MannKind takes off; Molson quiet in gray; Human Genome rebounds; three REITs, Trex launch deals

By Kenneth Lim

Boston, June 11 - The convertible market had an active session on Monday as convertibles mostly improved outright with MannKind Corp. surging after a puzzling climb in its stock.

Molson Coors Brewing Co. was quiet in the gray market as its $500 million deal was seen as fair at the midpoint of talk although analysts expected support from outrights looking for exposure to the sector.

Human Genome Sciences Inc. was flat to slightly better as outright investors looked for a bargain after the stock slipped the week before.

New deals continue to pour from the pipeline, with about $505 million of new convertibles planned by Sunstone Hotel Investors Inc., NorthStar Realty Finance Corp., Trex Inc. and Thornburg Mortgage Inc.

MannKind leaps with stock

MannKind took a big step up on Monday after the stock took off, but a lack of news on the tickers and a quiet gossip mill left observers scratching their heads.

MannKind's 3.75% convertible due 2013 traded at 94.25 against a stock price of $13.60, higher by about 5 points outright. MannKind stock (Nasdaq: MNKD) closed at $13.60, higher by 15.55% or $1.83.

"I have no idea what's going on there," a sellside convertible trader said. "The stock's been climbing since last week and nobody really knows why."

MannKind, a Valencia, Calif.-based biopharmaceutical company whose lead product is an inhaled insulin system still under development for treating diabetes, has seen its stock climb about 21.5% from a week ago.

"Someone mentioned that they're presenting at the Needham [& Co. Biotechnology and Medical Technology] Conference on Wednesday, and there was a report that [chairman and chief executive] Alfred Mann bought about 25,000 shares on the 7th," a sellside analyst said. "But that's what I read although I don't know why it's up so much."

The convertible trader said the name was worth a close watch, but the stock's sharp movement on Monday should be taken with a grain of salt.

"That is a big move, but sometimes stocks spike or dip for no reason at all," the trader said. "One thing to note is that the volume on the stock wasn't a lot, so it might not be indicative of anything major. It could also be just a few of investors buying ahead of the conference hoping for good news. There's certainly potential for a good upward move in the name because of this diabetes drug they have, so you'll probably see some movement in the stock every once in a while when people think some news is going to come out."

Molson Coors quiet in gray

Molson Coors' planned $500 million of six-year convertible senior notes was quiet in the gray market on Monday as analysts described the deal as a plain-vanilla offering that just modeled fair at the midpoint of talk.

Price talk guided for a coupon of 2.375% to 2.875% and an initial conversion premium of 22.5% to 27.5%. Molson Coors stock (NYSE: TAP) eased 1.69% or $1.51 to close at $87.61 on Monday after the deal was announced early in the day.

The deal was expected to price Monday after the market closed. The convertibles were offered at par.

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

Citigroup and Deutsche Bank were the bookrunners of the registered offering.

Molson Coors, a Golden, Colo.-based brewing company, said it will use $397 million of the proceeds to partly fund subsidiary Coors Brewing Co.'s cash tender offer to redeem $450 million of 6.375% senior notes due 2012. That tender offer was announced Monday and expires July 10. Another $45 million of the proceeds will fund convertible note hedge and warrant transactions while a further $50 million will fund a voluntary pension contribution.

"It's fair at the mids," said a convertible strategist who used a volatility in the low 20% range and a credit spread just wider than 40 basis points over Libor. "I think it's where it's expected to come. It doesn't look bad. It's an underrepresented space in the convertible market as far as beverages/breweries are concerned, so there could be some demand there from outrights. As long as it comes at the mids or better it should do OK. If they try to come aggressive it may take it down to par."

The strategist said Molson Coors' use of the proceeds to redeem the 6.375% senior notes will likely be better for the company's credit, but the improvement will probably be insignificant.

"The credit is so well-defined that I'm not sure it's going to move the needle that much," the strategist said. "It'll be a case of whether somebody thinks they can realize that much vol."

A sellside convertible analyst used a slightly lower volatility assumption but a slightly tighter credit spread and also found the deal to be "fair to maybe a little bit rich."

"On a hedge it looked kind of unexciting," the analyst said. "There could be some interest in outrights, except the stock...looked kinda weak. It had reversed off of its high and could be trending off of its peak."

While a potentially weak stock could be attractive for hedge investors, the deal nevertheless did not look that attractive on a hedge, the analyst said.

"That might be good for hedgies, but it didn't really set up great and it's not really a high volatility name," the analyst said. "If you weren't able to trade the vol and realize some of that in a relatively short term then the carry would start to hurt."

Human Genome holds up after slide

Human Genome's 2.25% convertible due 2012 was unchanged early Monday but saw modest gains later in the day as outright investors took advantage of the common stock's recent slide.

The convertible traded at 86 versus the closing stock price of $9.93, up by a half-point. Human Genome stock (Nasdaq: HGSI) slipped 1.1% or 11 cents over the day.

"We saw good outright buy interest in Human Genome Sciences," a sellsider said. "The stock was down last week and the vol has come off - six to nine months ago it was a 40% vol name, now it's about 32%, which is tied to the lack of stock-moving news flow. That's just a function of where their two main drugs are, starting to move into Phase 3 after a very busy 2006."

Human Genome is a Rockville, Md.-based drug company.

Three REITs, Trex launch deals

Four more new deals were announced on Monday as the primary market continues to run at a brisk pace in what has been one of the most prolific first six months to start a year.

Sunstone plans to price $220 million of 20-year exchangeable senior notes on Tuesday after the market closes, talked at a coupon of 4.3% to 4.6%, an initial exchange premium of 23% to 25% and reoffered at 99.5.

The notes are issued by Sunstone's operating partnership, Sunstone Hotel Partnership LLC and will be exchangeable into Sunstone's common stock.

There is an over-allotment option for a further $30 million.

Bear Stearns is the bookrunner for the Rule 144A offering.

Sunstone, a San Clemente, Calif.-based real estate investment trust with a portfolio of hotel properties, said it will use the proceeds to pay down a $175 million loan on the Hyatt Regency Century Plaza Hotel and to buy back up to $60.2 million of its common stock. Sunstone on Monday said its board approved a $100 million stock buyback program.

NorthStar's $150 million of 20-year exchangeable senior notes is also slated to arrive after the market closes, talked at a coupon of 6.75% to 7.25% and an initial exchange premium of 27.5% to 32.5%.

The exchangeables will be offered at par. They are issued by NorthStar's operating partnership, NorthStar Realty Finance LP, and are exchangeable into NorthStar common stock.

There is an over-allotment option for a further $22.5 million.

Banc of America and Wachovia Securities are the bookrunners of the Rule 144A offering.

NorthStar, a New York-based real estate finance company that focuses on real estate debt and securities and net lease properties, said the proceeds of the deal will be used to repay existing debt, acquire investment and fund general purposes.

A third REIT, Thornburg, announced plans for $50 million of perpetual convertible redeemable preferred stock but price talk and timing were not available Monday.

There is an over-allotment option for a further $7.5 million.

Stifel, Nicolaus & Co. and A.G. Edwards & Sons are the bookrunners of the registered deal.

The preferreds will pay a fixed quarterly dividend at the base dividend rate. If Thornburg's common dividend exceeds 68 cents per quarter, the preferreds will pay an additional dividend amount equal to the product of the excess and the prevailing conversion rate.

Thornburg, a Santa Fe, N.M.-based single-family mortgage lender, said it will use the proceeds of the deal to acquire or originate additional adjustable-rate mortgage assets and for working capital.

Trex is the only non-REIT with a deal expected to price Tuesday. The Winchester, Va.-based maker of wood-alternative decking, railing and fencing products has an $85 million offering of five-year convertible senior subordinated notes talked at a coupon of 4.5% to 5.5% and an initial conversion premium of 20% to 25%.

There is an over-allotment option for a further $10 million.

JPMorgan is the bookrunner of the registered offering.

Trex said it will use $25.7 million of the proceeds to repay its outstanding $24 million of 8.32% senior secured notes due 2009. It will also use the proceeds to repay an existing $45.8 million of senior secured revolving loan and fund general purposes.

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