Planned KB Home adds in gray; newer Theravance still weak; Molycorp, OPKO, Auxilium on tap

By Rebecca Melvin

New York, Jan. 23 - KB Home's planned $150 million of six-year convertible bonds were bid higher in the gray market Wednesday ahead of final terms seen being fixed after the market close, sources said.

The KB Homes notes, which were pricing concurrently with $100 million of common stock, were plus 1, plus 3 in the gray market, traders said. There was a mild benefit associated with higher shares for the Los Angeles-based homebuilder, but the positive reception for the notes would have occurred even without the support of the underlying shares, a New York-based sellsider said.

Molycorp Inc.'s planned $100 million offering of five-year convertible senior notes was quiet in the gray market ahead of final terms seen being fixed late Thursday. A drag created by a drop in the underlying shares was not seen as significant given that the new deal is coming with a concurrent secondary stock offering associated with a share lending agreement for affiliates of the underwriter. It wasn't seen as being widely played away from the underwriter.

The existing Molycorp convertibles were lower outright but flat to better on a dollar-neutral basis depending on delta, a Connecticut-based trader said.

D.R. Horton Inc.'s 2% convertibles came in somewhat along with many in-the-money names, which were not at levels that enabled them to keep pace with gains in the underlying shares.

Smithfield Foods Inc.'s 4% convertibles and Tyson Foods Inc.'s 3.25% convertibles were mentioned as other in-the-money names that were a bit weaker in the face of higher shares.

"They were not well priced for ever rising equities," one trader said.

Much of the existing homebuilder paper like D.R. Horton and Lennar Corp. is low premium, deep in-the-money paper, which was unlikely to be influenced by a new issue like KB Homes.

D.R. Horton's 2% convertibles were seen at 169.25 versus an underlying share price of $21.55 Wednesday afternoon.

Equities have edged higher for most of January, with the Dow Jones industrial average up 4.6% so far this month.

But while in-the-money names have struggled to keep pace with their underlying shares, many yield names have continued to improve. Hologic Inc.'s 2% convertibles due 2037 and Rovi Corp.'s 2.625% convertibles due 2040 were both cited as doing better.

Recently priced Theravance Inc. didn't recoup any ground, however, after putting in a weak debut on Friday.

Meanwhile two other new issues launched after the market close on Wednesday. They were OPKO Health Inc.'s planned $150 million of 20-year convertible bonds that were talked to yield 2.75% to 3.25% with an initial conversion premium of 17.5% to 22.5% and Auxilium Pharmaceuticals Inc.'s $200 million of 5.5-year convertible bonds that were talked to yield 1.75% to 2.25% with an initial conversion premium of 27.5% to 32.5%.

Both deals were seen pricing after the market close Thursday.

KB Home adds in gray

The planned $150 million offering of convertible senior notes due Feb. 1, 2019 for KB Homes was better by 1 to 3 points.

The convertibles market likes the housing sector right now, one source said, and good housing numbers that KB reported late Tuesday were deemed as credit positive.

KB reported a preliminary order number for the first seven weeks of its fiscal first quarter that was up 54%.

Orders totaled 750 for the quarter through Jan. 18, up from 488 a year earlier. But KB also said that it expected the growth to moderate as the quarter continues.

"It was definitely a factor," a sellsider said about the market's response to the $150 million offering.

"It will be interesting to see if it gets upsized," he said.

The $150 million offering has a $22.5 million greenshoe and was being marketed by bookrunners Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Bank of America Merrill Lynch and Deutsche Bank Securities Inc.

If the deal was valued using a credit spread of 370 basis points to 400 bps over Libor with a vol. at 40%, you get fair value at plus 2 points, a source said.

The notes were talked to yield 1.375% to 1.875% with a 45% to 50% initial conversion premium. They are non-callable until Nov. 6, 2018.

Proceeds from the notes and a concurrent stock offering will be used for general corporate purposes, including land acquisitions and development.

KB shares gained $1.52, or 9%, to $18.63 on Wednesday.

Molycorp plans $100 million

Moving in the opposite direction were shares of the Greenwood Village, Colo.-based rare earths metals exploration company, which fell 95 cents, or 11%, to $7.88, depressed by word that it is falling short of its capital requirements and therefore was bringing concurrent notes and common stock offerings.

Molycorp's offering of five-year convertible senior notes was talked to yield 5.75% to 6.25% with an initial conversion premium of 15% to 20%.

There is a $15 million over-allotment option on the offering of registered notes.

Molycorp is also offering $200 million of common stock, with a $30 million greenshoe, and a $40 million secondary stock offering related to a share lending agreement with an affiliate of the underwriters.

Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC will act as joint bookrunners for the notes, and Morgan Stanley, JPMorgan and Goldman Sachs & Co. will act as joint bookrunners for the primary share offering. Morgan Stanley will act as the bookrunner for the borrowed share offering.

The convertibles will be non-callable for three years and provisionally callable for two years if shares are 130% of the conversion price.

The notes have takeover protection.

Proceeds are intended to be used to fund capital expenditures and other cash requirements for 2013, including capital expenditures at its Mountain Pass facility.

Molycorp said its fourth-quarter revenue and cash flow were also significantly less than expected due to lower production. It is expected to report quarterly results next month.

The company also said production for the first half of this year would be lower than expected due to delays in achieving phase 1 commercial production rate of 19,050 tonnes at Mountain Pass.

Existing Molys

Molycorp's 6% convertibles due 2017 were trading at 91 bid, 92 offered versus $7.94 for the underlying shares, a Connecticut-based trader said.

That was up a point or so on a dollar-neutral basis depending on the delta.

Molycorp's older 3.25% convertibles due 2016 were offered higher at 78 but weren't heard to have traded.

Molycorp shares plunged 94 cents, or 11%, to $7.89 on Wednesday. Earlier this month, the shares fell 23% to $8.34 when Molycorp cited production delays and weak pricing for its revisions to 2013 guidance.

Nevertheless, operations at its Mountain Pass, Calif.-based rare earth minerals mining facility have begun and it is expected to produce 19,050 tonnes annually by the end of June. The company originally expected that it would hit that rate by the end of 2012.

Theravance still lags

Theravance's 2.125% convertible notes due 2023, which debuted in secondary market trading on Friday, haven't recovered since not holding in all that well post-pricing.

The notes were seen at 98.5 bid, 99 offered versus an underlying share price of $20.30 at the end of Wednesday.

On Friday they traded as high as 101.25 bid, 101.375 offered but then fell to par, with many prints around 99.25. The common stock closed down 27 cents, or 1.31%, to $20.69 that day.

"It's the underperformer of new deals," a sellsider said.

"People were hoping the stock would bounce, but it hasn't," he said.

He said that the paper didn't come at very attractive pricing and there is less demand for the biopharmaceutical sector than for the homebuilding sector.

Auxilium, OPKO to price

Auxilium launched its registered, off-the-shelf offering of $200 million of 5.5-year convertible bonds with a $30 million greenshoe, and it was being sold via joint bookrunners Goldman Sachs and JPMorgan. Cowen & Co. and RBC Capital Markets are acting as co-managers.

The bonds are non-callable with no puts. There is takeover protection.

In connection with the offering, the company expects to enter into note hedge and warrant transactions, or purchase a call spread.

Proceeds will be used for general corporate purposes, which may include the acquisition of businesses, products, or product rights or technologies, and also to pay for the call spread.

Based in Malvern, Pa., Auxilium is a specialty biopharmaceutical company.

OPKO was being marketed by Jefferies & Co. under Regulation D private placement with Rule 144A trading capabilities.

The notes will be non-callable for four years and then will be provisionally callable for two years if shares are 130% of the conversion price, and subject to a coupon make-whole for that period. After year six, they are freely callable.

There are investor puts in years six, 10 and 15.

Proceeds from the offering were earmarked for general corporate purposes, including research and development expenses, acceleration of clinical trials, acquisitions of new technologies or businesses and other business opportunities.

OPKO is a health care company based in Miami.

Mentioned in this article:

Auxilium Pharmaceuticals Inc. Nasdaq: AUXL

D.R. Horton Inc. NYSE: DHI

Hologic Inc. Nasdaq: HOLX

KB Home NYSE: KBH

Lennar Corp. NYSE: LEN

Molycorp Inc. NYSE: MCP

OPKO Health Inc. NYSE: OPK

Rovi Corp. Nasdaq: ROVI

Smithfield Foods Inc. NYSE: SFD

Theravance Inc. Nasdaq: THRX

Tyson Foods Inc. NYSE: TSN

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.