New KEYW adds outright with stock sharply higher; MGIC up on hedge with shares down

By Rebecca Melvin

New York, July 16 – KEYW Holding Corp.’s newly priced 2.5% convertibles traded up to the 104 context early Wednesday, but trading action was scant after the Hanover, Md.-based cyber-security services company priced an upsized $130 million of the notes at the cheap end of talked terms.

The new KEYW convertibles were quoted “up about 4 points outright,” but the spread was fairly wide, a syndicate source said, He said poor borrow was to blame for light market action post pricing.

Back in established issues, Intel Corp.’s sister convertibles traded actively and up as many as 5 points outright, but flat on a hedged basis, after the Santa Clara, Calif.-based chip giant posted strong earnings and a rosy outlook that sent shares up 9%.

MGIC Investment Corp. was in trade again and lower outright, but slightly better on a hedged basis, after the Milwaukee-based mortgage insurer reported disappointing earnings that sent its shares lower by 7%.

Fellow mortgage insurer Radian Group Inc. saw its two convertible bonds trade mixed.

Both bonds have been in trade in the last few sessions after proposed liquidity rules for mortgage insurers were unveiled by the Federal Housing Finance Agency.

New KEYW quiet

KEYW’s newly priced 2.5% convertibles were seen around 104 when the underlying shares were up about 7% at $12.95. But shares extended gains from there, ending at $13.29, which was up $1.18, or nearly 10%, on the day.

The bonds were not trading actively, and many market players said they had not seen the bonds on their debut at all.

Stock borrow was very limited, which hindered hedged participation.

Shares at that point were up 7%, so the bond was underperforming, a second market source said of the new convertible.

KEYW priced an upsized $130 million of the five-year senior notes before the market open on Wednesday at par to yield 2.5% with an initial conversion premium of 22.5%.

The registered, off-the-shelf deal was initially talked at $125 million in size. There is a greenshoe of $19.5 million, which was upsized from $18.75 million.

Pricing came at the cheap end of talk, which was for a 2% to 2.5% coupon and a 22.5% to 27.5% premium.

The securities were sold via RBC Capital Markets LLC and BofA Merrill Lynch as joint bookrunners, with SunTrust Robinson Humphrey Inc. acting as a co-manager.

The notes are non-callable for life.

In connection with the pricing of the notes, KEYW entered into privately negotiated capped call transactions with the underwriters.

A portion of the proceeds will be used to pay the net cost of the capped call, but the majority of the proceeds will be used to repay the company’s outstanding balances under an existing credit facility.

Intel little changed

Intel’s 3.25% convertibles due 2039 traded up to 166.57 by the end of the session, which was up 5 points on an outright basis, according to Trace data.

Intel’s 2.95% convertibles due 2035 surged up 4.4 points on an outright basis to 132.5, Trace reported.

Shares of the Santa Clara, Calif.-based chipmaker, traded sharply higher and ended the session up $2.94, or 9.3%, to $34.65.

The gain was seen little changed on a dollar-neutral, or hedged, basis, a New York-based trader said.

Behind the outright gains were Intel’s strong second-quarter earnings report and rosy outlook.

Investors are “teeing up earnings season, and Intel certainly made a splash at least on an outright basis.”

Second-quarter net income rose 40% to $2.8 billion, or 55 cents a share, from $2 billion, or 39 cents a share, in the year earlier. Revenue increased 8% to $13.83 billion. Analysts had expected earnings of 52 cents a share on revenue of $13.69 billion.

For the third quarter, the company now expects revenue of $14.4 billion, which is about 7% higher than the year-earlier period and better than analysts’ estimates for $14.03 billion of revenue.

But behind recent moves of the Intel convertibles prior to Wednesday was the fact that the name was moved out of the UBS convertibles benchmark index, and it has thereby garnered additional action from differing subsets of market players, an East Coast-based buysider said.

“There are several reasons why Intel has been trading a ton. One is that when an investment-grade, very rich name moves out of the index it tends to become less expensive because some people don’t care about owning it, while other people are stepping in,” the buysider said.

MGIC up. Radian mixed

MGIC’s 2% convertibles due 2020 traded late in the session at 131.385, which was down 8 points on an outright basis, but better on a dollar-neutral, or hedged, basis by about 0.5 point, a New York-based convertibles trader said.

The MGIC 2% convertibles trade on about a 30% delta.

The MGIC 5% convertibles were seen trading up on hedge by about 0.25 point.

MGIC shares fell 59 cents, or 7%, to $7.76 on Wednesday.

The company reported net profit of $45.5 million, or 12 cents a share, which was up from $12.4 million, or 4 cents a share in the year-earlier period but still 2 cents below analysts’ estimates.

MGIC also reported that net premiums written fell 9.8% to $213.4 million and net premiums earned declined 13% to $207.5 million.

Total losses and expenses in the latest period fell 26% as losses incurred in the quarter fell 28% to $141.1 million.

Meanwhile, Radian’s 2.25% convertibles due 2019 were seen trading late in the day at 137.129, which was down 4.6 points, according to Trace data. The 2.25% convertibles are held on a delta in the mid 70% range, and those bonds were seen unchanged on the day.

The Radian 3% convertibles due 2017 were seen trading at 132.88 at the end of the session, according to Trace. That was down 4.2 points on an outright basis and also down on a hedged basis by 0.25 point, a New York-based trader said. That bond has a delta in the mid-70% range.

Shares of the Philadelphia-based mortgage insurer ended down 58 cents, or 4.2%, to $13.10 on Wednesday.

If the new federal rules aimed at bolstering the companies in the event of another downturn are implemented, the companies have two years to implement them.

Mentioned in this article:

Intel Corp. Nasdaq: INTC

KEYW Holding Corp. Nasdaq: KEYW

MGIC Investment Corp. NYSE: MTG

Radian Group Inc. NYSE: RDN

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