Hybrid Vigor: Vol 1 Issue 19 "California, Here We Come"

Dear Friends,

We send you this letter just before I get on a plane to my home—if not native—state to visit with readers, prospects, students, advisors and friends this week. It will be hectic, hardly a laid-back time, but it should be fun. Don’t let Oracle Week, the debut of Bloomberg’s San Francisco radio station, or the presence (at least for now) of four California teams in the baseball postseason fool you. The Golden State is really focusing on the return of Hillside Advisors’ prodigal son. Hillside is, after all, named for my elementary school in Berkeley.

Ok, enough of that. This week’s edition features Kent Bailey’s insights on the recent Tesaro issue, Jeff Alton’s comments on GTAT’s upcoming report, and some comments from me on Molina Healthcare. Contrary to some rumors, Molina was not named for one of the lesser-known songs of the world’s greatest Bay Area swamp rock band. That’s right—John Fogerty and I are from the same town. (Billy Martin, too, since this is a big baseball week).

We also do a mini-retrospective on the first two-plus months of HARP. Without patting ourselves too much on the back, we’ll just say that you should find the results interesting, and we think they’ll encourage you to keep a closer eye on the Ugly 20.

Have a great week—go Giants and A’s!

Bill

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Molina Healthcare Exchange Should Boost Stock Next Week

Convertible repeat-offender Molina Healthcare has done its third deal, this one through an exchange offer.  The deal involves a bit more than one-third of Molina’s 3.75% convertibles maturing this fall.  Instead of delivering par value in cash, Molina will give exchanging bondholders a new piece of paper with a 1.625% coupon, a 30% conversion premium based on a 10-day averaging period starting August 19, a 30-year maturity, four years of call protection, and a sequence of puts beginning in four years.

The trade seems to make sense for both sides. Bondholders—presumably hedge funds currently set up with full or nearly-full hedges on the 3.75% bonds—will get an attractively priced new security which figures to trade higher in the aftermarket.  Based on the current price of the existing MOH 1.125% convertibles, the new bonds look to be theoretically worth somewhere in the 104-105 range. The company, meanwhile, restrikes a big chunk of its obligations higher, thus reducing some dilution.

The press release suggests that current bondholders will be buying back stock during the averaging period to adjust their hedges from those appropriate for the old bond (100%) to the new bond, which looks to have a delta closer to 60%.  The difference between a full hedge on the old bond and a 60% hedge on the new one looks to be about 20,000 shares per $1 million face amount, or about 1.38 million shares in aggregate. This translates to about 138,000 shares daily, or 20-25% of Molina’s average daily volume—seemingly enough to give the stock a boost during a typically slow trading period. 

Managed-care stocks have struggled of late and Molina is no exception, down about 15% over the past few weeks.  Investors looking for an entry point may want to get in before the averaging period begins on August 19.