MGIC trades 'fine' amid stock slump; new Ivesco lower; Navistar flat to higher on hedge

By Rebecca Melvin

New York, March 7 - MGIC Investment Corp.'s newly priced 2% convertibles slipped below par on their debut in the secondary market Thursday but held up or expanded on a dollar-neutral, or hedged, basis amid a slump in the underlying shares and despite the fact that the deal traded up to 105 bid, 107 offered in the gray market ahead of final pricing on Wednesday.

MGIC shares were up Wednesday, which was when the Milwaukee-based mortgage insurer launched offerings of secondary stock and convertible bonds. But the stock fell on Thursday after the stock deal priced at $5.15 per share, which was 8% below Wednesday's close.

MGIC's seven-year convertibles, which came at the rich end of revised talk and was upsized to a deal size of $450 million, expanded a point or two on a dollar-neutral basis, market sources said.

Invesco Mortgage Capital Inc.'s newly priced 5% convertibles traded down out of the gate on their debut in secondary market action despite a flattish share price and after the upsized $350 million of convertibles priced at the rich end of talked terms late Wednesday.

Back in established issues, Navistar International Corp.'s convertibles were higher on an outright basis, and flat to better on a dollar-neutral, or hedged, basis. The moves came after the underlying shares of the Lisle, Ill.-based truck and engine maker surged 28% following news of a narrower loss that was better than expected and word that chief operating officer Troy Clarke was named the company's new chief executive officer, replacing interim CEO and chairman Lewis B. Campbell, effective April 15.

Short covering may have played a role in the stock surge in Navistar, which has a lot of short interest, a trader said.

New MGIC expands on hedge

MGIC's newly priced 2% convertibles due 2020 traded OK during the session and expanded on a hedged basis, sources said, even though they slipped below par.

The new paper was seen near the market close at roughly 99.25 bid, 100.25 offered versus a stock price of $4.96.

MGIC shares closed down 70 cents, or 12.6%, at $4.91.

On a dollar-neutral basis, though, using a 70% delta and the secondary stock offering issue price of $5.15, the new paper was 101.125 bid, 102,125 offered versus a stock price of $5.15, a New York-based trader said.

"Yes, it traded fine. Ultimately, it did expand," an East Coast-based buysider said.

Even market players who bought the paper at 105 in the gray market Wednesday "did OK if they bought at 105 and laid off stock," a New York-based trader said at midafternoon. "If you paid 106, you're probably out about a point, that's all."

To "lay off" the stock means to sell shares.

The Milwaukee-based mortgage insurer priced $450 million of seven-year convertibles to yield 2% with a 35% initial conversion premium.

The deal, which was initially seen at $350 million in size, came at the rich end of revised talk.

The new deal was heavily traded Thursday. In fact, the top three names on the volume traded chart, including MGIC, Intel Inc., and Navistar, accounted for about 50% of the day's total volume, a trader said.

The talk was tightened to a 2% to 2.5% coupon and a 30% to 35% premium from an initially talked 3.75% to 4.25% coupon and 27.5% to 32.5% premium.

MGIC also priced 135 million shares at $5.15 per share.

The registered offerings were sold via bookrunner Goldman Sachs & Co.

The notes have an over-allotment option of up to an additional $50 million of notes, an amount left unchanged, and the shares have a 20.25 million share greenshoe.

The notes are non-callable until April 10, 2017 and then are provisionally callable subject to a 130% price hurdle. There are no puts.

There is change-of-control protection and dividend protection in the form of a conversion rate adjustment for any dividends paid.

Proceeds from the two offerings of more than $1.1 billion will be used for general corporate purposes, which may include increasing the company's insurance subsidiary capital and other subsidiaries and improving liquidity by providing funds for debt service.

The planned deal jumped in the gray market Wednesday to 105. Even after terms were revised tighter, the deal was seen at 103 to 104 bid in the gray market, sources said.

New Invesco weak

Invesco's newly priced 5% convertibles due 2018 slipped below par in early trading and were seen at 98.25 bid, 99.25 offered versus an underlying share price of $20.50 at midafternoon.

Shares of the Atlanta-based investor in residential and commercial mortgage-backed securities and loans slipped 9 cents, or 0.4%, at $20.57.

"They never saw par; they were down all day," a trader said of the Invesco convertibles' debut, contrasting it to the MGIC convertibles' debut.

Invesco priced an upsized $350 million of convertibles - up from an initially talked $250 million - at the rich end of talked terms, or at 5%, with an initial conversion premium of 15%, compared to talk at 5% to 5.5% and a 10% to 15% premium.

The five-year convertible bond issue had been seen in the gray market ahead of pricing at as high as 101.

The Rule 144A offering was sold via joint bookrunners Credit Suisse Securities (USA) Inc., Citigroup and BofA Merrill Lynch.

The notes are non-callable for five years. There is change-of-control and dividend protection and net share settlement.

Proceeds will be used to purchase the company's target assets, subject to the company's investment guidelines as a real estate investment trust, and for other general corporate purposes.

Navistar flat to up on hedge

Navistar's 3% convertibles due 2014 were seen at 98 versus an underlying share price of $32.00.

On an outright basis the convertibles were up a little more than 4 points. And on a dollar-neutral basis, the convertibles were up about 0.5 point to 0.75 point on a delta of 25% and were about flat on a 30% delta, a New York-based trader said.

Navistar shares surged strongly and were up $6.93, or 28%, to $31.89 at the market close.

The company had good news. But as one trader heard along the way: "The news was good, but not that good."

The struggling company named chief operating officer Troy Clarke as its new chief executive officer and reported a narrower quarterly loss that was better than expected. It also said its cash balance at the end of the quarter was greater than the company predicted in December.

The company's cash balance was nearly $1.2 billion, topping the company's forecasted range of $950 million and $1.05 billion. The company said it expects its second-quarter cash balance to be in the range of $1 billion and $1.1 billion and thinks that its cash balance will improved in the third and fourth quarter as truck volumes rise and margins expand.

"They were probably on a 30%, maybe a 35%. If you move up on a 30%, then you are probably breaking even here," a trader said.

Navistar has struggled through a weak truck market and expenses related to meeting U.S. environmental regulations pertaining to its diesel engines. The company is still waiting for the EPA to certify that its 13-liter engines comply with emissions regulations. The company said it expects approval by the end of March.

The company abandoned its own 15-liter engine that was unable to meet environmental standards, and began making an engine like those built by Cummins Inc. last summer.

To reach its cost cutting goals, the company has announced closure of a Texas plant, layoffs, and exiting a joint venture in India. Now the company said it is on course to exceed its goal of lowering costs by $175 million this year.

Still the company reported a loss of $123 million, or $1.53 per share, for the fiscal first quarter, compared with a year-earlier loss of $153 million, or $2.19 a share. Revenue fell 12% to $2.64 billion.

Analysts had been expecting a loss of $1.76 per share on revenue of $2.81 billion.

Mentioned in this article:

Invesco Mortgage Capital Inc. NYSE: IVR

MGIC Investment Corp. NYSE: MTG

Navistar International Corp. NYSE: NAV

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