Molina Healthcare slides outright, adds on hedge; DFC to price $200 million convertibles

By Rebecca Melvin

New York, April 9 - Molina Healthcare Inc. was a big trader in the convertible bond market on Monday - the day after a long holiday weekend - with the Molina 3.75% convertibles sliding sharply in tandem with the underlying shares after word that Ohio isn't renewing its contract with the health management organization. The convertible paper improved on a dollar-neutral, or hedged, basis, however, market sources said.

Action elsewhere in the secondary market was minimal, sources said. Even Molina was busy for a short period and then it "quieted down like everything else," a New York-based trader said.

A Micron Technology Inc. call of all of its 4.25% convertibles due 2013, of which there is $138.88 million left outstanding, didn't spark any notable trade.

The Boise, Idaho-based maker of semiconductor devices "had recently taken out a bunch of those," a Connecticut-based trader said.

The Micron convertibles will be redeemed at $1,062.08 per $1,000 bond on June 4.

Reno, Nev.-based gaming equipment maker International Game Technology Inc. looked to be lower, with the 3.25% convertibles due 2014 at 112 from 113.25 on Thursday, according to Trace data, but there was no notable action in the name, sources said.

Meritor Inc.'s 4.625% convertibles due 2026 printed at 91.5 but were otherwise quiet.

Meritor is "a credit play, so maybe people were re-hedging their credit," a trader said.

With credit markets were open half a day on Friday, market players may have been finishing off trades on Monday that they were unable to find liquidity for on Friday, the trader said.

Meanwhile, shares of the video game publisher THQ Inc. dropped 5 cents, or 10%, with most of that amount coming off sharply at the close. But the THQ convertibles printed at 49 bid, 49.25 offered, which looked roughly in line with where they had been trading, a market source said.

After the market close, DFC Global Corp. launched a convertible deal for $200 million of five-year bonds, which were talked to yield 2.75% to 3.25% with an initial conversion premium of 27.5% to 32.5%.

The Berwyn, Pa.-based provider of financial services to unbanked and under-banked consumers was being eyed by one buysider through the lens of previous deals in the space. He said, "Let's hope DLLR does better than CCRT."

Like DFC, Compucredit Holdings Corp. provides financial services to underserved consumers. Its shares have dropped sharply since its convertible bonds were issued.

Equity markets tumbled Monday in response to a disappointing March jobs report, which was released on Friday when stock markets were closed and the bond market was partially closed in observance of Good Friday.

On Monday, stocks were down for a fourth straight session, but the convertible bond market didn't follow the broader markets lower.

"It was just a quiet day," New York-based trader said. "Maybe guys didn't want to reach for liquidity on a stiff day."

Pressuring the broader markets was the fact that the United States added only 120,000 jobs in March, about half the pace from December through February, the Commerce Department said.

And while most economists had not expected March to beat January or February, Friday's report left much to be desired and some wondering if it foreshadowed softening in the first half of 2012.

As for what to expect on Tuesday, there may be some strength or it may be more of the same, a trader said.

"Europe is back tomorrow; and Europe gets their negative trading out of the way on Friday, so there may be some strength," the trader said.

In addition, investors will turn their attention to first-quarter corporate earnings reports, with Alcoa Inc. unofficially kicking off the session with its results Tuesday.

Molina adds on hedge

Molina's 3.75% convertibles due 2014 slid about 18 points outright to 112 from 130, while the underlying shares of the Long Beach, Calif.-based health management organization tanked on news that the state of Ohio won't renew Molina's contract to manage 1.5 million patients in Ohio's Medicaid program.

But the bonds were said to have improved by 1.5 points on a hedged basis. One trader said the improvement was 2 points better on hedge.

The bond was trading just south of 113 with the stock just north of $26.50.

The delta on the bonds moved from 70% to 75% before the news to 55% to 60%.

Ohio plans to merge eight managed care regions within the state into three, part of changes that will save taxpayers $1.5 billion, the Job and Family Services Department said in a statement on April 6.

DFC eyes $200 million deal

DFC's planned $200 million of five-year convertibles was talked to yield 2.75% to 3.25% with an initial conversion premium of 27.5% to 32.5%.

The deal was being priced concurrently with a call spread, which will raise the premium from the issuer's perspective.

The deal was seen being priced under Rule 144A, with final terms fixed after the market close on Tuesday.

Barclays Capital Inc., Deutsche Bank Securities Inc. and Wells Fargo Securities LLC are the bookrunners.

Nomura and JMP Securities LLC are joint lead managers.

Co-managers are C.L. King & Associates, Roth Capital Partners and William Blair & Co.

The bonds are non-callable for life with no puts. The securities have net share settlement and have dividend protection via a conversion rate adjustment, as well as cash takeover protection.

Proceeds will be used to repay amounts outstanding under the company's revolving credit facility and for general corporate purposes, and to fund the cost of a call spread.

Mentioned in this article:

DFC Global Corp. Nasdaq: DLLR

International Game Technology Inc. NYSE: IGT

Meritor Inc. Nasdaq: MTOR

Micron Technology Inc. NYSE: MU

Molina Healthcare Inc. NYSE: MOH

THQ Inc. NYSE: THQI

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