Convertibles wind down for Thanksgiving; Encore at par; Salesforce.com 'comes in' on hedge

By Rebecca Melvin

New York, Nov. 21 - Encore Capital Group Inc.'s newly priced 3% convertibles traded around par on their debut in the secondary market on Wednesday after pricing $100 million of the five-year notes at par at the cheap end of revised talk late Tuesday, market sources said.

The Rule 144A Encore deal came with a call spread and was weighted toward hedged participation, a syndicate source said. Shares slipped in early trade and the convertibles followed suit, leaving them essentially flat.

Elsewhere, Salesforce.com Inc.'s convertibles were higher outright, but came in a point on a dollar-neutral, or hedged, basis, after the San Francisco-based cloud computing company reported earnings that beat estimates.

Among other names in trade was James River Coal Co., and its convertibles were flat to lower at 41.5 bid, 42 offered, a New York-based trader said.

Beyond that the convertibles market was quiet Wednesday ahead of the U.S. Thanksgiving holiday, which will leave financial markets closed Thursday.

Equities traded mostly flat, but around midsession, news of an imminent cease fire agreement between Israel and Hamas pulled equity markets firmly into positive territory.

The cease-fire agreement was expected to take effect Wednesday evening, according to initial reports.

Following the Thanksgiving break, market players are hopeful that new issuance will strengthen heading into the end of the year.

"Conversations have been picking up on the heels of the election," a New York-based syndicate source said regarding his firm's work with prospective issuers. "Some of the uncertainty ahead of the election has subsided, and we are involved in active dialogue with companies."

"We are hoping for a strong finish. There has been a little bit of weakening in the credit markets, which bodes well for convertibles, particularly when equities hold up," the syndicate source said.

Encore debuts

Encore Capital's newly priced 3% convertibles due 2017 were seen at 99.5 bid, 100.5 offered before noon ET on Wednesday with shares around $25.40.

The paper was quoted at par out of the chute, a syndicate source said.

Shares of the San Diego-based credit services company fluctuated early but traded about flat much of the day on strong volume.

The new convertibles priced at the cheap end of revised coupon talk and at the price point of revised premium talk for a 3% yield and 25% premium.

There was significant demand for the paper with slightly more hedge fund participation. Plenty of liquid stock borrow in the name helped weight allocations in that direction, a syndicate source said.

The deal came with a call spread, and about $25 million will be used to buy back shares from purchasers of the notes.

"With the stock trading flattish the bonds were wrapped right round par," the source said.

"The stock didn't trade a lot yesterday, but it was active this morning, at 2.5 million shares, which was well above average volume," the source said.

At the open there was a par bid and offers slightly north of par versus Tuesday's close, which was $25.25.

Volume in the new issue was expected to be somewhat dampened by the holiday.

"It's not surprising; we had good representation from accounts on the call, but by today, many guys are gone, so you may see less activity on the break due to the liquidity," a syndicate source said.

Encore priced $100 million five-year convertibles at the cheap end of revised coupon talk, which was 2.75% to 3%, and at the revised price point for the premium. Initial price talk was set at 2% to 2.5% for the coupon and 25% to 30% for the premium.

The deal was sold via joint bookrunners Morgan Stanley & Co. LLC as left lead, Barclays and Bank of America Merrill Lynch and has a $15 million greenshoe.

Concurrently with the convertible offering, Encore entered into convertible note hedge and warrant transactions with initial purchasers of the bonds and option counterparties. The note hedge transactions are intended to reduce potential dilution and offset any cash payments associated with conversion.

The warrant transactions - which may contribute to share dilution - have a strike price that will initially be $44.1875 per share, and which boosts the conversion premium to 75% from the company's perspective.

Most of the proceeds, or about $61.5 million, will be used to repay borrowings under the company's revolving credit facility.

The five-year convertibles are non-callable with no puts.

Salesforce.com 'comes in'

Salesforce.com's 0.75% convertibles due 2014 traded up at least 5 points outright to 186.5 bid, 187.5offered versus an underlying share price of $155.60, an East Coast-based buysider said Wednesday.

A second source quoted the 0.75% convertibles slightly higher at 188 bid, 188.25 offered versus an underlying share price of $156.37.

On a hedged basis, however, the convertibles were lower by about a point if holders were on a delta hedge of about 88%, a West Coast-based trader said.

Shares, which have been up a lot the last couple of days, rose $12.69, or 9%, to $158.59.

Traders said the CRM convertibles were very active on a spike in the shares after the company reported earnings.

Late Tuesday, Salesforce reported fiscal third-quarter results that beat estimates. For the period ended Oct. 31, Salesforce reported a per-share loss of $1.55 on a non-adjusted basis.

Excluding items, the company reported earnings of 33 cents per share, which best analysts' estimates by a penny.

Revenue for the just ended quarter rose 35% to $788.4 million, compared to the year-earlier period. Salesforce is using acquisitions to expand its business.

Looking ahead, the company said revenue for the current quarter will be $825 million to $830 million, which compared to an average estimate of $829.9 million. Revenue for the 2014 fiscal year, which starts in February, will increase to $3.8 billion to $3.85 billion. Analysts on average predicted $3.83 billion.

Mentioned in this article:

Encore Capital Group Inc. Nasdaq: ECPG

James River Coal Co. Nasdaq: JRCC

Salesforce.com Inc. NYSE: CRM

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