical device maker, planned to price $110 million of five-year convertible notes and $25 million of secondary stock after the market close Wednesday, according to market sources.

The 1.15 million shares of common stock were being offered under an effective shelf registration by stockholders who received shares in connection with Insulet's previously announced acquisition of Neighborhood Diabetes.

The registered, off-the-shelf convertibles offering has a $16.5 million greenshoe and was being sold via J.P. Morgan Securities LLC.

Proceeds from the notes will be used for general corporate purposes, including the possible repurchase of existing debt that matures June 2013.

Insulet does not receive proceeds from the stock offering, which was being marketed by JPMorgan and Canaccord Genuity Inc.

Micron looks steady to higher

Micron's 1.875% convertibles due 2014, or the "old" notes, traded at 99 versus an underlying share price of $8.25 on Wednesday, which compared to a previous level of 99 bid, 99.25 offered versus an underlying share price of $8.23, according to sources.

Micron's 1.875% convertibles due 2027, which are the "new" ones that were exchanged last October, traded at 106.5 versus a share price of $8.25. That paper was previously seen at 103.75 versus an underlying share price of $8.175, according to a New York-based sellside analyst.

Shares of the Boise, Idaho-based chip maker traded up intraday but pared gains to end up just 3 cents at $8.17 on the day in tepid volume.

Mentioned in this article:

Brookdale Senior Living Inc. Co. NYSE: BKD

Insulet Corp. Nasdaq: PODD

Nuvasive Inc. Nasdaq: NUVA

Micron Technology Inc. NYSE: MU

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