Market sees $1 billion in four deals; Auxilium adds on hedge; Molycorp surges with shares

By Rebecca Melvin

New York, Jan. 25 - The convertible bond market was humming on Friday with four new issues, totaling $1 billion in new paper, released for secondary market action. By way of comparison, there was $1 billion of new issuance in seven deals for the entire month of November, according to Prospect News data.

Auxilium Pharmaceuticals Inc.'s newly priced 1.5% convertibles traded up after the upsized $325 million of the 5.5-year convertible senior notes priced at terms that were tightened during marketing.

Molycorp Inc.'s newly priced 5.5% convertibles traded much higher after an upsized $150 million of the five-year notes priced through the rich end of coupon talk. There was a 115 outright trade with the underlying shares at $7.70 and a 109 outright trade with the stock at $7.10, a New York-based trader said.

The high print on the new Molycorp paper was 119 plus, the trader said, explaining that the spike was related to the fact that the bonds were trading off of the concurrent common stock offering price of just $6.00, and shares jumped much higher on Friday to $8.00, or 13% higher.

"They are already in the money; that's pretty crazy," a Connecticut-based trader said of the new Molycorp deal.

But Molycorp's existing 6% convertibles were weaker given that the new paper, which is secured and has a lower strike price, was seen as more attractive to investors.

Ship Finance International Ltd.'s newly priced overnight deal of 3.25% convertibles traded up to 101.25 bid, 102 offered versus a $16.50 share price. The convertibles were seen later at 100 to 101, but that was still better on a hedged basis by about a point, syndicate sources said.

OPKO Health Inc.'s newly priced 3% convertible was quiet given that most of the initial purchasers of the paper were "buy and hold" investors, a syndicate source said. On an indicated level only, the new paper was seen at 102 versus an underlying share price of $6.14.

Meanwhile, JKX Oil & Gas plc launched a deal of at least $40 million of five-year convertible bonds at par to yield 8% with an initial conversion premium of 25% above the volume weighted average price of shares between launch and pricing, according to a news release.

KB Home's 1.375% convertibles, which debuted in the secondary market on Thursday, were essentially flat at around 100.25.

"Someone was trying to sell a small amount in the Street all day; that generally means it's not trading well," a New York-based trader said of the KB Home issue.

Higher stocks boost issuance

The windfall of new paper was attributed to a rise in stock prices and the hint of higher rates in the future, one trader said.

"Actually, you're hearing for the first time that rates could go up, and stocks are approaching all-time highs. These are positive catalysts. In addition, you've got a space that is going to overpay for the paper, you've got that extra boost," the trader said.

The trader said that he didn't think the convert space was anywhere near being saturated.

"Are you kidding, you've got Amgen going away next week. What is that? $2 billion, $3 billion. You could have seven to eight issues a week until June, and you'd still be OK," he said.

The trader was referring to Amgen Inc.'s 0.375% convertible senior notes due Feb. 1. The $2.5 billion issue priced in 2006 and has been a market benchmark.

The depth of the market was attributable to the intermittent issuance that has beset the market for the last four years, he said.

Looking ahead, he anticipated that the new clip of issuance should continue given that "stocks are acting like they want to go up for a while."

The only wild card he saw on the horizon that could put a crimp in the bull market is if it began to look uncertain that Germany's chancellor Angela Merkel would retain her office after September elections.

That's the only thing that will rattle this market, he said.

New Auxilium adds

The new Auxilium convertibles traded at 103.5 bid, 104 offered versus $18.30 during the session. Auxilium shares ended the session up 10 cents, or 0.6%, at $18.34 in ultra-heavy action.

"People liked it," a New York-based trader said, adding that the stock did well also.

Given that the stock traded as actively as it did and didn't go down meant that the stock did well, he said.

On Thursday, shares fell to $18.24 from $18.74 on volume of about 2 million shares. On Friday, almost 4.4 million shares traded.

"This is a stock where half a million shares trade in a day on average," he said. "People want the stock and when it came back down to a level, they are stepping in."

Auxilium, a Malvern, Pa., specialty biopharmaceutical company, priced an upsized $325 million of 5.5-year convertible senior notes, which was larger by more than 50% than the initially talked base deal size, and the bonds came at par to yield 1.5% and with an initial conversion premium of 32.5%, according to a term sheet.

The registered, off-the-shelf deal now has a $25 million greenshoe, which was downsized from $30 million.

Pricing came at the price points talked during marketing after they were revised tighter from initial talk of a 1.75% to 2.25% yield and a 27.5% to 32.5% premium.

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

New Molycorp surges

Molycorp's newly priced 5.5% convertibles surged after an upsized $150 million of the five-year notes priced through the rich end of talk.

Initially $100 million of the notes were expected to price.

With shares up 10%, the high mark on the new paper was 119 plus.

But shares of the Greenwood Village, Colo.-based rare earths metals exploration company exploded up 13% to $8.00, and shares traded totaled 51.8 million shares, compared to 9.14 million shares traded on average.

However, the stock offered concurrently with the notes late Thursday was priced at $6.00, which was below the closing price of shares on the New York Stock Exchange on Thursday at $7.07.

And short covering was likely behind some of Friday's stock move.

The existing Molycorp 6% convertibles were weaker at 89 versus an underlying share price of $7.75.

"The old paper was just layered. The new is secured and the old is not, that's not positive [for the old bond]," a trader said.

"The new paper came with better language, a lower strike price; if you are going to own it, that's the one," he said.

The deal has an initial conversion strike price of $7.20, which was a premium of 20% compared to the $6.00 share price.

Concurrently with the notes, Molycorp priced $225 million of common stock, or 37.5 million shares.

Molycorp also priced a secondary stock offering equivalent to about $38 million of borrowed shares to facilitate hedging activities related to the notes offering.

Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC were the joint bookrunners for the notes, and Morgan Stanley, JPMorgan and Goldman Sachs & Co. were joint bookrunners for the primary share offering, while Morgan Stanley was the bookrunner for the borrowed share offering.

The convertibles will be non-callable for three years and then provisionally callable for two years if shares are 130% of the conversion price.

Proceeds are intended to be used to fund current capital expenditures and other cash requirements for 2013, including capital expenditures at its Mountain Pass facility.

Ship Finance adds a point

Ship Finance's newly priced overnight deal of 3.25% convertibles traded up to 101.25 bid, 102 offered versus a stock price of $16.50, with borrow, a syndicate source said.

Toward the end of the session, the paper was seen at par to 101, which was about a point better on a hedged basis.

Ship Finance shares slumped $1.26, or 7.2%, to $16.26, but the convertibles deal was referenced to the $16.50 price of concurrent primary and secondary stock offerings.

A fair amount of the new paper traded in the United States, but it also traded in Europe as Deutsche Bank's London desk had the borrow facility.

Ship Finance, a Hamilton, Bermuda-based provider of specialized ocean going vessels servicing the energy industry, priced an upsized $350 million of five-year convertible senior notes ahead of the market open Friday at par to yield 3.25% with an initial conversion premium of 33%.

Initially the overnight deal was seen at $250 million in size.

Pricing came at the rich end of coupon talk, which was 3.25% to 3.75%, and at the talked premium point.

The registered, off-the-shelf deal came concurrently with a $70 million common stock borrow facility.

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

The notes are non-callable for life. There is takeover protection.

Proceeds will be used to redeem or repurchase all of the company's outstanding 8.5% senior notes due 2013. Remaining proceeds will be used for general corporate purposes, including working capital.

Mentioned in this article:

Auxilium Pharmaceuticals Inc. Nasdaq: AUXL

JKX Oil & Gas plc London: JKX

KB Home NYSE: KBH

Molycorp Inc. NYSE: MCP

OPKO Health Inc. NYSE: OPK

Ship Finance International Ltd. NYSE: SFL

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