Discounted Restoration Hardware remains below par; planned Ctrip.com seen modestly cheap

By Rebecca Melvin

New York, June 18 – Restoration Hardware Holdings Inc.’s new 0% convertibles remained below par on Thursday after the $250 million deal of five-year senior notes priced at a discount of 98.75. Shares were a little higher early in the session, which helped the bonds, a syndicate source said. But as they climbed higher into the market close, the new bonds didn’t keep pace.

Restoration Hardware’s older 0% convertibles due 2019 traded at 102.2, which was up modestly.

The planned $1 billion deal of Ctrip.com International Ltd., which was launched after the market close on Wednesday, was seen modestly cheap at talked terms. The shorter-dated, $500 million tranche of 2020 notes was seen plus 0.5 point bid in the gray market before final terms were expected to be fixed.

Ctrip’s older 1.25% convertible due 2018 was very heavily traded and was last seen down nearly a point at 115.59, according to Trace data.

Aside from the new and old Restoration Hardware and old Ctrip bonds, BioMarin Pharmaceutical Inc.’s convertibles traded actively and surged on an outright basis after the Novato, Calif.-based biopharmaceutical company announced positive results from a phase 2 trial for a drug to treat children’s dwarfism.

Health care outperformed the overall market, a trader said. But he wasn’t tracking the BioMarin bonds, which are expensive issues.

Synergy Pharmaceuticals Inc.’s stock extended gains, adding another 20% on top of a 68% spike on Wednesday. The convertible bonds weren’t as active on Thursday as on Wednesday, but they were marked up another almost 50 points to 294.875 bid, 296.875 offered versus a share price of $9.17, a trader said.

Shares of the New York-based biopharmaceutical company have doubled in the last two days after positive phase 3 trial results for the company’s plecanatide constipation drug were announced.

Qihoo 360 Technology Co. Ltd. saw a significant amount of follow-on trade in its 2.5% and 1.75% convertibles a day after news that an investor group including the chief executive has offered to buy the Chinese internet company for $77.00 per American Depositary Share.

Overall, there was a better bid to the convertibles market, which was attributed to better demand following weaker markets related to fears regarding the Greek debt bailout talks.

“It was better to buy,” a New York-based trader said of Thursday’s convertibles market. “Guys starting adding and lifting offers. It seems like people are more comfortable that Greece isn’t going to happen – that it will be much less of an event than people thought.”

In addition equities rallied, emboldening many outright players to dip their toes back in the water, the trader said.

The Nasdaq stock market, which includes a lot of biotech names, jumped 68.07 points, or 1.3%, to 5,132.95, the Dow Jones industrial average gained 180.10 points, or 1%, to 18.115.84, and the S&P 500 stock index jumped 20.80 points, or nearly 1%, to 2,121.24.

Restoration Hardware in focus

Restoration Hardware’s 0% convertibles due 2020 traded at 98.375 bid, 98.875 offered with the underlying shares at $94.51, a Connecticut-based trader said during the session.

The new bonds were seen at 99 before the open and then traded predominantly in the 98.5 to 98.75 range.

“So they were right around issue,” a New York-based trader.

Shares were a little higher in the early going, which helped the deal, a syndicate source said, but shares pulled up further into the close, ending higher by $1.39, or 1.5%, to $95.89.

“It wasn’t for hedge funds, and with the stock finishing up $1.39, it tells you that people wanted out and the underwriter is long a lot of bonds,” a trader said.

Restoration Hardware priced $250 million of the 0% five-year convertible senior notes that were reoffered at 98.75, and with an initial conversion premium of 25%.

Pricing of the Rule 144A deal came at terms that were mixed compared to talk for a 0% to 0.25% coupon and 25% to 30% premium.

BofA Merrill Lynch and Goldman Sachs & Co. were joint bookrunners of the offering, for which there is a $50 million greenshoe.

The notes are non-callable and have net share settlement.

In connection with the notes, the company entered into convertible note hedge and warrant transactions, or a call spread. The strike on the warrants is $189.00, which boosts the initial conversion premium to 100% from the issuer’s perspective.

Proceeds will be used to pay the net cost of the call spread and for business initiatives, including expansion of business and additional growth opportunities.

Planned Ctrip.com looks OK

Ctrip.com’s planned $500 million five-year tranche, which was seem pricing with a 0.75% to 1.25% coupon and a 42.5% to 47.5% initial conversion premium, was bid at 100.5 in the gray market. There wasn’t a gray market heard in the $500 million seven-year tranche, which was seen pricing with a 1.5% to 2% coupon and the same 42.5% to 47.5% premium.

Ctrip.com, a Shanghai-based travel services provider, plans to price up to $1 billion of convertible senior notes in two tranches under Regulation S and Rule 144A.

One trader saw the deal modestly cheap but said “the question is how many people are going to want $1 billion of Chinese exposure.”

Still he thought the deal would do fine.

He also said the weight of the new deal was not pressuring the existing space. There was no evidence that portfolio managers were lightening up to make room for the new paper, he said.

Using a credit spread of around 550 basis points over Libor and a 40% vol. on both tranches, the $500 million of 2020 notes were at a 101.85 valuation and the $500 million of 2025 notes came to 102.65.

Ctrip.com shares ended down 40 cents, or 0.5%, to $75.01.

The notes were being sold via bookrunner J.P. Morgan Securities LLC.

Mentioned in this article:

BioMarin Pharmaceuticals Inc. Nasdaq: BMRN

Ctrip.com International Ltd. Nasdaq: CTRP

Qihoo 360 Technology Co. Ltd. Nasdaq: QIHU

Restoration Hardware Holdings Inc. NYSE: RH

Synergy Pharmaceuticals Inc. Nasdaq: SGYP

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