Aspect, Blackboard gain in gray but borrow a concern; Iconix quiet; Eastman Kodak climbs with stock

By Kenneth Lim

Boston, June 14 - Aspect Medical Systems Inc. gained slightly in the gray market on Thursday as new deals continued to dominate activity in the convertible market.

Blackboard Inc. was also higher in the gray market with its deal receiving warm reviews for its cheap pricing although notes of caution emerged over its borrow and possible lack of trading.

Iconix Brand Group Inc. remained quiet in the pre-market as critics said its deal appeared to model slightly rich at the midpoint of price talk.

Off the primary market, Eastman Kodak Co. climbed after the digital imaging company announced a new camera sensor for low-light conditions.

Eastman Kodak gains on news

Eastman Kodak's 3.375% convertible due 2033 gained about 4 points outright to trade at 105.5 against a stock price of $28.55. Eastman Kodak stock (NYSE: EK) closed at $29.19, up by 7.99% or $2.16.

"Eastman Kodak was active, came up because of that new technology they announced," a sellside convertible trader said. "They were in slightly dollar-neutral...Hedge guys probably took a small hit because of this, but it depends on what kind of a hedge they had it on."

Rochester, N.Y.-based Eastman Kodak said Thursday that it has developed sensor technology for digital cameras that are highly sensitive to light and could eliminate the need for flash photography. The news sent Eastman Kodak's shares to a 52-week high.

"This was definitely a positive surprise," a sellside convertible analyst said. "Kodak's been trying to shift toward the digital photography business and it's been a major task for them considering that they were a film company for the longest time. I think most people were skeptical about their ability to make the switch, so this news is definitely comforting.

"But I think it still remains to be seen how much of an impact this will have on the company. They're still not completely disentangled from their more traditional businesses, and there's no indication about when the new technology will be in new products. The thing is, just because a piece of technology is better doesn't always mean it will sell. It's funny, but I guess that's just the way things work."

Aspect up in gray

Aspect Medical's planned $110 million of seven-year convertible senior notes were about 101 bid in the gray market ahead of pricing slated for after the market closed.

The convertibles were offered at par. The deal was talked at a coupon of 2.25% to 2.75% and an initial conversion premium of 25% to 30%.

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

Goldman Sachs is the bookrunner of the Rule 144A offering.

Aspect Medical, a Norwood, Mass.-based maker of the BIS anesthesia monitoring system, said it will use the proceeds to buy back about 2 million shares of its common stock from Boston Scientific, which will be left with about half of its current stake. The two companies earlier in the week ended their development alliance on the medical device.

"It's looking pretty decent," a sellside convertible analyst said.

The analyst said the deal looked about 1.5% cheap using a credit spread in the mid- to high-300 basis points over Libor region and a volatility in the mid-30% range.

The analyst said the deal looked like it would work for both outright and hedge accounts, but noted that problems with the borrow could affect the attractiveness of the deal. Market sources said the stock borrow rebate could be between 3% and 4.125%, which would be off top-rate.

"I haven't heard anything about the borrow, but if that's true, than that 1.5% to 2% cheapness would probably come down to about 0.5% to 1% cheap," the analyst said. "It really depends on what Goldman allocates to outrights and hedge funds. If they can find enough outright guys to support this then the borrow won't be a problem. If the borrow's on the edge and they can manage to find more outright demand then it will leave enough top-rate borrow for the hedge funds. The less hedge funds get it, the more borrow there is for them."

Blackboard climbs in gray

Blackboard's planned $150 million of 20-year convertible senior notes also improved in the gray market with its deal appearing to model cheap, analysts said.

The convertible was 101 bid in the gray market with the offering expected to price after the market closed. The deal was offered at par.

Price talk was set at a coupon of 3% to 3.25% and an initial conversion premium of 60% to 65%.

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

Credit Suisse is the bookrunner of the registered offering.

The notes will have extra embedded warrants at 0.6 to 0.65 times the base underlying shares.

Blackboard, a Washington-based provider of enterprise learning software applications, said $19.4 million of the proceeds will be used to repay an outstanding senior secured term loan with the remainder earmarked for general purposes.

"With warrants in it, I have it about 1% cheap at the mids," a convertible analyst said. "It looks pretty decent."

The analyst, who used a credit spread assumption in the high 200 basis points of Libor range and a volatility in near the mid-30% region, said the warrants make the convertible more equity-like.

"I don't know if it's more attractive, but the structure is more equity like when you add the warrants," the analyst said. "Because you're getting more value out of the warrants than the bond, basically."

Another analyst thought that a credit spread in the mid-200 basis points over Treasuries range and a volatility in the low 30% region was more appropriate. The second analyst had the deal modeling about 2% cheap at the midpoint of talk.

"Probably the difference in cheapness is the spread assumption," the second analyst said. "I'm surprised that they're that negative on it."

The second analyst said Blackboard appeared to be a "decent company."

"It generates some cash, a high single B credit, and you've got a put in four years," the second analyst said. "They didn't have much debt to speak of before this deal, so their net debt is going to be low still."

But the convertibles could be cheap for a reason, the second analyst said. One issue was that the additional warrant-structure could dampen interest in the deal.

"The warrant makes it more attractive, gives it very high gamma and vega and much better participation in the upside," the second analyst said. "That's what allows them to set the conversion price at a 60% to 65% premium, and it makes it more like an equity in that sense. But it's a little bit difficult to analyze it, and I think that the issues that have these structures, there aren't that many and I don't think they trade well. I think they tend to trade a little sloppier. There are certain contingents that can't understand them or can't model them and there are certain investors who just can't get past the high premium."

There was also a question about whether the stock borrow would be top-rate, the second analyst said.

"There is a question about the borrow and there is a question about how it's going to trade," the analyst said. "So yes, it models cheaper, but there might be a reason for that."

Iconix quiet in gray

Iconix's planned $250 million offering of five-year convertible senior subordinated notes did not attract any activity in the gray market on Thursday with the deal seen as possibly rich.

The deal was also expected to price after the close. Price talk was at a coupon of 1.5% to 2% and an initial conversion premium of 30% to 35%.

The convertibles are offered at par.

There is an over-allotment option for a further $37.5 million.

Merrill Lynch and Lehman Brothers are the bookrunners of the Rule 144A offering.

Iconix, a New York-based brand management company, said the proceeds of the deal will be used to fund convertible note hedge and warrant transactions and to invest in or acquire new brands.

A convertible analyst said the deal carried a credit spread in the high 100 basis points over Treasuries region with a volatility around 30%.

"It will end up with the bond modeling 1% rich or more," the analyst said. "That one didn't look all that attractive, and I haven't heard anything in it today."

© 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.