New Knowles adds on swap; Molina drops outright, adds on swap; TiVo, Pandora improve

By Rebecca Melvin

New York, April 29 – Market moves related to earnings news remained a feature of trade in the convertibles market on Friday, but there was also a new deal that edged up in active trade as the underlying shares slipped on the last trading day of the month.

Knowles Corp.’s newly priced 3.25% convertibles traded up a little more than a point on an outright basis, and was higher on swap after the Itasca, Ill.-based advanced micro-acoustic products company priced an upsized $150 million of the 5.5-year senior notes at the rich end and beyond the rich end of talk.

The new Knowles convertibles were last seen at 101.25 with the underlying shares down 24 cents, or 1.8%, at $13.15, a New York-based trader said.

The bonds priced with a 37.5% initial conversion premium, which was beyond talk for a lower 27.5% to 32.5% premium. The coupon came in at the low end of 3.25% to 3.75% talk, and the deal size was increased to $150 million from an initially talked $125 million.

Back in established issues, Molina Healthcare Inc. was a central focus of traders, and those convertibles fell on an outright basis but improved on a dollar-neutral, or hedged, basis after the Long Beach, Calif.-based Medicaid services company posted quarterly earnings that fell well short of estimates.

After Knowles, Molina was the most actively traded name of the day, a trader said.

TiVo Inc.’s 2% convertibles due 2021 were also active and traded up a few points to about 98.25 after news that Rovi Corp. agreed to buy the Alviso, Calif.-based digital video recorders company for $10.70 per share in cash and stock, or $1.1 billion. The price tag represented a 13.6% premium over TiVo’s closing share price on Thursday.

The convertibles of Rovi, a Santa Clara, Calif.-based software and internet media company, were not heard in trade.

Also trading some in the convertibles market on the last trading day of April were LinkedIn Corp.’s convertibles, which were a little bit better after earnings, and Pandora Media Inc.’s convertibles, which were also trading a little bit better, a trader said.

Pandora shares gained on a narrower-than-expected quarterly loss. The Pandora convertibles were seen at 90.5 bid, 91 offered versus an underlying share price of $9.93.

“Pandora traded up a bit today” and was better by as much as 0.25 point, a trader said.

Overall the convertibles market was busier than a typical Friday, the trader said.

While April was a dismal month in terms of new issuance, with only two new deals priced for about $155 million for the entire month, hedged traders in the secondary market appeared to fare OK. For the month, the convertible arbitrage index was up 1.6%, according to Hedge Fund Research. That compares to a gain of only 0.52% for the year to date, according to the index.

Equities ended down for the day, with the Nasdaq stock index off 29.93 points, or 0.6%, to 4,775.36, the S&P 500 stock index down 10.51 points, or 0.5% to 2,065.30 and the Dow Jones industrial average off 57.21 points, or 0.3%, to 17,773.64.

Stocks ended lower for the week but were mixed for the month. The S&P 500 index and the Dow ended the month practically unchanged, but the Nasdaq ended down 2.9% for the month.

New Knowles edges up

Knowles’ new 3.25% convertibles due 2021 were seen to have expanded some as the bonds traded up to 100.5 and 101 plus, with the underlying shares off slightly. The Knowles shares pared some of their intraday losses, ending down 3 cents, 0.2%, to $13.37.

The supplier of advanced micro-acoustic, specialty components and human interface services priced an upsized $150 million of the 5.5-year convertible senior notes after the market closed on Thursday with a 3.25% coupon and a 37.5% initial conversion premium.

Knowles increased the size of the notes from a planned $125 million.

The greenshoe was increased to $22.5 million from $18.75 million, according to a news release.

J.P. Morgan Securities LLC is the bookrunner, and BofA Merrill Lynch is a joint lead manager.

The notes are non-callable for life with no puts, and they have takeover protection.

In connection with the pricing of the notes, Knowles entered into privately negotiated convertible note hedge and warrant transactions with initial purchasers of the bonds, or a call spread. These transactions will raise the effective conversion premium from the issuer’s perspective to 57.5%.

Proceeds will be used to reduce borrowings outstanding under Knowles’ term loan facility, with a portion earmarked to pay the cost of the call spread.

Molina adds on swap

Molina’s 1.125% convertibles dropped 22 points on an outright basis, or about 13%, against shares that were lower by 19%.

The Molina earnings report weighed on its peers in the Medicaid/insurer space, including Anthem Inc.

Molina’s 1.125% convertibles traded at 143.6 in the early going, which was down 22.25 points on an outright basis. But versus Molina shares, which dropped sharply by $12.08, or 19%, to $52.13, the 2020 bonds expanded about a point to 1.25 points on swap, a New York-based trader said.

Molina’s 1.625% convertible due 2044 fell about 4 points to 113. That bond expanded about 0.25 point on swap.

“The 1.125% convertibles are up about 1.25 points on a higher delta. The 1.625% convertibles are deep in the money and they opened up about 0.25 point. Hedged investors did better, outrights not so much,” a New York-based trader said.

Molina posted first-quarter net income of $24 million, or 43 cents per share. Earnings adjusted for amortization were 51 cents a share, which fell well short of estimates for about 80 cents per share.

The Medicaid services company posted revenue of $4.34 billion, which was better than estimates for $4.17 billion.

Looking ahead, Molina expects full-year earnings of $2.50 to $2.95 per share, with revenue in the range of $17.3 billion to $17.4 billion.

Molina said it was overwhelmed by customer growth from Medicaid exchanges related to Obamacare.

Its national health care exchange membership more than doubled to 630,000 in the first quarter from about 266,000 in the year-earlier quarter.

Due to the unexpected growth, the company faced a setback in controlling customer medical care costs.

The big earnings miss was primarily due to the “general failure of Medicaid rates to keep pace with the growing medical care costs,” higher utilization by customers in Texas and Ohio, and higher-than-expected pharmacy costs, especially for high-cost specialty drugs, the company said.

In addition, the company referred to potential financial effects from the Zika virus. “While very few of the expectant mothers among our membership have contracted the virus, the full effects will not likely be known for several months,” the company said.

In Puerto Rico, where the Zika virus crisis is acute, Molina has about 339,000 plan members out of 4.2 million total.

Meanwhile, the risk adjustment program under Obamacare, where low-risk insurers take some of the burden from high-risk insurers, had a negative impact on the company.

Mentioned in this article:

Anthem Inc. Nasdaq: ANTM

Knowles Corp. NYSE: KN

LinkedIn Inc. Nasdaq: LNKD

Molina Healthcare Inc. NYSE: MOH

Pandora Media Inc. NYSE: P

Rovi Corp. Nasdaq: ROVI

TiVo Inc. Nasdaq: TIVO

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