New Medicis, Ryland upsized, trade flat to up slightly in secondary; Chesapeake pressured

By Rebecca Melvin

New York, May 11 - Most of Friday's action in the convertible bond market was concentrated in the two new deals that were upsized at pricing after same-day marketing Thursday.

Medicis Pharmaceutical Corp.'s upsized $450 million of 1.375% convertible senior notes traded up slightly in secondary dealings Friday after price talk was revised aggressively and final terms came toward the cheap end of the tightened talk.

"MRX did OK," a New York-based trader said, suggesting that on a dollar-neutral, or hedged, basis the paper was up by a teeny to 0.125 point.

Ryland Group Inc.'s upsized $200 million of 1.625% six-year convertible bullets lifted along with shares after that paper came at the rich end of talked terms. The new Ryland ended the day at 100.5 bid, 102 offered, with the underlying shares up 0.8%, according to a syndicate source.

The two new issues "traded a ton," a trader said. But many players were uncertain about the details of the debuts. Medici, for example, had a call spread, but market players didn't know how it was set up and how shares were trading in conjunction with those deals.

"The investment banking side has become so competitive due to lack of issuance. It's brutal, with guys chomping at the bit to get the business," a trader said.

For the week, $1.62 billion in new convertibles issuance priced in four deals, not including over-allotment options. The largest deal was Annaly Capital Management Inc.'s new 5% convertible senior notes, which was $750 million in size.

Annaly, which priced at a discount to par of 98, was mostly quiet on Friday, but an institutional-sized outright trade went up at 97.75, a trader said.

Elsewhere, NetApp Inc.'s convertibles were said to have traded "in" about 0.125 point, with the underlying shares of the Sunnyvale, Calif.-based data storage company rising 1%.

Chart Industries Inc. was in line.

Meanwhile, A123 Systems Inc.'s existing 3.75% convertibles due 2016 were mostly quiet, but traded down 2 points later in the session after the rechargeable battery maker cut guidance for its first quarter and full year and said it priced $50 million of 2013 convertibles in a private deal that is to be paid back in 28 increments twice a month until maturity.

Also Chesapeake Energy Corp. was under pressure, with the underlying shares of the Oklahoma City-based natural gas producer taking a steep dive in the last hour of trade Friday after the company disclosed that it might need to delay asset sale plans to comply with corporate credit facility requirements.

The company was planning to sell assets to fund operations this year as the company faces severely depressed natural gas prices.

New Medicis upsized

Medicis' new 1.375% convertibles traded at 101.875 versus an underlying share price of $37.66 toward the end of the session, a trader said.

The new paper, which traded very actively, gained maybe 0.125 point on a dollar-neutral basis using a 55% delta.

Shares of the Scottsdale, Ariz.-based specialty pharmaceutical company added 25 cents, or 0.7%, to $37.91 on Friday.

"We didn't get all the details regarding the call spread and the company buying back shares. No one gave the exact details, but the stock did seem to cooperate," a New York-based trader said.

A second trader concurred, saying that the underwriters have much tighter control of new deals than they have tended to have in the recent past.

The company entered into convertible note hedge transactions that were funded with $40 million of proceeds from note and warrant sales.

The deal was upsized by $50 million to $450 million, and pricing came toward the cheap end of revised terms after the close on Thursday.

The 1.375% convertible has an initial conversion premium of 25%.

Revised price talk was for a coupon of 1% to 1.5% and an initial conversion premium of 25%, which was tightened from original talk of 1.5% to 2% for the coupon and toward the tight, or rich, end of 20% to 25% premium talk.

The company is focused on dermatology and aesthetic treatments.

Proceeds are intended for general corporate purposes, which may include working capital, capital expenditures, repurchasing shares of common stock, repaying outstanding debt and corporate acquisitions.

New Ryland adds in trade

Ryland Group's new 1.625% convertibles was quoted last at 100.5 bid, 102 offered and the ending share price of the California-based homebuilder rose 18 cents, or 0.8% to $22.66.

The Ryland shares have a high volatility in the upper 40% to near 50%, and that high vol. makes it a likely candidate for hedge traders, market players said.

By way of comparison, the Medicis paper has a volatility in the low 30% range.

The issue priced after the close on Thursday and was upsized from $150 million.

The registered, off-the-shelf deal priced at the rich end of talk, which was 1.625% to 2.125% for the yield and 37.5% to 42.5% for the premium.

There is a $25 million over-allotment option, which was upsized from an originally talked $22.5 million.

Proceeds will be used for general corporate purposes, which may include the repayment or repurchase of debt.

A123 trades at 29.5

A123 Systems' 3.75% convertibles due 2016 traded down to 29.5 during the session, but was later seen at 30 bid, 30.5 offered, which was down about 2 points from previous levels.

Shares of the Watertown, Mass.-based developer and maker of lithium ion batteries and systems ended down 9 cents, or 8%, at $1.03.

The company sees first-quarter revenue of about $10.9 million, which is well below analysts' estimates of $18.4 million. The company expects a loss for the first quarter of $125 million, including $51.6 million in costs related to a recall of battery modules and packs that may contain defective prismatic cells. Net cash used in operating activities is expected to be $46.5 million, reducing cash at quarter end to $113.1 million.

The company now sees full-year revenue of $145 million to $175 million, down from the previous forecast of $230 million to $300 million.

In addition, the company announced a small, $50 million convertible offering, the principal of which will be paid back in semi-monthly installments until they mature in July 2013.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

A123 Systems Inc. Nasdaq: AONE

Chart Industries Inc. Nasdaq: GTLS

Chesapeake Energy Corp. NYSE: CHK

NetApp Inc. Nasdaq: NTAP

Medicis Pharmaceutical Corp. NYSE: MRX

Ryland Group Inc. NYSE: RYL

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