James River upsizes, jumps on debut; Ares, Gilead add to gains; Best Buy slips with earnings

By Kenneth Lim

Boston, March 24 - James River Coal Co. led the market action on Thursday, gaining on a well-received offering of seven-year convertibles as new issues dominated trading.

Recently priced Ares Capital Corp. convertibles were also active, gaining in price in line with the underlying stock.

Best Buy Co., Inc. slipped with the stock following a drop in fourth-quarter earnings and a lackluster forecast.

The market in general had a decent trading day, with good flows, especially in recently minted paper, one trader said.

"Not a bad day," the trader said. "The new issues over the past few days have been doing well, stocks are doing OK, so it's definitely better than at the start of the week."

The trader said some sectors are drawing better interest than others.

"We've definitely seen a bit more interest in the oil and mining names just because of what's going on in Japan and Libya," the trader said. "[James River] benefited from that."

Gilead Sciences, Inc. remained elevated a day after the company sold $1 billion of straight debt. The company's 1% convertibles due 2014 were seen at 109.5 versus a $42.75 stock price, while its 1.625% convertibles due 2016 changed hands at 122.

Gilead common stock gained 1.74%, or $0.72, on Thursday to close at $42.04.

James River upsizes

James River Coal priced an upsized $200 million of seven-year convertible senior notes on Wednesday after the close richer than talk to yield 3.125% with an initial conversion premium of 30%.

The notes were offered at par and traded around 101.5 early in the day. James River common stock closed at $23.97, down by 1.2%, or $0.29.

"They were up right out of the gates because the stock was also up, but stock kind of fell near the close, so that took some of the air out," one sellsider said. "We're heading out close to par."

Price talk was at a coupon of 3.25% to 3.75% and an initial conversion premium of 25% to 30%.

The company also sold 6.65 million shares of common stock at $23.50 apiece in a concurrent offering. James River was also offering $250 million of senior straight debt due 2019 in a parallel deal.

The size of the convertible deal was originally $125 million with an over-allotment option for an additional $18.75 million. The greenshoe is now $30 million.

UBS Securities LLC and Deutsche Bank Securities Inc. were the bookrunners of the Rule 144A offering.

Proceeds are earmarked to pay a portion of the purchase price of its previously announced acquisition of International Resource Partners LP. Any remaining proceeds will go to general corporate purposes including acquiring or investing in businesses or repaying debt.

If the deal is not consummated, James River can redeem the convertibles or use the funds raised for general corporate purposes including acquisitions or repaying debt.

James River is a Richmond, Va.-based coal producer.

The deal received good response from investors partly because of optimism about energy prices and the acquisition, the sellsider said.

"It kind of came at the right time, when a lot of people became very bullish about energy prices," the sellsider said. "People who bought it liked the acquisition that they're going to use this for, and the stock deal came at a discount to market, so they managed to push for richer terms."

The sellsider said one concern was the lack of a call or put over the life of the notes.

"It's non-call seven years, and that's probably one of my main complaints about the deal," the sellsider said. "I don't really like going seven years without a put, especially when the yield is just 3.125%."

Ares inches higher

The new Ares 5.125% convertibles due 2016 traded at 103 versus a common stock price of $16.50, a gain of about a point outright.

"The new ARCCs are doing well," a trader said. "[This week's new deals] are all up. Stock had a pretty good run today. That's obviously helping."

Ares common stock ended the session at $16.46, up by 1.35%, or $0.22.

The $200 million deal priced Tuesday after the close with an initial conversion premium of 17.5%.

Ares is a New York-based private equity firm targeting middle-market companies.

The trader said the small size of the Ares and James River deals left investors hungry for more.

"There's not enough of the new paper to go around," the trader said. "Some of the older stuff are too rich, so you need to find discounts in some of the newer deals. They're also more liquid, so it's easier to trade."

Best Buy lower with stock

Best Buy's 2.25% convertible due 2022 was about a quarter-point lower on Thursday, trading at 103.125 versus a common stock price of $30.65 following the company's fourth-quarter results.

The common stock slipped 5.4%, or $1.72, to close at $30.13.

The Richfield, Minn.-based electronics retailer said Thursday that fourth-quarter net income fell to $651 million, or $1.62 per share, year on year. But Best Buy earned $1.98 per share when restructuring costs were excluded, beating Street estimates of about $1.84 per share.

But the company's forecast of full-year profit of $3.30 per share to $3.55 per share was just short of analysts' expectations.

"Retailers like Best Buy are a little bit like proxies for the domestic economy," a sellsider said. "If the economy's not doing very well, consumer spending is going to be down and guys like Best Buy aren't going to do very well."

Mentioned in this article:

Ares Capital Corp. Nasdaq: ARCC

Best Buy Co., Inc. NYSE: BBY

Gilead Sciences, Inc. Nasdaq: GILD

James River Coal Co. Nasdaq: JRCC

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