New KB Home trades flat on hedge on debut; Auxilium offering upsized, talked terms revised

By Rebecca Melvin

New York, Jan. 24 - KB Home's newly priced 1.375% convertibles traded up to as high as 102 in the early going Thursday when the underlying shares were higher and following pricing of the upsized deal at the rich end of talked terms.

The new KB Home convertible, which was upsized to $200 million from $150 million, slipped back to par in active trade as shares moved down by more than 2%, leaving it "flat on hedge, which is a win considering it was overpriced to begin with," an East Coast-based buysider said. KB Home shares ended lower by 1.8%.

The new KB Home convertible accounted for the lion's share of the day's trading volume in convertibles, and other than that, the focus was on two new deals out of three that were seen pricing after the market close.

Auxilium Pharmaceuticals Inc.'s planned 5.5-year convertible bonds was well-oversubscribed and upsized to $300 million from $200 million during marketing. Pricing was tightened to a 1.5% coupon, which was through the rich end of talk, and at an initial conversion premium of 32.5%, which was at the rich end of talk, according to a syndicate source.

OPKO Health Inc.'s planned $150 million of 20-year convertible bonds was seeing interest among market players as well, but there was limited stock borrow available, which curbed potential hedged participation, a market source said.

Meanwhile, Molycorp Inc.'s planned $100 million offering of five-year convertible senior notes was quiet in the gray market ahead of final terms seen being fixed late Thursday. And after the market close, Ship Finance International Ltd. launched an overnight deal of $250 million of five-year convertible senior notes that were seen pricing early Friday.

The Ship Finance deal was seen pricing at a 3.25% to 3.75% coupon and a 33% initial conversion premium, and the registered, off-the-shelf deal was coming concurrently with a $100 million common stock borrow facility.

ABG Sundal Collier Inc. and Deutsche Bank Securities Inc. were the bookrunners for the offering of notes, with ABG Sundal as the left lead bookrunner. Deutsche Bank was acting as the underwriter for the stock offering.

Elsewhere, Advanced Micro Devices Inc.'s 6% convertibles due 2015 traded at as high as 97 and were also quoted at 95.25 bid, 95.75 offered with the underlying shares up 3% after the Sunnyvale, Calif.-based chip maker reported a fourth-quarter loss of $0.14 per share that was better than the $0.21 per share loss estimated.

InterOil Corp.'s small, $70 million of 2.75% convertibles due 2015 were not seen in trade but were quoted at 89.5 bid, 90.5 offered versus an underlying share price of $60.00. Shares reversed course Thursday, posting a nearly $5.00, or 8.7%, gain, and erasing three sessions of losses.

New KB Home flat on hedge

The newly priced 1.375% convertibles of the Los Angeles-based homebuilder traded up to 102 with the stock at its highs around $18.85, and moved back down to around par to 100.5 with the stock lower at $18.21.

KB Home shares recovered some ground, ending down 34 cents, or 1.8%, at $18.29 after earlier being down 2.25%.

"It did pretty well," a New York-based trader said, noting that even with the shares off more than 2%, the bonds held up near par.

One market source said that on a dollar-neutral basis the bonds were flat and a second source put them better by 0.75 point to a point on a dollar-neutral basis.

The KB Home was "hanging in there" on "pretty good volume," the second source said.

KB Home priced an upsized $200 million of six-year convertibles at par to yield 1.375% with an initial conversion premium of 50%.

The registered offering, which has a $30 million greenshoe, was initially talked at $150 million in size with a $22.5 million greenshoe.

Pricing came at the rich end of talk, which was for a 1.375% to 1.875% coupon and a 45% to 50% premium.

Concurrently with the notes, the company sold $100.38 million of common stock, or 5.5 million shares at $18.25 per share.

Up to 6.325 million shares will be sold if underwriters exercise their option to purchase additional shares.

The notes were sold via Credit Suisse Securities (USA) Inc., Citigroup Global Markets Inc., Bank of America Merrill Lynch and Deutsche Bank Securities Inc. as the joint bookrunners.

The notes are non-callable until Nov. 6, 2018. They will be net share settled, and they have change-of-control and dividend protection.

Holders can convert their notes into equity at any time prior to maturity.

Proceeds from the note sale and a concurrent stock offering will be used for general corporate purposes, including land acquisitions and development.

Auxilium upsizes, reprices

Malvern, Pa.-based specialty biopharmaceutical company Auxilium's offering of 5.5-year convertible bonds was upsized during marketing Thursday to $300 million from $200 million, and pricing was tightened to a 1.5% coupon, which was through the rich end of talk, and at an initial conversion premium of 32.5%, which was at the tight end of talk, according to a syndicate source.

Initially, the deal, which was still expected to be finalized after the market close Thursday, was talked to yield 1.75% to 2.25% with an initial conversion premium of 27.5% to 32.5%.

The registered, off-the-shelf deal now has a $45 million greenshoe, which was raised from $30 million.

Outside of KB Home, market players appeared to be focusing on this issue and the other new deal from OPKO.

Before talk was revised, the deal was seen 2% to 4% cheap by one Connecticut-based convertibles analyst.

At the original terms, the deal was seen at 103 at the midpoint of talk using a credit spread of 500 basis points over Libor and a 30% vol. But much of the cheapness would have been siphoned off with the revised talk.

Joint bookrunners were Goldman Sachs & Co. and J.P. Morgan Securities LLC, with co-managers Cowen & Co. and RBC Capital Markets.

The bonds are non-callable with no puts. There is takeover protection. And in connection with the offering, the company expects to enter into note hedge and warrant transactions or purchase a call spread.

Proceeds will be used for general corporate purposes, which many include the acquisition of businesses, products, or product rights or technologies, and also to pay for the call spread.

OPKO to price

OPKO was said to be attracting a lot of interest as well, despite borrow problems, which was seen limiting hedged participation.

The deal was seen 2% to 4% cheap, according to one source, who also said that there was pre-marketing of the deal that might limit the amount of players involved.

Like Pacira Pharmaceuticals Inc.'s 3.25% convertibles, which priced last week, the OPKO deal was said to have been pre-marketed, or to have been allocated in large part to investors that were involved in the initial pricing discussions.

Nevertheless, "it really comes down to whether you want to own the stock," a buysider said, putting a credit spread on the deal of about 700 bps over Libor.

Jefferies & Co. Inc. was the bookrunner for the offering, which was classified as a Regulation D private placement but seen trading under Rule 144A.

The notes will be non-callable for four years and then will be provisionally callable for two years if shares are 130% of the conversion price and subject to a coupon make-whole for that period. After year six, they are freely callable.

There are investor puts in years six, 10 and 15.

Proceeds from the offering were earmarked for general corporate purposes, including research and development expenses, acceleration of clinical trials, acquisitions of new technologies or businesses and other business opportunities.

OPKO is a health care company based in Miami.

Mentioned in this article:

Advanced Micro Devices Inc. NYSE: AMD

Auxilium Pharmaceuticals Inc. Nasdaq: AUXL

KB Home NYSE: KBH

InterOil Corp. NYSE: IOC

Molycorp Inc. NYSE: MCP

OPKO Health Inc. NYSE: OPK

Ship Finance International Ltd. NYSE: SFL

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