China Medical climbs on debut; RARE up, Duke, School Specialty, Chattem quiet in gray; Interpublic rises

By Kenneth Lim

Boston, Nov. 16 - The convertible bond market had another busy session on Thursday, with new issues continuing to drive activity.

China Medical Technologies Inc. gained a couple of points right from the start after the deal was upsized and priced at the rich end of talk.

RARE Hospitality International Inc. rose slightly in the gray market ahead of expected pricing after the market closed, although investors thought the deal was only a tad cheap.

Duke Realty Corp. and School Specialty Inc. were quiet in the gray market as critics called their offerings too aggressively marketed during talk. Chattem Inc. also was quiet in the gray market despite estimates that it modeled cheap, with the deal likely to end up with just a handful of investors.

Beyond the deals, Interpublic Group of Cos. Inc.'s new 4.25% convertible senior note due 2023 traded at 120.375 against a stock price of $11.90. That was about 4 points higher outright than levels on the company's older 4.5% convertibles due 2023, for which Interpublic exchanged $400 million of the newer series. Interpublic shares (NYSE: IPG) rose 1.45%, or 17 cents, to close at $11.93.

The new convertibles are "two vol points cheaper than the old one, breakeven a few months outside of call protection," a sellsider said, adding that the new convertibles also have parity below par and a liquid credit derivative market.

Interpublic, a New York-based advertising and marketing company, said Thursday it had completed the exchange of the notes through private transactions with a small number of institutional investors. Compared to the old notes, the new convertibles have a lower coupon, calls and puts that start three years later, in 2012, and dividend protection but not contingent payment.

China Medical climbs

China Medical's new 3.5% convertible due 2011 gained a couple of points outright on the back of strong interest in the upsized offering.

The convertible was marked at 101.75 bid, 102.25 offered against the closing stock price of $25.50. China Medical stock (Nasdaq: CMED) closed at $25.50, lower by 1.09% or 28 cents.

"Looks like they did well," a buyside convertible bond trader said.

China Medical priced its upsized $125 million offering Wednesday after the market closed, with an initial conversion premium of 25%. The notes were offered at par and talked at a coupon of 3.5% to 4% and an initial conversion premium of 20% to 25%.

The size of the deal was originally $100 million. The over-allotment option for a further $25 million remains.

Merrill Lynch was the bookrunner of the Rule 144A offering.

China Medical, a Beijing-based maker of cancer treatment devices, said it will concurrently repurchase $30 million of its common stock using the proceeds of the deal. It will also use the proceeds for general purposes and to acquire businesses, products and technologies.

A sellside convertible bond analyst said the offering appeared to be interesting mostly for outright investors.

"The company's got a pretty strong balance sheet, hardly any debt, and their business is doing well and growing," the analyst said. "Some people mentioned risks in terms of the company's business and management mostly based in China, but even if you discount it still looks fairly interesting...The borrow wasn't great, but it looks like they set up a borrow facility, so you'll probably still find some hedge guys playing it."

RARE gains in gray

RARE Hospitality's planned $110 million of 20-year convertible senior notes was bid up by just under a point in the gray market on Thursday, as the deal was largely perceived as just cheap enough.

The planned convertible was bid up by 0.25 to 0.5 point in the gray market. It was being offered at par. RARE stock (Nasdaq: RARE) gained 1.24%, or 41 cents, to close at $33.49.

"It's really the only one that anybody saw [in the gray]," a buyside trader said.

RARE planned to price the deal after the market closed, with talk guiding for a coupon of 2.5% to 3% and an initial conversion premium of 30% to 32%.

There is an over-allotment option for a further $15 million.

Wachovia Securities is the bookrunner of the Rule 144A offering.

RARE, an Atlanta-based restaurant operator, said it will use the proceeds to concurrently buy back its common stock, up to $70 million of which will be repurchased concurrently.

"We're haircutting the realized vol a little bit, because there's no market for this," said a sellside convertible bond analyst, who modeled the deal between 101 and 102 at the midpoint of talk.

A buyside convertible bond analyst said the offering did not seem appealing on an outright basis.

"Like all the rest, the stock looks a little overextended at the moment," the buysider said. "It's not necessarily the right time to be buying the equity."

Duke, School Specialty, Chattem quiet

Of all the deals that were pricing Thursday, only RARE saw any action in the gray market, as investors thought the offerings by Duke Realty and School Specialty appeared too rich, while only a handful of buyers appeared to have access to Chattem.

Duke's planned $500 million of five-year exchangeable senior notes were talked at a coupon of 3.75% and an initial exchange premium of 20%, and reoffered at 98.5 to 99. Duke stock (NYSE: DRE) gained 0.47%, or 19 cents, to close at $40.79.

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

Morgan Stanley is the bookrunner of the Rule 144A offering.

Duke, an Indianapolis-based real estate investment trust focused on the United States' Midwest and Southeast markets, said the proceeds of the deal will be used to fund a capped call transaction, to buy back $110 million of its common stock, to repay an outstanding unsecured credit line and for other general purposes.

"It looked like it was just fairly valued," a sellside convertible bond analyst said. "The credit is pretty much in line with Vornado, from yesterday [Wednesday]...and the implied vol and realized vol are pretty much right there. I wouldn't be surprised if some of the investors are even pushing for 98. It's probably going to come at the cheap end of the reoffer range."

A buyside convertible analyst said Duke's deal seemed like one of too many REIT deals.

"There will be roll call at the end of the year to see who hasn't issued a convert," the buysider said of REITs. "You don't get into the REIT club if you haven't got at least one convert outstanding. It's quite incredible, and most of them have gone up, which suggests that there's quite a bit of demand for them."

School Specialty viewed cheap

Meanwhile, School Specialty's planned $125 million offering of 20-year convertible subordinated debentures appeared just over a point cheap at the midpoint of talk, the sellside analyst said.

"It's fairly aggressively priced."

School Specialty's deal was talked at a coupon of 3.5% to 4% and an initial conversion premium of 30% to 37%. The debentures will be offered at par. School Specialty stock (Nasdaq: SCHS) closed at $37.79, slipping 0.6% or 23 cents.

There is an over-allotment option for a further $25 million.

Banc of America is the bookrunner for the Rule 144A offering.

School Specialty, a Greenville, Wis.-based supplier of education products and equipment, said it will use the proceeds of the deal to concurrently buy back up to $40 million of its common stock and to pay back part of its existing bank debt.

In fact, none of the deals from RARE, Duke and School Specialty appeared to go down particularly well with investors.

The buyside analyst said the deals did not look attractive when their stocks were taken into account.

"I personally look at it from an outright perspective, so you've got to weigh what you think the stock will do...I don't think most of them actually qualify," the analyst said.

A buyside convertible bond trader said the pricing was simply too aggressive.

"I don't like the pricing on any of those," the trader said. "The coupon's a little low, premium's a little too high in the new world of falling interest rates."

Chattem's deal received the biggest nod from the market, but the private offering was expected to fall in the hands of a small group of investors.

"The CHTTs we actually thought was OK," the sellside analyst said, adding that the deal modeled just over 2% cheap. "This one actually looks the most interesting."

The buyside trader agreed. "I would agree with that," the trader said. "But it remains to be seen how many people can get their hands on it."

Chattem's $100 million offering of seven-year convertible senior notes was talked at a coupon of 2% to 2.25% and an initial conversion premium of 25% to 27%.

The notes will be offered at par.

Merrill Lynch is the bookrunner of the Rule 144A offering.

Chattem is a Chattanooga, Tenn.-based maker of over-the-counter health care products, supplements and toiletries. It said about $26 million of the proceeds will be used for convertible note hedge and warrant transactions, and to repay $38 million on an outstanding revolving debt. It also plans to use the proceeds to help fund its planned acquisition of five Johnson & Johnson brands and Pfizer's consumer health care business.

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