Mylan, Hospitality Properties climb on debut; Health Management, Superior Energy gain with stocks

By Kenneth Lim

Boston, March 2 - Friday was kind to new issues, with Mylan Laboratories Inc. sprinting off the starting blocks amid strong outright interest in its convertible.

Hospitality Properties Trust also gained slightly but had a quieter debut with most of the volume coming in the morning.

The convertible market in general ended the week with a slow session. Health Management Associates Inc. gained outright after payment of a special dividend was seen as reducing takeover potential of the company.

Health Management's 4.375% convertible due 2023 gained about 2 points outright at 105.75 against a stock price of $10.25. Health Management stock (NYSE: HMA) closed at $10.29, up by 4.26% or 42 cents.

"They were very, very busy," a sellside convertible trader said.

Naples, Fla.-based Health Management, a hospital operator focusing on rural communities, on Thursday paid out $2.4 billion, or $10 per common share, through a one-time cash dividend. The payout, which was funded through $3.25 billion of new senior secured debt, halved the company's market capitalization and was seen as a way for Health Management to keep potential acquirers away.

"My understanding is that they financed the special dividend by taking on debt," a convertible analyst said. "They levered up, so if they levered up, there's less that a takeout guy can do with the company after it's been taken out."

The trader said "the takeover protection is that they just paid the dividend."

"When companies have cash, that's the juice that private equity wanted, and now it's all gone to the shareholders," the trader said. "The conversion ratio [for the convertibles] goes up dramatically and you've got a lot more gamma to play with there. People like that. It's like loose change in the pocket."

Superior Energy Services Inc.'s 1.5% convertible due 2026 also gained in line with its stock after the company was added to the Standard & Poor's MidCap 400 index. The convertible was marked at 98.75 bid, 99.25 offered against a stock price of $32.625. Superior Energy stock (NYSE: SPN) rose 4.7%, or $1.47, to close at $32.72.

"We saw outright buy interest in Superior Energy," a sellsider said. "They were added to the S&P MidCap 400, which helped the equity out."

Superior Energy, a Harvey, La.-based oilfield services and equipment provider, will replace Mercantile Bancshares Corp. on the index. The effective date of the change has not been announced.

Mylan surges with outright help

Mylan's new 1.25% convertible senior note due 2012 leapt by about 4 points outright on its secondary market debut as a strong common helped drive outright interest in the name.

The convertible was quoted at 103.875 bid, 104.125 offered versus a stock price of $19.85 late Friday. The convertible was offered at par. Mylan stock (NYSE: MYL) closed at $19.87, down by 1.92% or 39 cents.

Mylan's upsized $550 million deal priced at the rich end of talk on Thursday after the market closed, at an initial conversion premium of 15%. It was talked at a coupon of 1.25% to 1.75% and an initial conversion premium of 10% to 15%.

The size of the deal was originally $400 million. The over-allotment option was reduced to an additional $50 million from an additional $60 million.

There was a concurrent upsized $443.625 million offering of 22.75 million shares of Mylan common stock at $19.50 per share.

Merrill Lynch and JP Morgan were the bookrunners of the registered convertible and stock offerings.

Mylan, a Canonsburg, Pa.-based maker of generic drugs, plans to use the proceeds to fund convertible note hedge and warrant transactions and to fund general purposes.

"People loved the low premium," a sellside analyst said. "Jesus, is this right? The premium was supposed to be 15% of the new stock price, but the stock went up and it was only 11% at the peak. People gobbled it up."

The analyst said the deal looked like it was mostly played by outright investors.

"It didn't model cheap or anything when it came," the analyst said. "It had a really low coupon and volatility, so it didn't look that attractive for hedgies."

A convertible strategist said the strong outright interest in the name helped push the convertible higher than expected.

"I think it's even beyond the scope of where a lot of these new issues have traded, outside the generally accepted credit and vol," the strategist said. "It's about 100 basis points over Libor, which is hard to get any tighter, and right now it's about 28% or 29% vol, when probably the real vol is around 22%...I'm not going to use the word insane, but the strong support from the outright community has kind of stretched the valuations on this."

But the strategist said generic drug makers have tended to perform well.

"Generic pharma names generally do trade well," the strategist said. "You can look at Watson Pharmaceuticals and Teva Pharmaceutical; they all trade at multiple vol points above their vol metrics. Still, I thought it [Mylan] would trade at 24% to 25% vol; I didn't think it would go so high."

"There are still arb guys involved, but I would say the bulk of it is outright," the strategist said. "If you like the stock, it's a low premium; so, if you're outright it's pretty attractive."

A sellside convertible trader quipped that everybody got involved in the new convertible on Friday.

"It's a good piece of paper and it's a quality name," the trader said.

The trader said it was possible that some hedge accounts may also have been behind the strong bidding.

"You could have had guys shorting the stock yesterday or the day before; some of them shorted the stock at say $20.50," the trader said. "You don't get as many bonds as you want, but you have an awful lot of room to be bidding up these things like an outright."

Hospitality Properties gains

Hospitality Properties' new 3.8% convertible senior note due 2027 also improved, although activity died down shortly after the market opened.

The new convertible was 100.25 bid, 100.375 offered versus a stock price of $43.45. The convertible was offered at par. Hospitality Properties stock (NYSE: HPT) closed at $42.99, lower by 1.42% or 62 cents.

"I saw it traded in the Street but only in the morning," a sellside convertible trader said. "But it's been very, very quiet since then."

Hospitality Properties priced its $500 million offering on Thursday after the market closed, at an initial conversion premium of 15.8%. The deal was talked at a coupon of 3.625% to 4.125% and an initial conversion premium of 12.5% to 17.5%.

There is an over-allotment option for a further $75 million.

Merrill Lynch, Morgan Stanley and UBS Investment Bank were the bookrunners of the Rule 144A offering.

Hospitality Properties, a Newton, Mass.-based real estate investment trust that focuses on hotels, said it will use the proceeds to partly repay debt incurred through its acquisition of TravelCenters of America Inc.

A sellside convertible analyst said the convertible looked fair to expensive where they priced.

"They were closer to a 20% vol [where they priced], which for a REIT you might actually realize that these days," said the analyst, who used a smaller volatility assumption. "But I wouldn't want to put that on a new issue."

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