Omnicare improves hedged on results; Core Labs offered higher in gray; Medical Properties plans deal

By Kenneth Lim

Boston, Oct. 31 - The convertible bond market had a generally positive session on Tuesday as bond markets picked up.

Omnicare Inc. was better dollar neutral but lower outright after the company reported lower third-quarter profit and said its fourth quarter was likely to miss estimates.

Meanwhile, Core Laboratories NV's planned $250 million offering of five-year exchangeables was offered a point higher in the gray market as the market gave mixed reactions to the deal.

Medical Properties Trust Inc. also announced a $100 million offering of five-year exchangeables that are expected to price Wednesday after the market closes.

The convertible bond market in general had a better session in line with gains in the broader bond market, as Treasury yields fell on new economic data that fueled hope the U.S. Federal Reserve will hold or lower interest rates.

Among the gainers was Archstone-Smith Trust's 4% convertible due 2036, which was marked at 107.75 bid, 108.25 offered against the closing stock price of $60.21, about ½ point higher from day-ago levels. Archstone-Smith stock (NYSE: ASN) gained 0.35% or 21 cents on Tuesday.

Archstone-Smith is an Englewood, Colo.-based real estate investment trust that develops and owns apartment communities in the United States.

"The REITs were better to buy because the bond market was strong," a buyside convertible bond trader said.

FiberTower Corp.'s recently launched 9% convertible due 2012 was slightly lower outright but continued to stay well above its week-ago offered price at par. The convertible traded at about 121 on Tuesday, as FiberTower stock (Nasdaq: FTWR) closed at $7.25. The stock was down by 0.68% or 5 cents on Tuesday.

"Those are still doing well," the buyside trader said, noting that the deal was probably mispriced. "Any bond that trades up 10% out of the box has got to be mispriced. But the bookrunners had to get the deal done. Maybe they didn't have a good handle on it, but the company and the bookrunners and the markets accepted those terms."

Omnicare hedges better

Omnicare's 3.25% convertible due 2035 improved on a dollar-neutral basis but was 3 points lower outright after the company disappointed with its third-quarter earnings and fourth-quarter outlook.

The convertible traded at 85.125 against a stock price of $38 on Tuesday. Omnicare stock (NYSE: OCR) fell 10.87% or $4.62 to close at $37.88.

"Hedge guys did pretty well on that, but outright guys got whacked," a convertible bond trader said.

Omnicare on Tuesday said its third-quarter profit fell about 14% to $52.2 million, or 43 cents per share, from $58.5 million, or 54 cents per share, in the year-ago period. Excluding exceptional items, the nursing home drug supplier earned 63 cents per share, short of Street estimates at around 72 cents per share.

For the fourth quarter, Omnicare expects earnings per share to be flat, below analysts' estimates of 82 cents per share.

"It seems like quite a few things went wrong for Omnicare in Q3," a sellside convertible bond analyst said. "But I think what the market's really concerned about now is their Q4 guidance, which they're saying is going to be flat. The plant closings are obviously taking a bigger toll than people were expecting, and their ongoing case with UnitedHealth continues to be a big question mark. It also remains to be seen how the new Medicare rules are going to affect them."

But the analyst said Omnicare's credit was not affected much.

"They're still making money," the analyst said. "They're still a good credit, so this isn't going to affect the credit that much."

The convertible trader said most hedged investors came out better after the results.

"The stock had a 10% or 12% move down, that's definitely going to be better for hedge," the trader said. "How well you did would depend on what kind of a delta you have, but if you were on a theoretical market-neutral delta you would have done better."

Core offered up in gray

Core Laboratories' planned $250 million of five-year exchangeable senior notes were offered a point higher in the gray market on Tuesday, with investors split on the attractiveness of the deal.

Core planned to price its deal Tuesday after the market closed. Price talk was for a coupon of 0% to 0.25% and an initial conversion premium of 30%, and reoffered at 99.75. Core stock (NYSE: CLB) closed at $72.89 on Tuesday, up by 4.67% or $3.25.

There is an over-allotment option for a further $50 million.

Banc of America and Lehman Brothers are the bookrunners of the Rule 144A offering.

Core, an Amsterdam, Netherlands-based provider of oil reservoir management services, said part of the proceeds will be used to fund convertible note hedge and warrant transactions. The rest of the proceeds will be used to repay a revolving loan and to buy back up to 2.1 million Core common shares.

"It's too rich," a Connecticut-based buysider said. "Here's the thing: They price it at 99.75, a couple of points rich, but this deal may be out the door at par because...the underwriters they'll take care of it. But after that, after a couple of weeks, where's it going to be?"

The buysider said the problem with the deal was the low coupon paired with a high premium.

"A 0.125% coupon, up 30%, just doesn't fly in today's market," the buysider said.

Another buyside convertible analyst thought the deal was actually slightly cheap at the midpoint of price talk.

"Optically it's [the coupon] too low," the analyst said. "Optically it looks low, but it's a volatility play...It's a very solid credit."

The analyst said the implied volatility on the deal was actually a tad lower than the realized volatility on the stock, so the offering actually looked "a hair cheap."

"It's not very cheap, but it's a little bit cheap," the analyst said.

The case for outright investors is less certain, the analyst said.

"From a stock perspective, it's a great company with less competition than just about all other energy names, but that's mostly already priced in," the analyst said.

Medical Properties plans deal

Medical Properties also announced plans for a $100 million offering of five-year exchangeable senior notes, talked at a coupon of 6.125% to 6.625% and an initial exchange premium of 17.5% to 22.5%.

Pricing is expected Wednesday after the market closes.

There is an over-allotment option for a further $15 million.

UBS Investment Bank and JP Morgan are the bookrunners of the Rule 144A offering.

Medical Properties, a Birmingham, Ala.-based real estate investment trust that develops and leases healthcare facilities, said part of the proceeds will be used to complete its planned $90 million acquisition of six facilities during the fourth quarter of 2006. It will also use the proceeds to reduce its revolving debt and to pay for capped call transactions.

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